As more companies decide to remain fully remote or adopt a hybrid work model, many are adopting location- or geo-based salaries to account for the varying cost of living expenses among remote employees.
But is this the best approach to salaries when supporting a distributed team?
And if it is the better way—why isn’t everyone joining in on it?
Companies that implement a location-based salary policy essentially raise or reduce employee salaries based on where the employees have personally decided to live and work. It’s an approach that’s particularly impactful for employees who live and work in a big city as opposed to a smaller one, such as New York City vs. Des Moines, Iowa.
What does this say about equality, though? How does it impact employee engagement? What are the drawbacks of basing employee salaries on where they live?
To get to the bottom of this hot topic, we sought opinions from company leaders who have considered, implemented, or outright rejected location-based salaries.
Pros and cons of location-based salaries
We asked company leaders and HR executives their perspective on geo-based salaries, especially whether they are for or against it and their firsthand experience with it in their own companies. The result is a surprising mix of strong perspectives, both for and against location-based salaries.
If you’re currently deciding on whether to implement location-based salaries in your organization or are simply curious about the pros and cons of it as a compensation strategy, here are some arguments from both sides.
It’s “fair” from a practical cost of living standpoint
A prevailing argument among leaders who agree with and apply location-based salaries is that it levels out something that every employee experiences: costs of living. In theory, incorporating the employee’s location into their compensation is how you offer fair pay in the current employment market.
Mo Mulla, founder of Parental Questions, supports this notion.
“As a business owner, I want to compensate my employees fairly based on the cost of living in their area. It’s only fair that an employee in a more expensive city be paid more than an employee in a less expensive city. This helps keep employees happy and discourages them from leaving for a job in a different city. It also helps to keep our business competitive when it comes to hiring top talent.”
Scott Hasting, CEO of BetWorthy LLC, agrees and points out that employees have a choice in the matter, too.
“Since we recognize that employees can choose wherever they want to work, we wanted to keep everything fair. After all, you can choose to do your WFH in a rural area and enjoy the lower price of goods and services but that would be really unfair to those working on-site, like in our office in California, where the prices of things are way more expensive. Hence, we have implemented it across all our employees.”
Another pro in favor of location-based salaries is that it gives global employers more flexibility in their compensation approach. The ability to offer salaries by region, rather than having a set range for each role, is even more applicable when your team is distributed across countries and currencies.
Mulla says location-based salaries make sense for international hires and it also contributes to employees’ overall experience.
“Yes, we use this model for international hires. We find it more cost-effective to allow the culture and environment of an employee’s home country to shape their experience in ours. It can be difficult to acclimate employees that are so far removed from their home culture and family when they live here permanently, which is why having them feel like their work is still in their home country can be a valuable tool.”
It’s not fair because it rewards location, not merit or effort
Connor Brown, founder of After School Finance Website, finds location-based salary policies clearly unfair because they ignore employee contribution. “In my opinion, location-based salaries are unfair for the people. Everyone is working hard to reach the company’s goals, and everyone must be equally compensated for it.”
Bryan J. Driscoll, J.D., a lawyer and HR consultant with SimplifyLLC, believes location-based salary isn’t just a bad idea, it exploits workers.
“It makes employees look for jobs with competitors and could scare away top-talent. Location based salaries pay people based on where they live, not their value to an organization. An employee working in Des Moines has the same value to a company as the same employee working in San Francisco. Why would you pay the employee differently because of where they live? Because it’s another way for companies to exploit workers and increase already record-high profits.”
It doesn’t align with DEI
Trav J. Walkowski, partner and board chair at Employmetrics and head of People at Activeloop, points out that it goes against DEI values. “Just like someone shouldn’t be paid differently because of their race or gender, their location is also irrelevant.”
Ian Sells, CEO and founder at RebateKey, agrees and cautions company leaders that, “if you are willing to be diverse and inclusive, you cannot remove equality out of the picture. You need to offer equal opportunities and benefits for everyone.”
Leads to comparison and unhappy employees
Companies must always tread carefully when implementing major changes to HR policies. What do you gain and what’s the trade-off? How does it impact company culture? Company leaders who are against location-based salary are wary that it creates an unhealthy team dynamic and strains relationships.
Mike Nemeroff, CEO of Rush Order Tees, fielded requests for geo-based salaries, but decided against it because it didn’t align with company values and could promote hostility.
“We received several requests for salaries to be adjusted based on locations since expenses heavily differ, but we realized it went against our company policy. Even though it makes sense to adjust salaries based on a person’s location, it still feels unfair for other employees once they learn their peers are getting paid more than they are while conducting the same job. It also promotes hostility between team members and a negative environment which heavily impacts our company culture.”
It’s costly, financially and administratively
Even if a location-based salary lived up to all of its promises, it’s a nightmare to administer.
Walkowski emphasizes this administrative burden, particularly in how to verify addresses.
“There’s another huge concern that I don’t think anyone else is mentioning: there isn’t a good way to verify where people live. If a remote Google employee knows their pay will be based on their location, who is to say they won’t lie and say they live in a more expensive market? They could easily use the address of a family member, friend, or UPS location.”
There’s also compliance to worry about. He adds:
“There are colossal compliance implications with that, so companies are strongly advised to not encourage lying by using a geo-based strategy. I mentioned this to another HR executive and she said, ‘Well if I think someone is lying, I will send someone to their address to verify it.’ Oh, really? Alright, but that’s another expense then, and what if they’re like me and have their doorbell disconnected and never answer the door for random people? I suppose you could look in their mailbox, assuming it’s not one that is secured, but that’s illegal. Putting that much risk on a company is not a good idea.”
Driscoll notes that location-based salaries might lead to cost savings up front, but then incurs even more costs in turnover and recruiting.
Here’s his hard-earned wisdom after seeing his clients implement it.
“For each company I partner with, we go through a cost-analysis breakdown. Yes, they’ll save money at the top but their turnover will grow and their ability to attract and retain top talent will fall. For clients of mine who have implemented this policy against my recommendation, we have to conduct damage control after it’s implemented.”
Marc Stitt, chief marketing officer of FMX, has a similar perspective and warns about the real possibility of losing the employee to attrition, if you were to lower their salary based on their location.
“The Cost of Work Institute calculates that an employee’s annual wage is at least one-third of the cost of replacing him or her when they leave. The risk of attrition isn’t worth $15K in a reasonable cost of living reduction for an employee. The loss of an important person could have long-lasting and harmful effects on the company’s culture.”
It doesn’t work in the long term
Ed Snook, former head of Compensation at Lookr, has seen the rise in location-based pay’s popularity, but has noticed that its promise hasn’t paid off.
“I think the days of really differentiating salary based on location (within the U.S.) are drawing to a close. It’s really not worth it. What if employees move from high cost to low cost? Plus, all your new hires are going to say ‘Why would I join your company when these other companies aren’t adjusting salaries downwards?’ I think some companies will say ‘screw it, having different salary ranges in parts of the US is just not worth the burden.”
There’s no doubt that location-based salaries might work for some teams. It certainly makes determining salaries for international employees a bit easier, and perhaps not all teams will care about geo-based salary differences. But the arguments against it ring loud among the majority of company leaders we talked to, with reasoning that’s clear to us.
Using location as a main driver for determining employee salaries—even among those with the same role and responsibilities— undermines individual effort, fails to recognize unique talents and merit, and totally goes against any good DEI intentions in an organization. And despite good intentions, it can ruin the employee experience since it naturally breeds envy, resentment, and attrition among teams.
Is that really worth the few thousand of dollars in total compensation adjustment across your employee base?
For all those reasons, we’d caution against location-based pay for any company leaders considering it for their remote and hybrid teams. It doesn’t create a more equitable workplace.
The key to success in today’s talent market is creating an employee experience that gives meaningful support and fair recognition to help your team members thrive, and there are lots of other more effective—and equitable—ways organizations can achieve that.
Amy Spurling is the founder and CEO of Compt.