Some companies pay different salaries depending on where you live. This is why.

One of the primary goals of any business is to make and maximize profit. Coupled with its corporate social responsibilities, the lifespan of any business hinges on its profit sustainability. For startups, this should be the holy grail.

For startups or growing companies, one of the ways used to keep the business profitable internally is through the application of location-indexed salaries. This is done to keep compensation costs at an optimum level.

What are location-indexed salaries?

These are salaries determined with the use of a compensation calculator. For instance, GitLab’s Location Factor is how they determine location-indexed salaries.

The Compensation Calculator for every company works on the principle of a simple formula that takes into account the standard prevailing salary benchmark, employee's location (cost of living), job grade level, and current local exchange rate.

With remote work now mainstream, companies can maximize compensation costs by indexing employees' salaries based on their cost of living. In other words, employees on the same level and role would have different salaries based on their global geographical location.

Many top businesses, including some Fortune 500 companies, use this strategy one way or another. For example, consider how some of the world's best business franchises operate globally to sustain profitability.

Salaries are determined based on the employee's location. A Starbucks employee's base salary in New York will most likely not be the same as the base employee (in the same company) salary in Johannesburg.

Benefits of location-indexed salaries

Start-up companies can utilize this compensation tool for several reasons. First, it ensures you have the best talents in your company while maintaining a competitive salary compensation.

Maximizing compensation costs

One of the crucial costs startups have to undertake early on is hiring and compensating the right talents to grow the company. Location-indexed salaries help you strategize economically on how best to keep your compensation costs on a budget.

By hiring talents in areas with varied costs of living, the company can pay different salary scales to employees with the same talent, roles, and responsibilities. For instance, employees living in developing countries, with a lower cost of living, can afford to accept a lesser salary offer than an employee living in an expensive city.

With globalization at its highest today, a company can offer an Indian programmer living in the tech capital city of Bengaluru a $50,000 salary and also hire a San Francisco-based programmer a $250,000 salary for the same job. Considering that both cities have different living costs, especially with the currency exchange rates, the Indian programmer would have similar comfort as the SF-based programmer.

On a larger scale, by investing in foreign talents based in areas with a low cost of living (without compromising the quality of talents), companies can save up on compensation costs from a couple of thousands to millions of dollars.

Offering market-rate compensation

Since salaries are indexed based on the location of employees, companies can recruit and hire the best talents in different geographical locations. Moreover, by understanding the prevailing salary rates in developing countries, top talents can be hired using different salary scales.

For instance, the $50,000 salary offered to the Indian  programmer could be considered premium pay in that country. This allows the company to hire the best tech talents out of India. On the other hand, the same amount may only be appealing to a less-experienced programmer in SF.

Drawbacks of location-indexed salaries

As with most strategies, there are bound to be certain drawbacks when not properly implemented. Over time, the unreviewed use of location-indexed salaries could cause any of these disadvantages.

Losing talents to the competition

Companies practicing a location-indexed salary strategy, need to benchmark the market rate for specific roles, so they can be competitive. This applies to hiring new employees, but also to retaining current ones.

These employees in developing countries are exposed to being attracted by companies with deeper pockets, and they could jump ship when the opportunity arises. It's not a matter of loyalty but realizing they can get more compensation for their value.

As little as a $1,000 to $10,000 salary increase can cause employees in developing countries to move over to the competition.

To address this drawback, companies have to continuously make location-indexed salaries commensurate with what's obtainable in the market at any given time.

Breeding a toxic working environment

Employees having similar workloads, roles, and responsibilities but with different salaries can cause resentment and strife amongst colleagues. It's only a matter of time before a team member feels cheated.

Ultimately, this would have a significant effect on the team's overall productivity. In addition, lesser-paid employees in less expensive cities can develop an inferiority complex towards other team members with higher pay living in expensive cities. In time, these employees not only struggle with their performance, but they are also more open to exploring opportunities elsewhere.

Many start-ups struggle with finances at their early stages because a lot is spent on compensation costs. Finding ways to attract the best talents without breaking the bank becomes a huge priority.

For a remote worker, it’s important to understand your value. Remote workers should understand and use the fair global salary calculator to determine what others with similar skills are being paid globally. Then, depending on how you wish to get paid, confidently answer what range of salary you’re expecting during interviews.

Integrating a location-indexed salary strategy into the business can help companies maximize their compensation costs. Using existing market rates, companies can recruit and hire the best talents in areas with low cost of living and offer the highest obtainable salary.

This helps companies save up on salary expenses while also having a top-quality team to help build the company. In addition, by continuously comparing market rates to help adjust location-indexed salaries, a company can continue to draw out the best employees from the global talent pool.

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