How employers can set local salaries in a globally competitive world

How do you pay workers in different locations? The traditional answer — according to what the local market demands — is facing new pressure from an increasingly global talent pool.

As more companies operate across multiple regions, attracting and retaining top staff has become a multinational exercise freighted with HR politics. The rise of remote work, meanwhile, means questions of how to adjust pay should an employee move to a different city or country are more pressing.

The most skilled workers “are more mobile and are likely happier to move across regions for higher-paid professional roles,” says Pawel Adrjan, a director at hiring platform Indeed.

Lawyers, software engineers and investment bankers do similar work in London, Singapore or Berlin, he adds, meaning companies may have “no choice but to set salaries at a globally competitive level”.

A trend for US companies to pay above the local rate in other countries is pushing up pay at the top end of the jobs market globally, reflecting the strength of the country’s economy. This is challenging the traditional view that employing staff in conventionally cheaper overseas locations always saves on costs.

As a result, some sectors are seeing salaries skewed outside the norm. For instance, elite City law firms have been forced to ratchet up the base salaries of newly-qualified solicitors to £150,000 this year in light of the £175,000 US-headquartered firms now offer.

The Washington Post recently advertised a breaking news reporter position, a relatively junior role, in its London office with a salary of up to £85,000 — around what UK media companies typically offer to more senior editors.

Meanwhile, the pay packages offered by Californian technology companies such as Meta and Google are often well above standard rates wherever they operate.

“Inevitably, pay differentials do cause friction, because it’s such a personal assessment of what’s fair to you as an individual. That can be amplified where you’ve got really different pay policies by country,” says Andrew Curcio, global head of reward and benefits at PwC.

For instance, the gap between the median annual pre-tax salaries in the US and UK for science, technology, engineering and maths (Stem) occupations and managerial jobs is large and widening, according to a Financial Times analysis of government data.

That holds even when the different cost of living in each country is taken into account, using the IMF’s calculation of purchasing power parity (essentially, how much bang for your buck you can get around the world).

Global companies have traditionally addressed this in one of two ways, says Curcio. They might set pay bands centrally, then convert them in each location according to the cost-of-living in each market. Or they can let each country create their own scales.

The former can lack flexibility, while the latter can become so complex it is a struggle to administer.

In response, organisations are increasingly adopting a hybrid system where salaries are aligned globally for executives and senior employees, but local offices have more freedom to set their own packages, according to Curcio. This allows them to adapt to the nuances of each market while keeping the senior band working as one team.

However, further complexities may arise when workers move from one location to another, whether for a short secondment or a more permanent move. Differences not just in pay but also benefits, such as holiday entitlement, parental leave and health insurance can become apparent.

The typical approach is to add allowances for higher costs and inconveniences in the employees’ new country to their home salary, says Helen Mildred, group head of consultancy at ECA International, which provides advice and data to companies on global mobility policies.

That can add up: ECA research found the UK is the most expensive place to send a middle manager at an average cost of almost £400,000.

Pay is also an issue when employees are moved to a location with cheaper costs. They are often unwilling to take a pay cut, but research shows systems where expats earn more than locals can breed resentment. According to one paper by academics from City University Hong Kong, when many locals in China compare their pay with expats’ they are likely to see themselves as “victims of gross injustice”.

One solution that has gained prominence in the remote work era is for staff to be paid the same no matter where they live.

Reddit and Airbnb are among those adopting “geo-agnostic” policies. Both have one remuneration scale for each country they operate in — meaning workers are free to move to cheaper areas on big-city packages. Reddit said the policy helps it support the trade-offs its staff make in deciding where to live.

But few have extended that worldwide. US tech company 37signals is an exception, paying all employees San Francisco rates. “The same person produces the same work, no matter where they hang their hat,” its website reads.

However, it is unlikely such policies will see wider take-up, believes Daniel Seligman, CEO of offshore recruitment company Talently. Overpaying in lower-cost markets “reduces the cost-saving benefits of hiring from those regions”, he says.

Many organisations are turning to other forms of pay to stay competitive.

PwC research suggests the share of employees saying higher pay is their preferred way to be rewarded has fallen 20 per cent over the past decade in favour of benefits, development opportunities and work-life balance. Almost half of workers would accept a pay cut in order to work remotely, a University of South Australia study found.

Against a backdrop of escalating cost pressures on business — inflation, the recent raising of employer tax contributions in the UK and post-US election uncertainty — and the ongoing impact of hybrid working, Curcio expects businesses will need to keep rethinking their salary benchmarking strategies.

“All of this, I think in the next 12-18 months, will be thrown up in the air,” he says.