In this blog we will explore the topic of Location based compensation and should someone living in one city be paid as someone in another.

  1. Different approaches to location-based pay.
  2. Office based staff V remote based staff. Do they offer the same value to the business?
  3. Internal conflict around technical duties, is this an issue?
  4. Tax implications for the business
  1. Different approaches to location-based pay.

There are a few things to consider with remote based pay. Do you allow anyone work from anywhere, well if you allow that, you will run into a few tax issues. For example, if you are an Irish company you have to deduct tax for all of your employees, if you are not based in Ireland, you will also be liable for tax wherever you live. the employee will be double taxed. Which is far from ideal for the employee. So the business will need a legal entity in each jurisdiction you have staff. There are alternatives of course, you can use a flexible work force or contractors, or outsource companies who have legal entities in each country to employee your remote staff. That can cost a pretty penny. So, approach with caution.

So, what’s the answer here, let’s say your top Software Engineer is Romanian and looking to move home, you really don’t want to lose them. Option 1 – ask them to become a contractor. Meaning they set up as a sole trader (or equivalent) or set up their own LLC or limited company  and invoice the business directly and look after their tax in their home country. Alternatively, the business sets up another limited company in Romania and look to add more employees using there Engineer as a site lead.

In the USA is different in that if the business has a HQ in New York and wants to employee people in LA let’s say, if a non-resident receives W-2 wages for work performed out of state being California, even if it’s from a New York employer, the income is not subject to New York income. So, working from anywhere in the US is a lot easier.

Back to Ireland, if you have an office in Dublin, Ireland, an employee let’s say a Java Developer can live anywhere on the island of Ireland, so to ease the cost of living the Engineer can live in a more cost-effective place in Ireland. Let’s look at Dublin and Offaly. An average 2 bed apartment would cost anywhere from €2,200 – €3,500.

Compare that to a 3-bed house in Tullamore in Offaly which is only an average of €1,500. Other costs will be similar, so the argument would be should that same Java Engineer be paid the same if they are to work 100% remotely. Key question that Engineer might ask is, why am I being paid less because of where I live?

  1. Office based staff V remote based staff. Do they offer the same value to the business?

Location based salaries will be a hot topic over the next few years as company leaders realise that remote working is here to stay. I think it is reasonable that companies acknowledge that is there is a mass call back to the office, some employees have moved and geographically is now not feasible to come to the office 2-3 days a week. Kids are in school, employees are part of communities, activity groups etc.

Taxes are not difference around the island of Ireland, but if someone is based abroad as mentioned above there is a liability to pay local tax. Some companies will pay people the same no matter where they are based. But is that going to stay that way. Are companies getting the most out of that Employee, if they are senior, are junior members being mentored effectively remotely, in person and in the office? Does that matter anymore?

I have always felt that the biggest loser of working from home is those more junior and graduate members of the team who do not have the option to just walk up to someone to seek guidance, they now have to ping a message and reply, or arrange a meetings to suit all calendars. There was a lot to be said for the desk walk by!

  1. Internal conflict are we likely to see this with location-based pay?

In most work environments people compare their abilities with others, there is the best performer who sets the pace and those aiming to perform better.  So will that create a them versus us mentality. What I mean by that is, for those who go to the office and build in person relationships against those who don’t. Will groups form and look after one another in an in person setting. This again is a natural thing to happen in a healthy work environment.

I think this dynamic is likely to happen weather payment is the same or different. If you take any IT job in Dublin for example. Let’s say a sprint team has 3 Software Engineers, a QA Engineer, Product Manager and perhaps a rotating Project Manager. If half the team are in an office and the other half based in other locations, are duties going to be spread evenly. Is the more interesting creative and innovative work going to be handled by those who are together in person, how will the best results form, its generally brainstorming in a group. Then naturally the interesting Engineering will be created by those same people. Its very hard to find a solution to this. Its more an observation that could happen.

Are we also likely to see those working remotely be more at risk of isolation, well perhaps not. We have to remember that companies have worked in a remote setting for years and has been very successful. As this blog is pay related, in my experience, location-based pay has always been in place for those not in the office.

For example, if you go back 5 years and a Software Engineer is based in Dublin and decides to move to New York, their contract changes and compensation changes with it. So why is it today if someone decided to move from Dublin to Sligo that they don’t expect to have a salary in line with living in that area. They no longer have the high cost of rent (relatively speaking), no commute costs etc. More importantly they no longer are around the office to add to the culture assisting in grooming the graduate and junior Engineers etc.

Google recently announced that, “Whether you choose to transfer to a different office or opt for completely remote work, your compensation will be adjusted according to your new location.”

This is becoming more and more popular amount the leadership in the larger companies around the world. Again, this blog is more pointing out where pit falls might occur.

  1. Cost implications for the business to offer a work from anywhere.

Its all well and good for a Google or Amazon to say you can work anywhere because they have such a large office footprint worldwide with a large back office supporting those offices and businesses. Sadly, the majority of companies they do not have the privilege to offer there staff the option to work anywhere, unless as mentioned above the employee opts to be a contractor. This works today and always has. The cost implications are of course the cost of a contractor is higher than that of an employee.

3 Cost implications for the business to offer a work from Anywhere strategy.

  1. Under utilised Offices in prime locations
  2. Opening and servicing legal entities in strategic locations to allow for remote working employees.
  3. Confusing accounting and foreign exchange.

The reality of the costs above, if you were to get half of your workforce working remotely you will be able to reduce your office space, in some cases remove it completely. Not having an office will again reduce those costs, so no heating or air conditioning bills, plumbing, remodelling etc. In fact you could use the extra legal entity as ways to expand and showcase to customers your world wide reach.

Paying people appropriately will always be at the top of HR agendas, changing contracts based on location will be a touchy subject. ith clear communication those expectations can be set so there are no surprised.

Here are 3 strategies to consider when adopting a location-based compensation strategy:

  1. Use the average salary in cities to establish the difference that should be applied to each salary. For example, there is an 11% difference between the Average Salary in Dublin against the average salary in Galway. So, this strategy would see an employee’s salary reduce or increase based on those averages.
  2. Pay according to there value no matter where they are. For those harder to find skills such as a Software Engineer, IT jobs in general can be tricky. Savings can be made by reducing office space.
  3. Using a cost-of-living index, this is a way to measure core expenses in a town or city. Areas such as housing, transportation, meals, and utilities. The tool Numbeo which breaks down typical costs and index figures for cities all over the world, allowing companies to compare employees’ cost of living. Then make the appropriate calculation to make it attractive for that person to join the business.

Elwood Roberts is a unique Recruitment Partner with over 18 years’ experience in the Irish and US markets. For years we have helped hundreds of companies of all shapes and sizes fill those hard to fill jobs from both the IT and Construction sectors.

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