The rise of remote work has fundamentally reshaped global employment dynamics, but it has also intensified debates about equitable compensation across borders. While 62% of organizations now use geographic pay policies to adjust salaries based on local labor markets or cost of living, this practice has led to stark disparities.
For example, Indeed research found tech employees in high-cost cities like San Francisco earn 20% more than those in smaller cities for identical roles, and women in remote roles earn just $0.83 for every dollar earned by men. This gap widens further for women of color. These imbalances persist even as 67% of employees expect their pay to reflect their location, creating tension between corporate cost-saving strategies and worker perceptions of fairness.
The push for location-based pay models is driven by both economic pragmatism and market forces. Companies like Google have reduced salaries by up to 25% for employees who relocate from urban hubs, arguing that wages should align with local living costs. However, this approach risks exacerbating existing inequalities: remote employees in lower-income regions face systemic earning disadvantages, while highly skilled professionals in wealthy areas retain wage premiums.
For employers navigating this landscape, the stakes extend beyond budgets. As the remote work revolution continues to unfold, these challenges underscore the need for strategies that harmonize cost efficiency, talent retention, and ethical compensation practices.
What is location-based pay, and why are companies using it?
Location-based pay refers to compensation strategies that adjust salaries according to an employee’s geographic location, factoring in regional cost of living, local labor market rates, and organizational budgets. This approach has gained traction as companies balance cost efficiency with global talent acquisition.
Definition of location-based pay
Location-based pay aligns salaries with economic conditions in an employee’s region. For example, a marketing manager in Los Angeles might earn 25% more than her counterpart in Green Bay due to higher housing costs and competitive tech salaries. Employers often use cost-of-living indices or localized salary surveys to determine adjustments, though some prioritize labor market benchmarks over living expenses.
Types of geo-based pay models
There are a few primary ways location-based pay models are structured, including:
- Cost-of-living adjusted pay. This model ties one’s salary to regional expenses. The classic example is a web designer in New York City earning $120,000 annually, while their doppelganger in Newport earns $85,000 for the same role.
- Job-market-based pay. The competition for local talent varies across job markets. Tech roles in Bangalore may pay 30% less than equivalent positions in Silicon Valley, reflecting regional wage norms rather than living costs.
- Flat-rate remote salaries. Becoming more widely adopted, this model offers uniform pay regardless of location. Flat-rate salaries simplify administration but risk overpaying in low-cost areas and underpaying in expensive cities.
Why companies are adopting location-based pay
“The argument seems straightforward: if a job is performed remotely, it shouldn’t matter where the worker is based,” argues Anita Lettink, experienced HR and Payroll Advisor and Author. “And in an ideal world, that might be true,” she adds.
Lettink, a keynote speaker and authority on the topic, emphasizes, “Location plays an important role when paying people. And there are reasons why employees must always inform their employers where they are working, even if they are ‘working from anywhere.’” While timely communication and taxation are two main reasons, using location-based pay as a global compensation strategy is a popular third.
Cost savings is the primary driver for adoption, particularly for firms expanding into lower-wage regions. Paying remote workers 25% to 35% less in Asia than their Western counterparts can dramatically reduce payroll expenses. World at Work found that more than half of organizations use a city/metro area as an indicator to instruct location-based pay strategies.
Market competitiveness also plays a pivotal role. Companies adjust salaries to match local benchmarks, ensuring they attract top talent in high-demand regions.
Legal compliance further incentivizes these models. Countries like Germany mandate location-specific minimum wages, while Brazil requires regional bonuses for hazardous work. Multinationals must also navigate tax implications, such as Singapore’s progressive income tax brackets influencing take-home pay calculations.
The risks of pay inequality in location-based salary models
Location-based pay models, while economically pragmatic, introduce significant risks that can undermine workforce cohesion and organizational stability. These disparities often create unintended consequences that ripple across recruitment, retention, and corporate reputation.
- Pay disparities between remote and in-office workers. Remote employees may resent their colleagues earning more for identical but in-office roles in urban centers, fostering perceptions of inequity. This dynamic can create a “two-tier” workforce, where remote workers—often in lower-income regions—feel marginalized compared to office-based peers.
- Employee morale and retention issues. Workers who accept pay cuts after relocating often report feeling undervalued, leading to higher turnover. Salary transparency laws, now active in 14 U.S. states and the EU, amplify these risks by exposing gaps that erode trust in leadership.
- Employer brand and talent attraction risks. Companies perceived as underpaying remote talent struggle to compete for top candidates, particularly in fields where professionals prioritize pay equity. Public backlash can escalate if employees share pay discrepancies on platforms like LinkedIn or Clutch.
- Legal and compliance challenges. Mismatched pay structures may violate anti-discrimination laws in jurisdictions like Canada and France, where equal pay for equal work is legally mandated.
- Operational complexity. Managing dozens of regional pay tiers increases administrative burdens, particularly for HR teams navigating conflicting tax codes and labor laws. Errors in cost-of-living calculations or delayed adjustments for inflation can further alienate employees.
- Erosion of team cohesion. Pay gaps often correlate with reduced collaboration between high-earning and low-earning regions, particularly in global companies.
These risks highlight the delicate balance companies must strike between cost efficiency and equitable compensation in a borderless labor market.
Regulatory and compliance considerations for location-based pay
Navigating location-based pay requires careful adherence to evolving regulations, particularly as governments worldwide tighten oversight of compensation practices. Failure to comply risks fines, litigation, and reputational damage.
Pay transparency laws and compliance risks
Jurisdictions like California, Colorado, and New York City mandate salary range disclosures in job postings—even for remote roles—with penalties up to $10,000 per violation. The European Union’s Pay Transparency Directive further requires employers to justify geographic pay gaps exceeding 5% for similar roles. These laws force companies to balance localized pay strategies with clear documentation proving differentials stem from objective factors like cost of labor, not bias.
Fair pay and anti-discrimination laws
When pay disparities disproportionately affect protected groups, location-based models risk violating anti-discrimination statutes. To mitigate risk, employers must demonstrate that pay variations align with verifiable market data rather than demographic factors. For example, using metropolitan statistical area (MSA) benchmarks helps standardize adjustments while avoiding arbitrary zip-code-level discrepancies.
Global compensation compliance for remote workers
Multinational employers face layered obligations: France mandates profit-sharing schemes (intéressement) for companies with over 50 employees, while Mexico requires an annual aguinaldo bonus equal to 15 days’ salary. Wage compression challenges emerge when a senior developer in Mumbai earns less than a junior counterpart in Toronto despite comparable responsibilities.
Additionally, many countries enforce non-monetary benefits such as housing allowances in Austria or Belgium, even though income remains tax-free. Adapting to these rules demands meticulous payroll structuring, particularly in regions with unique tax treaties or provincial rate variations, such as Canada’s higher tax rates compared to the U.S.
Organizations can reduce legal exposure and maintain workforce equity by integrating localized compliance checks into pay structures.
Best practices for fair and transparent remote compensation policies
Adopting equitable compensation strategies in a globalized workforce requires balancing localization with fairness. These practices help organizations maintain trust while navigating regional complexities.
- Use data-driven salary benchmarking. Prioritize salary benchmarking and labor demand metrics over static cost-of-living indices—e.g., cybersecurity roles in Tel Aviv may command higher premiums than in Lisbon despite similar expenses. Leverage tools like Velocity Global’s Global Work Platform™ to manage and pay a global workforce across 185+ countries.
- Ensure pay equity across roles and locations. Audit salaries quarterly, adjusting for role, experience, and localized benchmarks. A project manager in Mexico City should earn proportionally to peers in Madrid when accounting for regional market variances.
- Be transparent about compensation models. Clearly document how location impacts pay, such as tiered systems grouping economically similar regions. For instance, transparent salary adjustments for role seniority before geography effectively minimizes perceptions of bias.
- Provide non-monetary benefits to balance pay adjustments. Offset regional pay gaps with equity grants, global wellness stipends, or childcare support. An engineer in Nairobi might receive fewer stock options than one in Amsterdam but gain access to local upskilling grants.
- Adapt to local labor laws and tax regulations. Use integrated platforms to comply with statutory employee benefits by country. Automated payroll systems reduce errors while aligning with tax treaties.
- Offer flexibility in compensation structures. Let employees choose between higher base pay and benefits like co-working memberships. Flexible work fosters a sense of autonomy and trust in employees—a powerful catalyst for retention and well-being.
By embedding these practices, organizations can foster inclusivity while sustaining global growth.
Optimize your payroll strategies with Velocity Global
Navigating global compensation requires expertise in balancing regional compliance with equitable pay structures. This is where Velocity Global’s Employer of Record (EOR) solution becomes an indispensable partner. By automating payroll, benefits, and tax compliance across 185+ countries, Velocity Global empowers companies to implement fair location-based pay strategies while mitigating legal risks and fostering trust across distributed teams. Get in touch to learn more.
