How to Do Salary Benchmarking for Global Teams

One of the biggest challenges global-first businesses face is salary benchmarking. In other words: how do you pay a globally distributed team fairly and cost-effectively? Let’s start with the basics.

What Is Salary Benchmarking?

Salary benchmarking is the process of establishing and applying market rates to the roles in your company. It involves gathering data from reliable external sources to inform how much you pay each member of staff based on their role, level, and location.

For local-first teams (i.e., those based in just one location), this process is fairly straightforward. You simply gather market rate data for the local area by role type and decide how competitive your compensation packages should be. The trickiest part of this process is leveling your employees within a standardized career growth framework, which you’ll need before you begin any benchmarking process.

In contrast, the process is much more complicated for global-first teams because you have to consider many more variables. After all, what’s considered a good salary in one country or city isn’t in another.

Why Is Salary Benchmarking Important?

Despite its complexities, salary benchmarking is highly beneficial for your team and wider business. What was once seen as a “nice to have” is now a must-have. Salary benchmarking sends a clear message to employees, candidates, and investors that you're transparent and value fairness.

Effective salary benchmarking helps you:

• Make informed, cost-effective decisions about compensation.
• Attract and retain top talent.
• Increase employee engagement and productivity.
• Ensure fairness for employees and the local communities they live in.

In the long run, salary benchmarking might just increase your bottom line. So how do you go about it?

{{ungated-inline-cta}}

There Are Three Main Approaches to Paying a Global Team

There’s no “right” way to do salary benchmarking; every company has a slightly different approach, and what works for some won’t for others. However, there are three main avenues you can take.

Before we dive in, it’s worth noting that it’s useful to have a career development framework in place and have already leveled your employees within their job families before you start salary benchmarking. This will make the process much simpler and fairer. Once you’ve done that, you can consider the three approaches below.

1. Pay Staff at Local Rates

This involves paying staff based on their location, and it’s the approach many global companies choose to take. GitLab’s compensation philosophy is one of the most well-known examples of this.

Paying staff at local rates takes into account localized market rates for labor or for the cost of living - and often a combination of the two. This allows you to adapt to market changes as and when necessary.

The main advantage of paying staff according to local rates is that it enables you to remain competitive in both high and low-wage areas. Even if your employees don’t receive equal wages, they can still enjoy a very similar standard of living. It also means you don’t overpay for talent in lower-wage areas, saving your business money and allowing you to hire more talent.

On the flip side, it can be time-consuming and expensive to keep location data up to date. Additionally, some people also think this approach to salary benchmarking isn’t fair. They might say: “Should someone be “penalized” for working in a lower-wage area? What about equal pay for equal work?” This brings up the challenging question of “what is equity?” Is it paying the same regardless of where someone lives? Is it paying per cost of living? Or is it something in between?

How Do You Pay Local Rates?

To pay local rates, you need to obtain as much reliable local data as possible for each level of seniority in each location you employ people in. Here’s a six-step process to guide you:
‍

1. Choose your external data source for salary benchmarking. Some popular options are Mercer, Option Impact/Pave, Radford, Figures, Ravio, Mercer, and Willis Towers Watson. These providers will have good data and coverage across seniority levels in certain countries such as the UK, US, Germany, France, and other EU countries. However, they often lack data for countries in other regions. It’s worth noting that there may be some anomalies in this data, so you may need to “clean” it up a little. This is because all sources use data from real businesses, so there will always be some discrepancies within it. For example, you may see data that suggests a mid-level engineer earns slightly more than a senior engineer. Common sense tells you that this data is likely an anomaly.
   ‍
2. For countries that lack data, we recommend taking a robust baseline market as a pivot for the rest of your global benchmarks. Often companies choose the location where the majority of their employees are based, such as their HQ, and anchor off this. The baseline location should also have sufficient benchmarking data available for the majority of roles within your organization.
   ‍
3. Next, gather data from local markets, including recruitment reports, cost of labor tools, candidate feedback, and cost of living and rent indexes. The sources you use will largely dictate whether your location factors are at a city (e.g., Madrid), country (e.g., Spain) or regional (e.g., Southern Europe) rate.
   ‍
4. Analyze the data to reveal an accurate picture of how each location compares to your baseline location. This will tell you what the differential is so you can create a location factor.
   ‍
5. The location factor can then be applied to each location. This will form part of your salary benchmarking formula: (Job family + Level) x Location factor = Base salary. E.g., London (baseline market) = £42,000, Honduras = £42,000 x 0.63 (location factor) = £26,460
   ‍
6. Finally, convert the salary into the local currency. As currency fluctuates regularly, it may be worth using average exchange rates over 1-2 years to avoid extreme highs and lows.

2. Pay Staff Based on Location Bands

Similar to the above, this approach again uses localized data but then groups similar location costs into bands. This is what Buffer uses for its compensation policy.

Using a banded approach helps close the gap found in traditional compensation approaches where multiple location indexes result in a fragmented approach to pay. For example, without a banded approach, you may have two people on two marginally different salaries even though one is based in Spain and the other in Portugal.

However, one of the disadvantages of using this approach is that you may end up “overpaying” some people when compared to the local market rate approach.

So How Do You Pay Staff Based on Bands?

Paying staff based on bands is becoming increasingly popular, so here’s how you would go about it:

1. First, carry out steps 1-5 from option one for each location where your employees are based.
2. Then, decide how many location cost bands you would like, as well as the location factors for each band. Below is an example using five bands. Your approach to choosing a location factor for each band can be both “scientific” and based on what you feel is right (i.e., your company goals, values, and beliefs). Just because the data tells you that the salaries in a particular location are consistently half that in your baseline location doesn’t mean you have to pay accordingly.
3. Now, categorize your locations into the bands based on their location factors. For example, if Honduras has a location factor of 0.63, then in our example below, it would fall into the “Average” band and be assigned a banded location factor of 0.7.
4. Finally, convert the salary into the local currency. As currency fluctuates regularly, it may be worth using average exchange rates over 1-2 years to avoid extreme highs and lows.

Table showing location bands

3. Pay Everyone the Same, Regardless of Location

The alternative to localizing your salary benchmarking is to pay everyone the same wherever they live. So a Senior Software Engineer in San Francisco would be paid the same salary as a Senior Software Engineer based out of New Delhi. This is how distributed software company Basecamp pays its staff. Its philosophy is “equal work, equal pay.” And there are some benefits to operating that way.

Paying equal compensation for equal work enables employees to live and work where they please, with no penalty for relocating to a cheaper area. After all, all work has a fixed value to the business, irrespective of geography. Equal pay for equal work is also much simpler in terms of data and logistics.

However, there are downsides to this approach too. If you choose to pay everyone a San Francisco-based market rate, it’d be really expensive for your business, but if you chose a lower benchmark city, you’d lose your competitive edge in more costly areas. As a result, your team might become less diverse, and those who do remain employed in high-cost areas would have less disposable income than their colleagues in other parts of the world. So is it really equal pay when an employee in one country can get a lot more out of their salary than an employee in another country?

Then there’s the knock-on effect for the local community. Some say offering well above the market rate in lower-wage areas could be detrimental to the community by drawing too many workers away from essential local jobs.

What’s the Methodology for This Approach?

This approach to salary benchmarking is certainly the simplest in terms of logistics. Here’s how you do it:

1. Choose your geographical benchmark. For the most globally competitive (but expensive) option, choose a high-wage city like San Francisco, New York,or London.
2. Collect data on the benchmark’s market rates for each role within your career growth framework. For example, what should a Senior Software earn in San Francisco vs. a Junior Software Engineer?
3. Convert the salary for each role and level from the base market to the local currency of the employee’s location. As currency fluctuates regularly, it may be worth using average exchange rates over 1-2 years to avoid extreme highs and lows.

E.g., London (baseline market) = £42,000
Honduras = £42,000

Continue to Review Your Benchmarking Regularly

We’re all familiar with the continuously waged “war for talent,” where base salary remains one of the main weapons in any company's arsenal. Consequently, market rates change continuously. Combined with other factors like inflation and the rising cost of living, this means that keeping track of this salary benchmarking data is no mean feat. So in order to remain competitive and fair, you should review your benchmarks and location factors twice a year, informing how competitively you should pay for each job family and location.