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? In many cases, calculating appropriate rates and applying payments fairly across extended workforces can be difficult. This is especially true when hiring across multiple global markets simultaneously.

In this guide, we’ll break down everything you need to know about the salary benchmarking process, including three effective ways to approach it. We’ll also walk through some best practices to uphold, some of the biggest challenges you may face, and how to overcome challenges—alone or with the help of an Employer of Record (EOR).

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 salary benchmark data from reliable external sources to inform how much you pay each member of staff based on their job title, level, location, and other relevant factors that differ depending on local laws and customs (e.g., seniority, bonuses, 13th and 14th month pay).

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 levelling your employees within a standardised 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 competitive salary in one country or city may not be in a neighbouring location.

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’ business practice is now a must-have.

Salary benchmarking sends a clear message to employees, candidates, and investors that you're committed to transparency and fairness. Effective salary benchmarking helps you:

• Make informed, cost-effective decisions about employee 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, even if it means adjusting salaries upward and paying more in the short term. So how do you go about it?

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The Three Main Approaches to Paying a Global Team

There’s no right way to do salary benchmarking; every company has a 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 the value of building a career development framework. In practice, that means already having levelled your employees within their job families and trajectories 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

The first approach involves paying staff based on their location, and it’s the approach many global companies have chosen to take—largely because it’s straightforward. GitLab’s compensation philosophy is one of the most well-known and effective examples of this.

Paying staff at local rates takes into account localised market rates for labour or for the cost of living, often in conjunction. 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 argue that workers are penalised for working in a lower-wage area. Or they might say that equal work deserves equal pay. This brings up the challenging question of pay equity—it’s unclear if true equity is paying the same regardless of location or indexing for respective local costs of living.

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 locations in which you employ people. 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 have sound data and coverage across seniority levels in Western states such as the UK, US, Germany, and France. However, they may lack sufficient data for other regions. In addition, there may be anomalies in this data, so you may need to clean it. All sources use data from real businesses, so there are often discrepancies within it. For example, you may see a mid-level engineer earning more than a senior engineer. Anomalies like these need further context to inform benchmarking decisions.

2. Select a robust baseline market as a pivot for other benchmarks. For countries that lack data, we recommend baselining from one representative market with comparable laws, demographics, and dynamics. Use this as a pivot for the rest of your global benchmarks. Companies often choose the location where the majority of their employees are based, such as their HQ, and anchor off of it. The baseline location should also have sufficient benchmarking data available for the majority of roles within your organisation.

3. Gather data from local markets. You should be looking for recruitment reports, cost of labour tools, candidate feedback, and costs of living and rent indexes. The sources you use will largely dictate whether your location factors are at a city rate (e.g., Madrid), country-wide rate (e.g., Spain), or regional rate (e.g., Southern Europe).

4. Analyse the data to compare against your baseline rate. Data analysis should yield 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 (i.e., a percentage).

5. Apply location factors across employee salaries in each location. This will form part of your salary benchmarking formula: (Job family + Level) x Location factor = Base salary. For example, consider a company operating in London that creates a baseline off of its market salary for a given position (£42,000). If that company’s calculations reveal that the location factor for Ecuador is 63%, then the calculation for an employee in the same position but located in Ecuador would be as follows:  £42,000 x 0.63 = £26,460.

6. 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.

Following this strategy, you can easily pay each employee the same amount relative to actual costs of living and spending power indexes in the various locations in which they live and work.

2. Pay Staff Based on Location Bands

Similar to the above, this approach again uses localised data but then groups similar location costs into bands. Many companies that hire on a more regional basis rather than targeting specific countries use this approach. For example, Buffer uses this for its compensation policy.

Using a banded approach helps close the pay gap found in traditional employee 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.

How Do You Pay Staff Based on Bands?

Paying staff based on salary bands is becoming increasingly popular, so here’s how to do it:

1. Carry out steps 1-5 from option one for each location where employees are based.

2. Decide how many location cost bands you would like and factors for each band. The table below is a hypothetical 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., based on your company’s 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 follow suit—paying more could net better talent.

3. Categorise your locations into the bands based on their location factors. Set a minimum and maximum factor for each band. Any location costs within that range will be rounded up or down to the easier-to-manage banded location factor. For example, if Honduras has a location factor of 0.63, as in the example above, then it would fall into the Average band in the table below and be assigned a banded location factor of 0.7.

4. Convert the salary into the local currency.

For reference, here is the sample table used in the calculations above:

You shouldn’t use these exact figures when creating your benchmarks. Instead, create your own tables and rate calculations based on current pay data in the locations you target.

3. Pay Everyone the Same, Regardless of Location

The alternative to localising 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 this 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 every single developer or technical professional a San Francisco market rate, it’d be exorbitantly expensive for your business. However, if you chose a city with a lower benchmark, you could 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, again, we arrive at the question of pay equity: 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.

How to Pay Everyone the Same, Efficiently

This approach to salary benchmarking is certainly the simplest in terms of logistics, even if it can be challenging in terms of affordability and/or ethical concerns. 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. Specifically, make sure to cover each role within your career growth framework. For example, you should go beyond static rates for positions like ‘software engineer.’ Instead, you should be asking: what should a Senior Software earn in San Francisco vs. a Junior Software Engineer in the same city?

3. Convert the salary to the local currency of the employee’s location. See above.

The simplicity of this approach makes it attractive, but companies that use this method need to carefully monitor the actual impacts salaries and wages have on their employees. Their seemingly equal pay might suddenly be impacted by inflation or other factors where they live. If that happens, it might make sense to adjust rates temporarily or switch to one of the approaches above.

Best Practices for Global Salary Benchmarking

Companies looking to benchmark salaries across their global workforces should follow one of the approaches above. While these approaches do have important differences, there are practices that need to be followed, whichever you choose.

To begin with, all approaches to benchmarking require employers to generate or acquire accurate salary data in their baseline location. Whether these are used to adjust employees’ pay in other locations or to set the rate all employees are paid, they need to be accurate and up-to-date. That means careful sourcing and review, with adjustments as needed.

Another essential practice is transparency. Once companies have decided on an approach, they should make that decision clear to all who might be impacted by it. One excellent method is to follow the example of the companies cited above and make a public-facing blog or webpage about their payment philosophy. Letting the world know how you pay your workers and why shows a commitment to transparency and fairness—which could attract top talent to you.

The Importance of Reviewing 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.

Legal & Ethical Considerations for Global Benchmarking

When expanding globally, it's essential to navigate the complex web of legal and compliance requirements associated with compensation benchmarking. Each country has its own labour laws, tax regulations, and employment standards that can significantly impact your compensation strategy.

Key considerations include:

• Minimum Wage Laws: Ensure that your total compensation meets or exceeds the legal minimums in each country to avoid penalties and reputational damage.
• Equal Pay Regulations: Some jurisdictions enforce strict equal pay laws, requiring employers to provide equal compensation for equal work, regardless of location.
• Tax Implications: Different countries have varying tax obligations for both employers and employees. Missteps can lead to financial liabilities and compliance issues.
• Employment Contracts: Local laws may dictate specific clauses that must be included in employment agreements, affecting how you structure competitive compensation packages.
• Currency Controls: Some countries have regulations on currency exchange and repatriation of funds, which can impact salary disbursements.

The takeaway is that the best way to avoid any possible negative outcomes is to approach benchmarking carefully and with fairness in mind—ideally with the support of an EOR.

Omnipresent Gives You More Time to Focus on Your People Policies

Salary benchmarking a global team is highly complex and can be time-consuming, but it’s crucial for the long-term success of global teams. Ultimately, there are no easy answers, but the approach you take should be the one that best aligns with your own company’s goals and values.

Thankfully, Omnipresent can free up your time to focus on HR policies like salary benchmarking by taking care of global employment administration and compliance for you. We handle onboarding, payroll, benefits, and more so you can build a world-class global team and a leading global-first business.

Get in touch to find out more.