Skye Gould / Business Insider
- Susan Alban and Meghana Reddy argue that location-based compensation should be a thing of the past.
- Tech companies will lose top talent if they don’t switch to a national pay structure.
- The latest trend shows that many companies had already moved away from geographic wage differentials before going public.
- Check out Insider’s business page for more stories.
We are two leading people in high-growth tech, one of us is an operational partner at a VC that spends time in over a dozen companies, the other is an HR executive at a high-growth technology startup.
One of the biggest problems we’re working on today is hiring great talent. There have been seismic shifts as to where tech workers work geographically and how they are rewarded in the US
The changes that have taken place are here to stay.
We believe that early stage founders will lose talent if they don’t adapt quickly and switch to a national pay structure.
Susan Alban and Meghana Reddy
Talent becomes national
The COVID pandemic has changed how, and most importantly, where knowledge workers do their jobs and how employers build their teams.
On the employee side, when workers were told to stay away from home and office in 2020, they were separated from a certain location. Many moved temporarily and sometimes permanently, often choosing cheaper cities and suburbs.
On the employer side, companies found they could expand their talent sources outside of the competitive (and diversified) markets of San Francisco, Seattle, and New York. Recently, LinkedIn found that job postings that mention “remote work” have increased nearly five-fold over the past year.
This employers’ desire for wider access to talent was compounded by record-high venture dollars that flooded the tech market ahead of the IPO.
With that money comes aggressive business and product goals, which means companies are quickly scaling their teams to meet those goals. This increases competition for talent and increases employers’ willingness to expand into remote and distributed work.
How are employees paid?
As this trend accelerated over the past 12 months, many HR leaders pondered how the geographic distribution of talent should affect compensation.
In early 2020, big tech companies like Facebook and Affirm hit the market with plans rooted in historic compensation practices. They stated that in cases where employees would move permanently, their salaries would be adjusted to reflect the cost of the work dynamics in their new hometowns.
For example, in the case of a software engineer moving from Menlo Park to Austin, that employee’s pay will be adjusted lower to reflect the relatively lower labor costs in her new city.
Even the long-deprecated GitLab maintained its “pay local tariffs” approach, and it seemed that geographic wage differentials, also known in pay circles as “geodiffs”, were being persisted in technology across the board.
But it hasn’t been like that for the past 15 months, at least not in the pre-IPO tech sector.
A survey of over 300 venture capital-funded startups, conducted in April 2021, found that only 21% of companies planned to adjust employee compensation when moving from a high-priced market to a lower-cost one. The co-founder of the compensation startup Welcome, Rick Pereira, explained that in June 2021, only 4% of startups adapt technical roles based on geographical considerations and only 28% do this for non-technical roles, even though the engineering compensation has decreased by 11 a.m. since 2020 % has increased.
And even big tech companies that seemed to be chasing Geodiffs have done things to soften the blow, such as:
This means that in the US we are seeing a narrowing of geodiffs and the creation of a national labor market. This is done for three reasons:
- Having Geodiffs is more technically complex and requires more discussions with affected employees and more exception handling for the HR team. Employees and candidates are less and less accepting the dire rationale that they should be paid less for an identical job and contribution depending on where they live.
- For smaller businesses, the real cost differential between popular high-cost and low-cost locations does not translate into sufficient cost savings to justify the added complexity and risk of costly employee turnover.
- With a sufficient share of the market holding national pay rates in 2020 while we all waited to see how long we would be stuck at home, the “new normal” in pre-IPO technology became national rates. This means in-demand talent now has ample alternative employment opportunities as there are a sufficiently large number of employers – including Loom, Reddit, and other prominent tech employers – willing to hire with geographically independent compensation. Companies that maintain geodiffs are therefore at a disadvantage when it comes to attracting and retaining talent compared to a growing number of location-independent companies.
The last two reasons are in a sense self-fulfilling, as more and more companies give up geodiffs and the gaps worsen and the more the market moves towards national benchmarks, the more detrimental it becomes to maintain gaps.
(It’s worth noting that international wage differentials seem to persist, given significant differences in taxes and employment regulations.)
What companies should do in the future
Ultimately, since the work in the technology has been separated from the location, we see that, so is the remuneration.
A significant portion of the pre-IPO market has already switched to a national compensation approach and any early stage founder should carefully consider this.
By retaining Geodiffs, founders penalize their companies in attracting and retaining talent compared to other employers and potentially oblige their companies for hidden costs such as increased recruitment efforts and employee turnover.
The thoughtful founder should consider whether location-based pay can offer any value, but with the development of a more nationally labor market that is likely to continue in the future, potential savings can be a mirage.
Susan Alban is the Operating Partner and Chief People Officer of Renegade Partners, an early stage venture capital fund. She is a former consultant to McKinsey & Company and was the first general manager of Uber EATS in the Bay Area.
Meghana Reddy is VP of People and Operations at Loom, a video messaging tool that enables modern working. She is a former director at Bain & Company.
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