A CTO’s Guide to Remote Compensation Strategies
Understanding the benefits and drawbacks of location-indexed and location-independent salaries, with numbers.
Understanding the benefits and drawbacks of location-indexed and location-independent salaries, with numbers.
Q: “I’m the CTO of a Series A startup, and I’m leveraging our remote culture to attract engineers from larger companies. However, despite being well-funded, we don’t have the budget to compete on salaries with unicorns and Big Tech.
What are my options to hire good engineers, within a reasonable salary budget?”
This is an evergreen question. However, it’s especially timely as strong VC funding is one of the six contributing factors to the current heated tech hiring market. As startups raising healthy funding look to scale, they naturally seek to hire experienced engineers, often wooing them away from larger companies.
To answer this question, I’m pulling in my friend Sergio Pereira who has been a Chief Technology Officer (CTO) of remote teams for 6 years and is sharing his knowledge at Remote Work Academy, through articles and courses. He is also active in several CTO roundtables, keeping his ear on the ground.
In this issue we cover:
The shift from office-based to remote. Remote work is here to stay, and increasingly so with startups.
Location-indexed salaries. The benefits and drawbacks of this approach.
Location-independent salaries. Although often a more expensive approach, this comes with plenty of upsides. It also brings the important question of what, exactly, to benchmark on. Comparing UK, Netherlands, Switzerland, Portugal, Belgium and France taxation rates.
Benchmarking. How can you anchor ranges for remote salaries?
Numbers. Salary numbers considered competitive for seed-stage and Series A companies based on The Pragmatic Engineer Job board statistics and conversations with founders at Seed and Series A stages who are hiring successfully.
Although the issue is written targeting CTOs, the information below is relevant for engineers and managers. It’s good to understand the tradeoffs companies make when deciding on a compensation strategy. Also, one day you might become a decision maker on budgets. When you do, come back to this article to weigh tradeoffs on either approach.
Over to Sergio:
With the explosive growth of remote work since 2020, many startups are adopting a remote culture to attract the best talent. But how much they should pay remote employees is not an easy question.
Remote work is not a new concept; some companies have already been doing it for over a decade. One notable example is Automattic. I remember interviewing an engineer from Automattic back in 2014, and it blew my mind how they had people spread across 50+ countries working together. Fully remote. It was unheard of back then, and I loved it.
What is new about remote work today is that millions of people experienced working from home for the first time during 2020, because of the global pandemic. Most of them preferred it, and now want to continue.
For companies, the pandemic abruptly disrupted their business-as-usual, which led to consecutive contingency plans and new ad hoc processes to support their remote employees.
In this article I share my perspective on how this shift from office-based to remote working is taking the tech hiring market by storm, and the big divide among companies when it comes to defining compensation for international employees.
1. The shift from office-based to remote
Now, as the pandemic gets behind us, companies are announcing longer-term “post-pandemic” policies. And there’s a new dynamic:
Most Big Tech companies move back to the office.
Most startups are remote-first.
Most employees want to work remote.
As a result, many engineers leave Big Tech and join smaller startups, so they can continue working remote.
An engineering manager I interviewed and hired last year said he was job seeking because his employer, a well known bank, had decided to return to the office for 2 days per week. He had already sold his stuff in London and moved back to his home country, so was only accepting remote offers.
I’ve been a startup CTO for the last 8 years, and for the last 5 years I’ve managed remote teams and hired engineers from anywhere in the world. I’m not going back to the office, as I would lose valuable engineers.
And it’s not just me who sees remote as an opportunity to attract the best engineers. I’ve been participating in roundtables with other CTOs for the last 2 years, and I see most of my peers gravitating towards remote as well. Even as they set post-pandemic policies, going back to the office is optional or even non-existent as an option.
This shift from office to remote coincides with the hottest tech hiring market in history, with way more job openings than there are engineers available to fill them. Salaries for software engineers are higher than ever, especially in places like the Bay Area, where Google is offering above $500K in total compensation for staff engineers.
Remote is a great way to find the best talent anywhere in the world. One hot topic is how to structure international employees’ salaries. This topic was already very hot, regionally. But it becomes even more significant when your talent pool is global. There’s a divide in my discussions with other CTOs, where our strategies differ.
2. The divide in remote salaries
There are two schools of thought emerging about remote compensation:
Salaries indexed on location. This means a software engineer in London, United Kingdom, earns a higher salary than the same engineer in Bangalore, India. The rationale is that London has a much more expensive cost of living than Bangalore, so salaries reflect that reality.
Equal salary for the same role regardless of location. This means a software engineer in London earns the same as one in Bangalore. The rationale is that two people doing the same job should earn an equal salary, and this strategy aims to be fairer.
Both strategies are viable, and there are successful companies adopting each of them. Let’s expand on their pros and cons.
3. Location-indexed salaries
I see mostly medium to large-sized companies opting to pay based on location. Usually, the key reason is a drive for frugality on salaries in larger teams:
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