#37 - Global compensation strategies: How much should I pay my global employees?

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How to define a global compensation strategy

with Paul Arnesen from Talentroo 

Sandra Redlich  00:05

Paul, thank you so much for joining us for round two on the state of work podcast, we've recorded another episode before which people can listen to, it's called 'How to recruit the best talent for global expansion'. And in that talk, you did mention global compensation already. And you're very passionate about that topic and you were sharing some of your ideas. And we just thought, there's so much there that people can take home and think about and learn from that it's worth doing a standalone episode on this topic. So yeah, let's dive right in. Could you explain for anyone who hasn't listened to the episode just yet - what is global compensation?

Paul Arnesen  02:15

Yeah, well, first and foremost, thank you very much for having me back. I really enjoyed the first chat. And I really encourage everybody to go and listen to that, obviously. Well, so yeah, global compensation basically... The way I would define it is, when you are hiring on a global scale, you have to deal with a lot of different payment systems and structures because you are not hiring a person from one country that is taxing to one region or one country alone, we might have people in Asia or in Europe and everything. So you're looking at sort of setting up for your HR department, like a system where basically or like an...  You have to organize your way of compensating people depending on where they're living. And that the complexity then comes into, oh, you're gonna set like one standard of compensation that is sort of all encompassing the entire globe, or you're gonna look at different models, depending on where someone lives. So there's a lot of sort of issues that can arise from thinking about how you are gonna compensate someone when you have a global company or a mindset of being a remote first company that hiring people from wherever they live, and that can work from anywhere or work from home from where they live.

Sandra Redlich  03:33

And does compensation include benefits then as well, that's just something that popped into my head just then because obviously, you know, different areas have different benefits that are legally required. And companies do offer additional benefits as well. Would you include that in compensation?

Paul Arnesen  03:49

Yes. So well, then again, it comes down to what kind of sort of payment structure or contractual structure you want to have on your employees. So most of the time, if you're working with a lot of independent contractors, freelancers, benefits and everything is sort of not included. That's sort of based on sort of tax implications that comes into play then if you sort of give a freelancer equipment, for example, or like, I don't know, like gym memberships and stuff like that. But at the other end, if you do have a lot of you know, full time employees, then benefits definitely becomes part of global compensation. And there's a lot of things to sort of, you know, talk about around that as well because culturally for example, benefits is different. What is maybe a interesting benefit to have in one part of the world might not be that interesting in another part of the world. For example, I'm myself, I'm from Scandinavia, a typical benefit is like a gym membership. That might not be that interesting in other parts of the world. Or they might have food vouchers for example, stuff like that, you know? So again, if this comes under which it does global compensation, you know, even more complexity arises because then you have to define what someone in one part of the world wants and what someone in another part of the world wants. And it's difficult to make one, in my opinion, it's difficult to make one model fit everyone.

Sandra Redlich  05:21

That's a perfect segway into my next question, which is when and why would a company need a compensation strategy? And maybe also, what are the different strategies or approaches you could take? You've mentioned already maybe looking at individual strategies. So depending on where your employees are from, or if you're having full time employees versus freelances. So what are the different approaches? And when would a company need to actually start thinking about a proper strategy?

Paul Arnesen  05:48

Yeah, so I think that's all about scaling. I will say, from my experience of working with companies, most companies in a startup phase, they will probably rely mostly on independent contractors, because they want to have projects done. So they sort of hire someone on a short term basis to sort of develop either a marketing strategy or a sales strategy or something. And then you hire independent contractors to help you sort of establish your business, obviously, then you only have to worry about say, this project has a cost, and then that's what you pay sort of a compensation on to that contractor for developing or finishing that project. Obviously, when you scale up, or if you have maybe a startup with a lot of funding, maybe you want to start developing a team, and you sort of start hiring talent, acquisition specialists or a talent acquisition team, and then you basically then define, okay, we are, especially if you're going to say that we're gonna hire remote people, and we want to look for the best person out there, regardless of location, then you have to then develop that strategy to say, Okay, what do we want to say? What like, what's our budget for a position? And what are we willing to pay? And if that is sort of the idea, then maybe it doesn't matter where they live or where they come from, because you're defined that budget for that role. That's sort of the high level of stuff. I think that the most big companies today that are scaling up, they do that approach first, say the cost of an employee for this role is this much so and then we hire remotely. So it doesn't matter where you live. We're going to pay that regardless.

Sandra Redlich  07:29

And they're referring to their local market, I guess, then? So wherever the startup is, based on the average industry standard?

Paul Arnesen  07:35

Exactly, yeah. So some companies that I work with, say, like German companies, for instance, they say, Okay, you work for a German company, but maybe you live and your tax residency is in Argentina. We are gonna pay you the same salary that you would be paid if you lived in Germany, Berlin, for example. That's a very common strategy that is sort of happening more and more. But what I wouldn't say more and more it is happening out there. That's one strategy. Another strategy is then to say, let's hire... It's a little bit dependent on what kind of positions you're hiring for. A lot of companies say they need a lot of customer support, they might still go to some of those, like typical customer support countries like the Philippines and South America, and you know, and you find people there and obviously, then you know, the cost of them is lower. So that's sort of what you, then that's sort of the strategy you then develop in terms of budgeting for that compensation.

Sandra Redlich  08:41

How can you manage to legally comply with all the different minimum wages that happen in the different countries? Because I can imagine that's a lot to keep up with, like, I'm not aware of all the different legal requirements and all the countries over the globe, especially the ones where you would typically look for certain personnel, is there a way to make that more easy?

Paul Arnesen  09:02

Well, the obvious answer is obviously use a service like Lano, because they will already have specialists that have done that research for you. And then you use basically local entities through Lano, that will tell you exactly how much you legally need to pay, or the minimum you need to pay in any country. So if you want to do this by yourself, there's a lot of information out there, but it's very difficult and I wouldn't necessarily recommend anyone to do this by themselves. Because if you basically... like one of the examples of a big issue that I know some companies have faced and I will bring more examples of this coming, is that they hire someone on an independent contractor agreement and basically they treat them as a full time employees with benefits and everything. And then basically what you owe to that person is taxes, because the country is... Germany is a big example of this, they might come in and check with that person and ask them what they've been doing and how they're being compensated. And then all of a sudden, because you haven't navigated those waters before, you actually decided to make the contract. You're owed a lot of taxes on the person you didn't think about, that you had to pay employee taxes on.

Sandra Redlich  10:20

False self employment, I think is the buzzword here, that people have to look out for not only companies, but also freelancers, because they are liable for this as well, as they have to make sure that I think less than 80% of income is coming from one single partner they're working with. So yeah, that's definitely a big thing to look out for.

Paul Arnesen  10:38

Yeah. And then one of the things that has happened now I've seen because a lot of people now, potential employees and candidates on the market, they are looking for remote work, but they don't understand this, because they don't have this information. Because you as a person that find maybe an open vacancy, an open job on the market. So I'm gonna apply for this as fully remote. But it says maybe a contractor, you sign the contract, and then you start working. And then you're surprised that it's not like a full time employee position because it's based on the contract and then you have to deal with all your own taxes and everything like that. And then it comes back to the service provider or the client to basically, are you able to provide this information upfront? And again, then some service like Lano will actually help also then navigate on the employee side, you know, the candidate side to say, this is what you need to do, here are all the documents that you need to send to us to be legally registered as a freelancer or independent contractor in your country.

Sandra Redlich  11:39

How can companies decide then how much to pay their employees or contractors? You already mentioned that a lot of companies choose to just, you know, follow their own local industry standard. But as I understand it, there's a lot of ups and downs or pros and cons for either approach that you can have, could you maybe name a few different approaches? And what the benefits and disadvantages of those as well?

Paul Arnesen  12:03

Yeah, so usually, so one of the, I will say, one of the unknowns, I remember myself when I sort of set up my company, and we started looking at hiring people from different regions of the world, I was a little bit unaware of tax issues in different countries, and I mean tax as an employer. So as an employer, you are actually legally obligate, you need to pay taxes to the country. So when you're hiring someone, say, as an example, I was looking at hiring people from Portugal. I used to live there, I have a good network down there. And I wanted to hire them full time. And I had like a fixed salary in mind. But when I did the calculation, in Portugal, how much I as an employer have to pay in taxes on that employee, to the Portuguese tax authorities, all of a sudden, the total cost of that employee became very much higher than say, I wanted to do the same for someone living in Germany, because taxes as an employer to Germany is much lower than it was in Portugal. So the total calculation that I had to consider was basically not only just employee compensation, but also the taxes as an employer to pay. So basically, what you have to do then, is you have to make a total package cost of a role or a position. So say, like a position is worth up to, this is just what I would do, maybe if they say that the role is 5000 euros per month, or you know, 60,000 euros per year. If that is salary only, then you have to calculate, you know, depending on where they are living, like either like 5%, 10%, 15 up to 20, 25% employer taxes, well, then you basically don't have to calculate the total cost of that position. That means that basically, it becomes very difficult for, like, people that live in countries like Portugal, which I use them as an example, because they have very high employee taxes in Portugal, for me as an employer to hire someone from Portugal and pay them what I would pay them if they were a tax resident of Germany, just because the total cost will be so much higher in Portugal, so I sort of have to make that calculation. So it will sort of impact my bottom line, if I will say, I want to have 20 people living in Portugal or working on a German salary. Maybe I should just hire them from Germany. Then it always comes down to where are the best people living, you know, which is obviously a very, like it's very subjective. Doesn't really make sense. But yeah, so that's one of the implications, you know, where you're thinking about this. I think another problem, it's not a big deal at this time. But it might become a problem is that what you're doing when you're hiring in a specific country is that if you like, if you're based in one part of the world, and you're hiring a lot of people from another part of the world, and you have defined your salary or your compensation to be based locally, you say that you're a German company, and you want to hire most of your people or staff from Brazil, you want to pay them on German compensation rates, you're basically creating a little bit of an internal, you're creating competition in that market, you're hiring from, that the other companies locally in Brazil, is impossible for them to compete for the same talents. This is not a problem when it's like two or three roles. But if say a big company comes in and say we are, you know, Silicon Valley salaries, we're gonna go, we're gonna hire like 5000 people on Silicon Valley salaries, say software developers, designers, you know, very skilled labor. In essence, you will create something like a brain drain, where the best people will always tend to look for those remote companies that are offering salaries that are locally based. Silicon Valley, you know, Germany, UK, wherever. And they would sort of maybe sit around and wait for those positions to be available. And not say yes to local positions with local pay rates, because the salary differences is massive. And what are the implications of that, again, is that so basically, this is like a, you know, healthy competition. But in the end, what could happen is that actually governments come in and they will limit what can... I had this discussion with someone in Portugal, and I say, why would a software developer, so if for those who don't know, like, average salary in Portugal is somewhere between 1000 to 1200 euros per month.

Sandra Redlich  17:15

Is that before or after tax?

Paul Arnesen  17:17

Before taxes. A good software developer would make that, you know, in Portugal, a skilled one. But I had an interview with a few people in Portugal for a client, and I said, so the client is offering, you know, 5000 euros per month, or something like that. And then there's less what I make now, because obviously, they didn't work for a Portuguese company, they worked for an international company. But a government, say, a Portuguese government or Spanish or whatever, they also need those developers to work on their projects, to develop their services internally, they will also have smaller companies that need to have the same people. In the end this sort of competition, especially for those high demand roles, like software developers, analysts, engineers, and everything, they might tend to sort of wait for the opportunity for remote companies, because it's expanding so fast. And companies like Lano, and everybody are making it easier for companies to go into these countires and hire. So my worry is that maybe, you know, governments will say, Well, we're going to limit a little bit, or we're going to put an extra tax on companies hiring remotely, because we need to make sure that we don't lose those people to international companies.

Sandra Redlich  18:32

You're basically hindering the local national economy, the businesses in those markets, for example, Portugal, to move on, and make good profits and get the best talent that can help them build their companies and have substantial growth, because you're taking the talent away from them?

Paul Arnesen  18:52

Yeah, on a big scale, yes, it can become a problem. I know that when I started my HR.... Back in the day, I was living in New Zealand, and there was a big problem or brain drain there from engineers and doctors and everything moved to Australia, because the salaries are higher. So for in New Zealand to compete for the best talents was very hard because the salaries were lower. So in the end, basically, there was a few, I remember, because I studied Employment Relations and everything. And that was sort of like a topic in the books, in the textbooks. You know, how do you avoid this brain drain, when you can't really compete on salaries anymore? Because it's so easy to move. This is obviously, you know, 15 years ago now, but this is sort of, in my opinion, this is sort of the new, maybe it becomes sort of the new brain drain where there's such a big demand for highly skilled people in some smaller countries around the world, but they're also so skilled so they can work for the wealthy companies outside of the country that can actually just snap them because it's easy enough for them to hire them.

Sandra Redlich  19:56

Yeah. So in your opinion, would you say then that remote work justifies pay cuts? To say we're not going to be paying or have a global compensation strategy to pay everyone the same, depending on our local rates, but we're going to adapt to maybe local rates in the country we're hiring from. So obviously the same position, in your example, Brazil would get less money than the same position in Germany. But it's adapted to the local market to make sure that we don't create a brain drain?

Paul Arnesen  20:26

Yeah. So this is where I'm very conflicted, because I'm not sure if it's justified, because I believe a role in itself has a value like this is what this is worth for me as a company. And if you have founding, and you have, like, you're not doing this to save money, like this is not a way to save money for a company. So I mean, that the only way to say that maybe you have a social responsibility, in some sense to say that, if I am going to, and this is also about scale, right, so if you hire like two, three people, it doesn't really have an impact. But if 200 companies are hiring two, three people, then all of a sudden, there's an impact. So it's not really feasible. And I don't think it's ever going to become a reality. But I think it's good for companies to have this a little bit in the back of the mind that I don't want to create some sort of divide in that region or country. Because if it becomes big enough, what I'm worried about is, as I said, that governments will come in and sort of start limiting. We want remote work to be accessible for everyone, we want it to grow, we want everybody to be able to have the best opportunities to work, to make the salaries, that is sort of what they're worth. But I know also, a lot of... Especially I've seen discussions on LinkedIn that are very good candidates that are speculating in this, they're actually sitting there and say 'I'm not going to work locally anymore, I'm gonna wait until that position opens up because I can get paid 10 times more than I will get paid locally'. So I think it's just about having a... I think it's... I would say I justify having a strategy where you pay people equally across the world. But when you want to say if you're thinking about scaling up, and all of a sudden you go over I say a certain number of people, you hire like big teams in one region, I think you should develop a strategy with say, this role in that region is that pay structure. And then this role in that region is that pay structure, and then make it very clear internally inside of your company, why this structure exists. Yeah. Because otherwise you have... It shouldn't be something that you create to save money and be like, stingy, and you just want to hire the cheapest labor, because just they're cheap. So it has to be some sort of strategy behind this. And I think when you justify it like this, a lot of people don't really complain. Because if everybody's on the same level, like I said, it only actually applies when there's like, 10, or more people in the same company in the region. So, but yeah, but who knows? I mean, that's the thing, if it becomes bigger than it is now, and remote work is growing quite rapidly, I'm worried that, you know, governments will come with some special taxes on this, let's make it less attractive.

Sandra Redlich  23:23

Do you think it's worth if you are in the position of scaling up and saying, I want to increase my workforce in a certain area in the world, to not only come up with a regional pay structure, like you just said, and setting up transparent internal pathways to communicate this to your employees, but also starting to develop relationships with the national governments that you're planning on hiring from, to make sure that these things do not happen, and that you're having a transparent and open relationship with certain stakeholders in these regions as well?

Paul Arnesen  23:58

Yeah, I think that's a good idea, actually. And I think, obviously, this will probably only apply for like big companies coming in and say that if Apple or Google or Amazon, and  they are already doing this to some extent, but if they say, we're going to open an office in Brazil, we're going to pay them what we will pay someone living in Silicon Valley, then they should have... Because now I'm saying putting it the other way. But then if that is also the case, have a discussion then with the government to see, because then we're looking at, you know, five, six hundred people something in the region to sort of create that conversation because I think what happens if you don't have that conversation, because I don't know who's going to really have that conversation. Because if you're just a small startup, like a marketing agency or something, you wouldn't be the one who knocks on the door of the goverment and say, by the way, we got to pay the people, you know, local rates, this and that. And we want to make sure that we're not stepping on someone's toes. That wouldn't really happen. So there has to be like an effort from like, either a conglomerate of companies or some industries or something that comes in and say, We want to ensure that we are still able to, you know,employ talents in your region without creating some sort of internal conflicts here. Other industries, because we're not here in the business of... Healthy competition is always good. But you know, they can actually be also that they can out compete local innovation, because they come in. So they have to sort of be... I think communication is always important and transparency.

Sandra Redlich  25:42

I actually have a funny little anecdote for this, because we were chatting before, I was recently visiting some friends in Zurich, in Switzerland, and my friend happens to work for Google. And she just started a new position doing community engagement, which kind of came up in the wake of... I'm not sure if anyone knows about this, but Google had planned to open an office in Berlin. And there was a lot of fight back and a lot of protests happening, because the people in Berlin around the area where the office was going to open, were not happy with them moving in, and they didn't want them there, which actually led to them not opening this specific office in Berlin. And to fight against this setback and protests from the local people, she actually started working in that specific space for Switzerland to make sure that she engages with community and with the stakeholders that are important in their region, to make sure that this doesn't happen again, and that they're working together. Because obviously, Google is a big player and a big company with hundreds of 1000s of employees. So I think this is also a very interesting development that companies, big companies need to take accountability and make sure that they're doing what's right for the region that they're in as well. And I think global compensation is definitely playing into that as well.

Paul Arnesen  27:08

Yeah, absolutely. Because when it's that scale, it will have an impact on the region, it will have a direct impact on so much happening around there. And obviously, Google is such a, they basically have a monopoly. And if they create fair, equal opportunities, maybe they will be welcome. But if they come in and say, Well, we are Google, we are not going to pay our duties here, we just want to sort of use... I've seen that also, the good side of this is in some way, I remember when I was living in Portugal, both Volkswagen and Mercedes, they came to Portugal to set up basically their software development. I don't remember exactly what they were called, but basically, they were the ones... All the apps and everything you see in those cars now was developed in Portugal. And they hired a lot of local people there. They basically set up very cool offices, and all the people that worked there were very happy with that opportunity. But it was not remote work. But it was sort of like they came in, like a big player, like, you know, big companies that came in and sort of established themselves and they were very welcome because they brought a lot of innovation and technical ideas. That's obviously not remote work. But you know, I think it was also because they did sort of their due diligence of like communicating. They hired sort of local people, they did everything correctly, in that sense. And then I think the salaries were fair for Portuguese and was yeah, maybe a little better. But yeah, I think and they're still thriving at this, Volkswagen was thriving really well.

Sandra Redlich  28:48

So I think the takeaway here from this conversation is, if you're just starting out, hiring a global workforce, make sure that you have these things in the back of your head. And by the time you're starting to scale up, and you're focusing on one specific area in the world to get your employees from, make sure that you have these conversations, that you put some strategies and processes in place to make sure that you know what approach you're taking, and just be aware of the implications that can possibly have and get the help from the people, from the services out there that can support you because you don't have to figure this out alone.

Paul Arnesen  29:28

No, no, you have to... It should be a conversation you have with your shareholders to say okay, we want to have a strategy that we are you know, we keep our own innovation on the top, we attract the right people, we keep people happy. The same time we have a local responsibility. Paying people is the most important thing you can do. But compensation comes with a big cost. It's usually the biggest cost for companies and it really can affect your bottom line, if you don't take into consideration your strategy before you, you know, go on new, exciting endeavors with the company, want to scale up and you have all these ideas and everything because it can backfire in many ways and unknown. You know, there's a lot of unknowns and remote work is still for a lot of countries and regions out there, they encourage it and they like it, they see innovation coming in. But at the same time, they're also learning quite a lot as we go along. The pandemic sort of started a new revolution. I think this revolution is basically just like, developing as we go along. And yeah, we might see things happening in the next few years that is not beneficial for remote work. I really hope it will be, but I don't know, as I said, it's a lot of unknowns.

Sandra Redlich  30:52

Well, thank you so much for sharing all of your insights and giving us your experience and your very unique look out because you have so much experience with different markets with hiring and being an employee yourself in the early days. So I think there's a lot that people can take away from this episode.

Paul Arnesen  31:09

Thank you very much as well.