This story is part of our Salary Series, where we take a deep dive into the world of pay: how it's set, how it's changing, and what's next. Read the rest of the series.
Last month, the CEO of marketing startup Iterable, Andrew Boni, made a surprising announcement: The company would be moving to 100% "geo-neutral" compensation. Iterable's roughly 500 employees, working across 33 states as well as the United Kingdom, would be paid equitably regardless of where they lived, with the salaries of those living in the U.S. anchored to the most competitive market, the Bay Area, and those in the U.K. anchored to London.
"If you're a software engineer and you're talented, there's not a great reason why you shouldn't be paid the same if you're living in San Francisco versus if you're living somewhere else in the U.S.," Boni told Protocol.
Iterable's move, though unusual, is becoming increasingly common in a tech industry that has in recent months witnessed an almost unprecedented competition for talent.
"I've been doing this for 22 years, and the candidate is king right now," said Megan Slabinski, a district director for global staffing firm Robert Half.
In the past, "it was kind of like old school 'Mad Men' thinking," and companies thought that they could dictate the terms of compensation and issue things like cost-of-living adjustments without pushback, according to Scott Orn, the COO of Kruze Consulting, which works with seed-stage to series C-level startups on their accounting, finance and HR practices. Finding someone "out of market" or outside of the major cities like San Francisco and New York was a way to reduce compensation costs, added Slabinski.
That is no longer the case, according to tech executives, investors and industry experts who spoke to Protocol. Today, startups and public companies alike are losing candidates in secondary or tertiary markets who are getting competitive offers "that are blowing historic offers out of the water," observed Katie Hughes, a partner at General Catalyst. Venture capital is more active "than anything I've ever seen in my career," and that activity has translated directly into the competition for talent, she said.
One sign that companies are loosening their grip on relocated workers: PEOs, or professional employer organizations, which help companies with their state and local tax compliance, have doubled their market share in the second half of 2020, and "it's gotten even stronger in 2021," according to Orn. What this means is that startups that used to have employees in two or three states, for example, may now have them in six to eight.
One reason companies may be moving away from the old model, or geo-differentiated pay, is that it's frankly easier, said Bethanye McKinney Blount, the CEO and co-founder of Compaas, a compensation analysis software company. When companies have geo-differentiated pay structures, figuring out compensation can get complicated quickly due to the "very nuanced permutations" of salary bands. Having a national rate makes compensation much easier to manage and administer from an internal systems perspective, said Blount.
The move is also strategic for smaller startups that otherwise have a harder time competing with the Googles and Facebooks of the world, according to Zuhayeer Musa, a co-founder of Levels.fyi, a website that crowdsources and analyzes tech industry compensation packages.
But even the FAANGs are moving away from their strict, tiered compensation system, according to Hughes. Musa told Protocol that in the past, large public tech companies might have had three tiers, with employees in Tier 2 cities like Chicago or Atlanta being compensated maybe 80% to 85% of what those in Tier 1 would command, and so on down the line. Today, those companies are feeling pressured to go down to, say, two tiers instead of three, and decreasing the differential, said Hughes.
Officially, geo-based pay is still king. Spokespeople from Microsoft, Google and Facebook all confirmed in statements to Protocol that they do indeed still issue market-based compensation. Google even developed a Work Location Tool to "help employees make informed decisions about which city or state they work from and any impact on compensation if they choose to relocate or work remotely," according to a Google spokesperson. As of early August, around 10,000 Google employees had applied for fully remote work or to transfer to a different office since the launch of the tool in June.
Despite its popularity with employees, it's not always in the company's favor to issue geo-neutral pay. For one, it's usually more expensive. Each additional tax nexus in a state is an added cost and a headache for HR departments to sort through.
And although it sounds more equitable, HR experts debate how fair it really is to issue a blanket pay policy regardless of location. It can cause cultural tension within an organization when a person who lives in Bozeman, Montana, for example, gets paid the same as someone living in New York. That salary would go a lot farther in Bozeman, said Hughes, which can get awkward and poses a question of inequity.
Despite the changing tide, there are also always exceptions. One notable example: Stripe, which offered $20,000 bonuses and a 10% pay cut in September 2020 to all employees who chose to relocate to a less expensive city. Stripe, though, has the advantage of a major valuation and imminent public listing. "No one's going to leave," said Orn.
Tech workers will do well to remember that compensation trends in Silicon Valley would still be considered outliers in other industries, whose cultures are still deeply entrenched against remote work. Like the CEO of Morgan Stanley famously said to bankers itching to stay remote in June, "If you want to get paid New York rates, you work in New York. None of this, 'I'm in Colorado and work in New York and am getting paid like I'm sitting in New York City.'"
