What Is Location-Based Compensation?
In today’s increasingly remote and distributed work environment, location no longer limits who companies can hire, but it certainly still affects how much they pay. That’s where location-based pay structures come into play.
Location-based pay refers to compensation strategies where salaries vary depending on an employee’s geographic location. Around 60% of companies with a global structure pay according to location, and whether it’s a tech worker in San Francisco or a marketing manager in Austin, companies are increasingly adjusting pay to reflect and benefit from local economic conditions. The idea is simple: where you live impacts how much you’re paid.
Location-based pay thus works in one of two ways: paying people more based on location costs of living or inconveniences in order to provide competitive salaries to key workers, or paying people less based on lower costs of living in order to benefit a growth or expansion strategy.
However, for companies looking to expand globally or manage remote teams, aligning pay with location isn’t just about cost. As the workplace evolves, so do expectations around fairness, transparency, and flexibility in compensation, so effectively adjusting pay structures to reflect geographic realities is about building a sustainable and competitive workforce model while staying compliant with labor laws across borders.
Definition and Core Concept in Detail
At its core, location-based pay compensates employees differently based on their physical work location. Employers use regional data like cost-of-living indexes or work with experts to understand local salary benchmarks to determine what a role should pay in one place versus another.
This strategy isn’t new. In fact, governments and multinationals have used it for decades. But in the remote-first era, it’s gained renewed relevance and could now affect new generations of workers in new ways. In 2022, over 70% of companies lacked defined protocols for remote work pay. Now, with employees dispersed and entrenched across various states, countries, and continents, businesses are struggling to adjust, as standardizing pay based solely on job title no longer accurately reflects the true cost or value of labor.
Why It’s Relevant in Today’s Remote and Hybrid Workforce
Remote work has changed everything. Employees are moving out of high-cost urban centers and into more affordable regions without necessarily changing roles. Whether this move has come from an employee’s desire for a lower cost-of-living, or an employer’s desire to put feet on the ground in markets while saving on labor costs, it has forced companies to confront one critical question about remote work and pay localization: Should someone working from a small town earn the same as someone working from a global headquarters?
Remote work salary adjustment is, therefore, a key topic of conversation that comes with a potential minefield of problems around fairness, transparency, and the risk of legal noncompliance. Businesses adopting hybrid or fully remote models must decide how to manage pay differences without sacrificing equity or performance. In short, a clear, location-based compensation policy gives companies the flexibility to hire anywhere while still maintaining internal consistency.
Difference Between Location-Based Pay and Equal Pay
It’s important not to confuse location-based pay with equal pay for equal work. The latter is about ensuring employees doing the same job receive the same compensation, regardless of gender, race, or other protected characteristics. When it relates to location, this is sometimes called geographically agnostic compensation.
However, the line between the two can blur, as, if handled poorly, location-based compensation can raise legal concerns or lead to perceptions of pay inequity. That’s why it’s essential to implement pay variations thoughtfully, transparently, and with a clear strategy.
This is also why global companies work with partners like international HR services to understand the possibilities, benefits, and limitations available to them in specific locations as part of an expansion or adjustment effort.
Why Companies Use Location-Based Pay Models
Cost-of-Living Adjustments
One of the most cited reasons for adjusting salaries geographically is the cost of living. Simply put, it costs more to live and work in the US than it does in Tanzania. Many factors play a role in this, and anything from rent to transportation, healthcare, and taxes can vary dramatically from one location to another.
By tailoring compensation to reflect these differences, companies ensure employees can maintain a reasonable standard of living wherever they’re based. This also helps prevent overpaying in low-cost areas or underpaying in expensive ones, keeping pay both competitive and sustainable long-term.
Local Talent Market Rates
In addition to cost of living, businesses must consider local labor markets. If software developers in Denver earn 20% less than those in Seattle, offering the same salary across both markets might make hiring difficult or unnecessarily expensive, depending on where you’re hiring.
Instead, using market-specific benchmarks allows employers to make more informed, data-driven decisions. It ensures that offers are attractive locally, improving recruiting success and long-term retention. For global teams, this may mean gaining access to international compensation benchmarks that make it easier to scale your workforce without sacrificing consistency.
Operational Budget Optimization
Salary is often the largest line item in a company’s operating budget. By adopting a geographic pay strategy as a general policy, businesses can stretch their budgets further in ways that are predictable, especially when hiring remote or international employees.
Instead of paying San Francisco rates across the board, companies can hire high-quality talent in lower-cost regions and redirect savings to other strategic areas, such as benefits, learning and development, or expansion into new markets.
This doesn’t mean undervaluing workers. Instead, it’s about creating sustainable models where compensation aligns with the realities of each region. With proper execution, companies can remain competitive while controlling costs and improving flexibility.
How Location-Based Pay Works
Pay Bands by Geography
Most companies that adopt a location-based pay structure use geographic pay bands, defining salary ranges based on location tiers or zones where they have or want teams. These bands can offer guides to hiring, promotion, and adjustment decisions by providing a structured approach to managing differences in cost and market value.
Rather than negotiating pay on a case-by-case basis, HR teams can use these bands to ensure consistency and fairness. Consistent pay bands also simplify compliance, especially when managing global teams with region-specific wage laws and reporting requirements.
A global HR partner like INS Global can help businesses create location-specific pay bands across dozens of countries, offering guidance on how to standardize compensation across diverse legal and cultural environments.
Tiered Pay Systems (High-Cost vs. Low-Cost Cities)
Tiered systems categorize locations into groups based on relative cost or strategic importance. A typical model might include three tiers like the following example:
- Tier 1 – High-cost urban areas (e.g., New York City, London, Tokyo)
- Tier 2 – Mid-sized metros with moderate costs (e.g., Denver, Madrid, Kuala Lumpur)
- Tier 3 – Low-cost regions or rural areas (e.g., Tulsa, Chiang Mai, Porto)
Each tier comes with its own salary range consistent for the regions or cities included, each reflecting a broad approach to local standards and expectations. While this model allows for some flexibility, it also requires regular updates to reflect economic shifts, inflation, or changes in talent demand. It also may not take enough local differences into account, grouping together areas that are still too different.
Examples of U.S. and International Pay Bands
In the U.S., companies often adjust salaries by metro area using cost-of-living indexes or market salary data. A software engineer based in a large coastal city like San Francisco might earn 25–30% more than their counterpart in Raleigh, North Carolina, for example, even if they perform the same role.
Globally, pay band strategies are even more important for considering currency fluctuations, tax structures, and labor laws, which vary the most across borders. Companies, therefore, need regionally optimized, legally sound compensation models.
Adjusting Salaries Based on Location
When Employees Move
One of the biggest triggers for a remote work salary adjustment is relocation. When employees move to either a higher or lower cost region, employers must decide whether and how to adjust compensation.
Some companies choose to leave salaries unchanged, especially if the move is temporary or the employee negotiated based on the original location. A company could also choose to keep the salary the same if the new location has a lower cost of living, yet they want to make the employee’s salary even more competitive.
Others may take a stricter approach, reducing or increasing pay based on new geographic bands, even if this means effectively decreasing the employee’s salary by reducing their purchasing power.
The key is consistency, as if one employee receives an adjustment and another doesn’t, internal trust and fairness can erode quickly. That means developing standardized relocation protocols, making sure employees are aware of the potential for change in advance, and ensuring fair treatment for every employee, regardless of where they move.
Voluntary Relocation vs. Employer-Initiated Moves
When an employer initiates a relocation, they often offer relocation packages or retain existing pay to maintain goodwill. But when employees choose to relocate (especially to a lower-cost area) and this relocation may even come with negatives, such as a move to a less convenient time zone or longer chains of communication, the question of a salary adjustment becomes more common.
While voluntary moves don’t usually trigger a geographic pay strategy review if they don’t affect the way an employee performs their role, they can do. The question is whether the employer will adjust proactively or only upon policy enforcement.
Employers should outline these expectations clearly in their compensation policy and employee contracts, as ambiguity leads to confusion, and confusion leads to the potential for conflict. That’s why INS Global emphasizes the importance of clear documentation and employee communication strategies when businesses pay employees internationally or roll out location-based pay policies worldwide.
Location-Based Pay Models
Cost-of-Living Model
This model adjusts compensation based on the employee’s living expenses, using data like housing costs, transportation, food, and healthcare to determine salary ranges. Employers may apply a multiplier to a base salary, depending on whether the employee lives in a high-, medium-, or low-cost area.
The cost-of-living model is popular in government sectors and multinational companies, but it can be extremely hard to replicate for private sector workers due to the need for said workers to share a lot of financial details.
On the one hand, it ensures that employees can maintain a similar standard of living regardless of location. However, it can also be difficult to implement consistently and is particularly open to abuse, especially in countries with rapidly changing economic conditions or due to varying expectations of life quality among workers.
For companies considering this method, tools that monitor cost-of-living data in real-time may allow companies to respond quickly to market shifts and economic instability.
Market-Rate Model
Rather than focusing on living costs, this model pegs compensation to the local labor market. It evaluates how much companies in the same city or country are paying for similar roles and adjusts pay accordingly.
This model is often considered more fair from a business standpoint, as it reflects supply and demand. If engineers in Warsaw command less than engineers in Toronto, salaries are naturally adjusted to meet market expectations. However, it may not always reflect an employee’s individual contribution or financial needs, and more experienced employees may dislike being lumped in with the average worker in their position.
Headquarters-Based Model
Some companies choose to pay all employees based on their headquarters’ location, regardless of where they live. For example, a company headquartered in San Francisco may pay remote employees in Latin America or Southeast Asia San Francisco-level salaries.
This model is rare but growing in popularity among tech startups and values-driven organizations that promote equality and transparency. It removes friction and fosters a sense of fairness, but it can also inflate costs unnecessarily, especially when hiring in low-cost markets.
While it undoubtedly saves on time and effort otherwise spent on working out adjusted salaries for other areas, employers must be cautious, as offering high salaries in low-cost regions can destabilize local wage markets and invite regulatory scrutiny if used on a large scale. Similarly, while these models promote equal treatment of salaries in order to promote fairness, they may not be taking differing regulatory requirements into account, such as the recent example of Yale school getting into trouble when failing to account for state variation in pay period requirements.
Pros and Cons of Location-Based Pay
Pros for Employers
Cost Savings in Lower-Cost Areas
One of the most compelling reasons to adopt a location-based pay structure is cost efficiency, as it is typically implemented so employers can expand their teams into new regions without incurring the same expenses they’d face in high-cost cities. This way, businesses can reduce overheads without compromising on talent quality.
Lower payroll costs allow companies to invest more in innovation, customer service, or global expansion, which is why businesses may choose to establish legal entities or use EOR solutions to onboard talent anywhere in the world, all at regionally appropriate pay levels.
Competitive Offers Based on Local Markets
Offering salaries that reflect local expectations helps employers remain competitive when recruiting in regional talent pools. If candidates in Jakarta expect considerably less than those in Tokyo for similar roles, adjusting your compensation may be a way to both increase hiring speed and reduce offer rejection rates.
Pros for Employees
Opportunity to Live in Affordable Locations
With a structured and pre-existing approach to location-based pay, employees can have the freedom to live in regions that suit their lifestyle or financial goals. Instead of being forced to live in expensive cities to earn top pay, globally mobile workers can choose more affordable areas and still earn a competitive salary while still working within fair and equitable salary ranges.
This shift supports better work-life balance, especially for employees prioritizing space, family time, or lower living costs. With the rise of remote work being an especially important part of global working trends today, this flexibility is more attractive than ever and a major potential selling point in talent acquisition.
Improved Work-Life Balance
When compensation properly reflects the cost of living in a specific place, employees may feel less financial pressure and more personal freedom, leading to lower burnout, higher engagement, and better retention. In particularly competitive industries, this advantage can be decisive.
Employers that embrace location-based compensation and communicate it transparently thus tend to see higher employee satisfaction and loyalty.
Cons and Controversies
Perception of Pay Inequity
Despite its logic, a location-based pay structure can cause friction within teams when two employees doing the same job may receive numerically different salaries purely due to geography. Without clear communication, this difference can be seen as unfair, especially if performance and output are equal.
The perception of inequity can erode trust and collaboration, particularly in global or remote-first companies, where employees in lower-paying regions may feel undervalued, while those in high-cost areas may question their financial sustainability and worry about their future.
To mitigate this, employers must be able to explain their geographic pay strategy transparently. The right pay platform can help companies manage this process across international teams by providing internal messaging frameworks and compensation communication templates tailored to different cultural contexts.
Demotivation for Remote Workers in Lower-Paid Locations
If remote employees in lower-cost areas earn significantly less than their peers, it can lead to demotivation and disengagement. Some may view it as being penalized for their location, especially if they contribute equally.
As a result, employers need to weigh savings against a potential cost in morale. A small salary reduction might be justifiable and accepted, but too large a disparity, however, may signal to employees that their work is valued less. Over time, this perception can increase turnover and reduce productivity.
Legal Risks in Certain Jurisdictions
Location-based pay is not without legal risk. Some jurisdictions have strict labor laws that prohibit pay disparities for similar work, regardless of location, such as in the US where many states now have laws requiring equal pay for roles regardless of remote work. Others require transparency, audits, or equal pay certifications.
Failing to navigate these legal nuances can result in penalties, audits, or employee lawsuits.
Alternatives to Location-Based Pay
Location-Agnostic Pay / Flat Pay Models
An emerging alternative to location-based compensation is location-agnostic pay, where employees are paid based on their role and performance, not their location.
This model offers simplicity and transparency, as employees doing the same work earn the same amount, regardless of where they live. It promotes equity, retention, and team cohesion, especially in remote-first environments.
Companies like Buffer, GitLab, and Basecamp have adopted flat pay models, citing fairness and simplicity despite have high proportions of internationally-based workers. They believe the value of work shouldn’t depend on zip code, and while this strategy may increase costs in low-cost areas, it can also strengthen brand reputation and attract top-tier talent globally.
It’s not the right fit for every business, but for companies prioritizing culture and equity, it offers a compelling alternative.
Hybrid Approaches
Partial Adjustments or Ranges
Some companies use hybrid models, where location affects pay to a degree, but not as drastically as full-tier systems. They may offer a narrow range of salaries for the same role, allowing for location-based nuance without creating extreme disparities.
These models blend equity with flexibility, offering a scalable way to manage remote teams.
Hybrid models also allow for more compensation transparency vs flexibility. When employees understand how their compensation is determined, and see that it’s applied fairly, they’re more likely to accept adjustments.
That’s why communication is as critical as the structure itself. Here, providing the tools to train managers, share pay philosophies, and lead difficult conversations across culturally diverse teams is essential.
Key Legal and Compliance Considerations
- Local Minimum Wage and Labor Laws – No matter the compensation model, companies must comply with local wage laws. This includes respecting minimum wages, overtime rules, and benefits entitlements in each jurisdiction. Even a well-intentioned location-based pay model can backfire if it falls short of legal standards.
- Pay Transparency Regulations – An increasing number of regions are adopting pay transparency laws. In states like Colorado and Washington, job postings must include salary ranges. Employers must ensure that location-based compensation practices align with these disclosure requirements.
- Anti-Discrimination Laws and Equal Pay Audits – Inconsistent application of location-based pay can violate anti-discrimination and equal pay laws, particularly if it disproportionately affects protected groups. Governments and regulatory bodies are paying close attention, especially in large organizations, so audit tools, compensation analytics, and legal expertise are key to stay ahead of these risks.
How to Implement a Location-Based Pay Policy
Step-by-Step for HR and People Teams
- Conduct Market Research and Set Pay Zones – Start by researching market data across your regions. Use trusted sources to define pay bands based on cost of living, local market rates, and business goals. Create distinct zones or tiers and apply them consistently.
- Build Compensation Frameworks – Establish salary bands and bonus structures for each location or tier. Define how they’ll be updated, and what data will drive decisions. This ensures scalability, consistency, and legal compliance.
- Communicate Transparently with Employees – Transparency is key. Communicate how location affects pay and what factors are considered. Share documentation, hold Q&A sessions, and create a point of contact for questions. When employees understand the “why,” they’re more likely to support the “how.”
Tools and Software for Location-Based Pay
Compensation Management Platforms
Platforms like Pave, Carta, and Workday help HR teams manage compensation frameworks at scale. They support geographic pay tiers, role mapping, and equity tracking.
INS Global helps businesses integrate these tools into their international HR infrastructure, ensuring smooth operations across regions.
Market Data Tools (e.g., Radford, Mercer, Payscale)
Accessing reliable compensation data is essential, as region-specific salary insights can be found for a wide range of roles and industries. These benchmarks allow companies to align pay with current market conditions.
Here, INS Global can provide essential guidance by interpreting available data to build accurate, competitive compensation models.
Rethinking Compensation in a Global Workforce
The way companies pay employees is changing, and today in a world where remote work is here to stay, geographic pay strategies are increasingly considered as ways to balance globally-mobile work forces with budgetary needs. However, whether your company chooses a location-based, flat, or hybrid model, the key is clarity, consistency, and compliance.
INS Global is your trusted partner in global expansion and HR strategy, and as a top-tier PEO and EOR provider, INS Global supports businesses in building smart, scalable, and compliant compensation systems across more than 160 countries.
From designing pay bands to managing payroll, from legal compliance to employee communication, INS Global ensures that your compensation strategy reflects your values and your global ambition.
Ready to implement a modern compensation model that works across borders? Connect with INS Global today and build a workforce that’s motivated, loyal, and legally secure, no matter where they live.
FAQs About Location-Based Pay
Do Remote Workers Get Paid Less in Cheaper Cities?
In many cases, yes. Under a location-based pay structure, remote employees living in lower-cost areas may receive adjusted compensation. However, some companies choose to pay equally regardless of location.
Can Employers Change My Salary if I Move?
Yes, if your company has a policy that ties pay to geography. Employers should inform employees in advance and ensure legal compliance before making adjustments.
How Do Companies Determine Pay Zones?
Pay zones are usually based on a combination of cost-of-living data, local salary benchmarks, and operational priorities. Zones can be domestic or international, and updated annually or more frequently.
Is Location-Based Pay Legal?
Yes, but it must comply with wage laws, anti-discrimination regulations, and transparency rules in each jurisdiction. Poor implementation can lead to legal issues, which is why many companies rely on experts like INS Global.
What Happens If I Move Without Notifying My Employer?
This can cause legal and tax issues, especially if your employer isn’t authorized to operate in your new location. Always notify your employer before relocating, particularly across state or country lines.
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