Location-based salaries will kill your startup’s culture

2020 has inspired all of us to do some soul-searching. We’re asking ourselves big questions about what we value, how we want to spend our time, and where we want to be in life. As a result, people are making moves. My company is based in New York City, but throughout the last few months, I’ve had employees move to Idaho, Florida, Virginia, California, and Colorado. Some are looking to escape city life after the pandemic magnified its flaws, and others are choosing to live closer to family and friends. Whatever their reasons, I’m now managing team members with drastically different costs of living.

While tech giants such as Facebook have warned that employees who move to less expensive cities will face pay cuts, that type of policy doesn’t work for startups. Whether you are a team of 10 or 300, reducing salaries to save a few bucks isn’t worth the damage you’ll do to team culture and morale. Here’s what startups should consider before adopting a location-based compensation strategy.

Check your limits as an employer

Companies have a responsibility to pay their employees fairly and on time, but that’s where their control ends. The manager who chooses to move into an expensive high-rise downtown doesn’t deserve to make more money than their peers who choose to buy a modest home in the suburbs or live with their parents to save on rent. We all make personal decisions, and thankfully, companies don’t get a say on how we spend our paychecks.

I reminded myself of this when ChartHop employees asked to move away from New York City earlier this year. I considered visualizing our workforce and starting to analyze the new costs of living differences between employees, but then I took a step back. I pay my employees to work hard and do everything they can to make the company successful, not to live in a certain place. As long as an employee has proven they can be effective in a remote environment, their location shouldn’t matter.

Weigh the cost of attrition

Without flashy benefits or company prestige, hiring and retaining talent is one of the biggest challenges startup leaders face. So while the opportunity to reduce costs is understandably appealing, cutting a good employee’s salary will rub them the wrong way and potentially make them feel undervalued. Worst-case scenario: They find a new job.

It’s important to weigh the cost of losing an employee versus the amount of money saved by reducing their pay. The Cost of Work Institute estimates that an employee’s departure costs the company at least one-third of their annual salary. A fair cost of living reduction might mean reducing an employee’s pay from $120K to $105K—the risk of attrition isn’t worth $15K. Beyond dollars lost, losing a key employee could have a lasting and negative impact on the culture we’d worked so hard to build.

You’ve got bigger fish to fry

Determining location-based salaries is a complex and time-consuming process, and if your calculations aren’t consistent and transparent, it can be easy for wage inequalities to emerge. At a minimum, location-based compensation structures should consider:

Market rate, which is the range of pay for a specific position within a geographic area.

Employee experience, which includes factors such as education, skills, and time in position.

Comprehensive cost of living data, which should consider average costs for housing, utilities, transportation, food, and more.

Income tax rates, which vary from state to state and even more with international employees.

I’ve spent a lot of time thinking about this issue, and I know it would take other founders dozens of hours to research, visualize, and create compensation calculations that would ensure employees are paid fairly across locations—not to mention when intersected with gender, race, age, etc. This doesn’t include the time spent communicating with employees so they understand how their salary is being calculated based on location and why compensation may vary across their teams. There are tools that can make this process easier, but startups racing to scale shouldn’t be wasting precious bandwidth on initiatives that risk demoralizing employees. Company culture affects every other part of the business, so protecting it should always be a founder’s top concern.

As companies shift away from office-centric culture, employees won’t be limited to specific locations anymore. This new freedom poses an important question to founders: Do you put a higher value on culture or cost savings? There are lots of practices that founders, rightly or wrongly, imitate from big companies, but just because Facebook is doing it doesn’t make it right for your business—or your culture.

Great companies focus. A startup’s main advantage is its ability to focus on the right things and get a team achieving milestones together. Location-based compensation isn’t the right place to focus. Investing in your employees and your culture is.

Ian White is the founder, CEO, and CTO of ChartHop, the world’s first organizational management platform built to help companies plan for the future.