At OpenRegulatory, we’re a small team of 4 people, and everyone receives the same salary.
There are a lot of tangents I could go down from here – like:
- Why not pay salaries based on where someone’s located? Someone in e.g. India should receive less than someone in Berlin, because their costs of livings are lower (yes, but with remote work, the person in Berlin could move to India?).
- Why pay everyone equal salaries? Someone who contributes “more” should receive more money (yes, but how do you define contributions, and is the time you spend on these sort of calculations a net benefit to the company?).
Etc., etc. But those are for another day.
Today, I’ll be talking about paying everyone the same salary, regardless of location, and regardless of role at the company. Cool.
But.. hold on. Just when you feel like you’ve come up with a simple solution to the salary-problem, things become surprisingly complicated.
Let’s say you want to pay a yearly salary of 75k€ before taxes.
Salaries in Germany
First off, a normal employee in Germany will actually cost the company 89.8k€ per year (not 75k€!) due to employer-paid social security contributions.
Personally, I think this is as close to a state-mandated scam as it gets, because it hides the actual costs of employment both from employees (many of them don’t know about this) and employers (many of them don’t understand this).
Why not come up with a calculation where the salary equals the amount of cash deducted from the company’s bank account every month? Anyway, that’s another tangent for another day.
Moving on..
A CEO in Germany, on the other hand, will cost the company less – only 75k€ per year due to the company not having to pay social security contributions (applies to owner-CEOs – hey, that’s me!).
So the CEO “company cost” is only 75k€, while the employee costs 89.8k€, with both of them having a contract stating a salary of 75k€.
Hm.
Let’s look at other countries next.
Other Countries
Freelancers are simple, because calculating their costs is very simple.
A freelancer (in India, or anywhere else) costs the company 75k€, just like the CEO. No social security contributions and hidden costs here.
But things get really messy once you start looking at employing people in other countries. There, you’ll have widely varying costs.
Usually, you end up hiring these team members through “employers of record” who employ them in their respective home country, charging ~500€ / month for this “service”.
(I’m still not really sure how this “service” always ends up being so expensive)
Regardless, with this setup, an employee in Spain with a salary of 75k€ actually costs the company ~100k€ (!). This is caused by 1) the employer of record cost (500€*12), but also 2) Spanish labor law which (among other things) dictates that employers must pay an additional 13th and 14th salary per year (!).
That’s crazy! How can the Spanish employee cost 33% more than the freelance team members and the CEO?
Salary Equality?
So how to we optimize for “equal salaries” here?
If you define the “salary” in “equal salaries” as what’s stated in the contract, then, yeah, true, everyone is now receiving a salary of 75k€. Fair. Or wait, actually not fair, because the actual company costs vary wildly. It’s fair to whoever likes to compare contracts, but it’s not fair to whoever likes to compare bank statements.
So if you instead define “salary” as what’s the cost to the company, then suddenly freelancers and the CEO should get a raise, because their current company-costs (= salaries) of 75k€ are lower than what other people are costing the company (89.8k€ and 100k€).
What to do?
I don’t know, but I’ll just throw even more questions at you:
- A German employee, costing 89.8k€, will have health insurance included in this total cost.
Should everyone have health insurance included? - A German CEO, costing 75k€, has to purchase their own health insurance.
Should everyone not have health insurance included? - The German person might have more public holidays than the Indian person.
Should the company apply both Indian and German holidays to everyone? - The Indian person might pay less income tax than the German person.
Should salaries be adjusted based on income tax burden? - The Spanish person could reduce their company cost by setting up a Spanish company which invoices the German company and employs them.
Should every foreign team member be required to set up their own company?
And so on, and so on.
Suddenly, optimizing for equal salaries became very, very complex, and achieved the exact opposite of being a simple solution.
Luckily, we’re a small team of 4 people. We look at the amounts above, make some minor adjustments based on “what feels right”, discuss this briefly, agree and move on.
Sure, you could start off a huge academic discussion on what sort of formula would achieve true “equality” here, but at the end of the day, we’re in the business of shipping great software, and not in the business of devising the global-optimum salary equality formula.
And a local-optimum solution which feels right might not be far off from the global-optimum solution anyway; and wasn’t the initial goal to find a solution which everyone liked? By publishing all these calculations and this thought process internally, sharing them with all team members, and zeroing in on a “feels right” solution which seems acceptable to everyone.. haven’t we achieved our goal already Beyond this, it seems going down the rabbit hole of over-optimizing equality no longer achieves its initial purpose.
So.. that’s our approach. It works because we’re a small company.
But, oh boy, if we were a large company, I really wouldn’t know how to solve this.
What do you think? Let me know in the comments 🙂
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