Compensation

Hiring international employees: Why the right salary data is crucial

24 April 2023
The Carta Team

Hiring is one of the biggest challenges for any company. A good compensation plan enables founders and hiring executives to set salary levels, identify and attract talented candidates, and choose among those candidates to make the right hires. 

All of that becomes exponentially more difficult when hiring employees outside the U.S.—especially when deciding how much to pay international hires. Countries outside the U.S. may have completely different salary structures and expectations, hiring laws, visa requirements, and cultural factors that affect your company’s ability to connect with and hire the right people. Obtaining the most accurate international compensation data available is a crucial prerequisite for companies looking for the right talent at the right salary levels.

What is international hiring and compensation?

International hiring and compensation for U.S.-based companies is the process of hiring and compensating employees in other countries. Compensation may include direct compensation such as salaries, wages, bonuses, and equity, and indirect compensation such as perks and employee benefits. 

Once they get beyond the early startup stage, companies in the U.S. typically have human resources or talent departments that establish hiring processes, onboarding, and compensation philosophies. This may include working closely with company leadership to identify needed job roles, craft descriptions for job boards, broadcast new opportunities, screen resumes, help set salary levels, potentially assist in interviewing or decision-making, and regularly review the company’s compensation plan.

Many of these tasks become more complicated when hiring international workers.

International salary levels: Key factors

When setting salary levels for international employees, U.S. startups should consider several aspects, including cost of labor, local market trends, local employment laws, exchange rates, and taxes.

Cost of labor

The cost of labor, and hence salary levels, vary significantly from country to country—for example, Switzerland, Australia, and the United Kingdom have base salary levels at or close to the levels of the U.S., while India, Argentina, and South Africa salaries are a fraction of that, according to Carta data

Employees in countries with a high cost of labor will require a higher salary to maintain a reasonable standard of living. Not taking cost of labor into account will mean that your salary offers may be too low and will not be accepted by the candidate—or too high, resulting in overpayment.    

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Companies should conduct thorough research on the local market to understand the compensation and benefits packages offered by other employers in the same industry and location. This helps to ensure that the company’s offerings are competitive and attractive to potential candidates. In a global workforce, salary trends can change relatively quickly—an appropriate offer at one time may be too low six to 12 months later.

Local employment laws

Companies must comply with local laws and regulations when it comes to compensation and benefits, such as minimum wage requirements, work visas, sponsorship requirements, employee-equity grants, and differing statutory benefits like tenure-based severance payments. Failure to do so can result in legal liabilities and financial penalties. Companies should also become familiar with the roles played in some countries by national labor unions as well as work councils, or employee representatives who influence workforce policies at the company level.

Foreign exchange rates

The volatility of a country’s economy can have a significant impact on salary-setting. Companies should be aware of volatility in both foreign-exchange rates and inflation to ensure that pay remains competitive. 

Taxes

Taxes can significantly impact an employee’s take-home pay, so startups should ensure that they are offering a salary that takes taxes into account.

Benefits of hiring internationally

International hiring and compensation has become increasingly important in recent years, driven by technology changes as well as pandemic-led workforce trends.

Until the last few years, U.S. companies, including technology companies, operated under traditional workplace customs—employees commuted to the office full-time, even from distant suburbs. That began to change with the emergence of workplace communications tools like Zoom and Slack that began to make it more possible for colleagues to collaborate remotely. 

The worldwide emergence of COVID-19 early in 2020 sent that trend into overdrive—suddenly, nearly every tech company pivoted to fully remote work, and executives began to see that the new software tools enabled companies to operate efficiently, even with remote employees in far-flung locations. 

While the pendulum has shifted back toward employees returning to the workplace, hybrid work plans, with employees working from the office two-to-three times per week, have become the norm. 

As a result of these trends, U.S.-based companies have become much more willing to hire new employees far from the company’s headquarters, even overseas. Twelve percent of U.S. small-and-medium-sized business (SMB) customers have at least one employee based outside of the U.S., and 20% of midmarket (MM) employees have at least one international employee, according to Carta data.

This presents an opportunity for U.S. companies. Their search for talented employees does not have to be limited to those working near its headquarters, and in many cases companies can pay lower salaries due to cost-of-living differences.

This opportunity has increased the number of companies looking to hire international workers. But the road to hiring global talent and compensating a global team  isn’t an easy one.

What are the challenges of international hiring and compensation?

Ultimately, for U.S. companies to succeed with their international hiring, they must decide on the right salaries and compensation packages to offer. That requires knowing the “discount rates” for every new market and being able to make the geographical adjustments, or “geo-adjustments,” necessary for accurate and successful job offers.

A lack of familiarity, bandwidth, and resources outside the U.S., along with high overhead costs complicate international hiring further. 

Lack of familiarity with non-U.S. compensation

U.S. companies and their human resources departments have access to many data points when it comes to setting salary levels—they have experience hiring locally based employees (or at least U.S. workers), they know what salaries are competitive, and they know what kinds of offers tend to get accepted by desired employees.

For international hiring, much of that information is in a black box. There is little data available, and most companies don’t have many examples for comparison purposes. 

The company may ask itself: Should we offer a talented engineer $150,000 per year, or is the equivalent of $50,000 per year more in line with pay scales in a given region? To make this decision, companies must have a sense of compensation levels in a given region, and what discount rate they should apply for compensation in other regions compared to the U.S., since compensation is generally higher in the U.S. than overseas. For most companies, however, that information is not readily available, making it difficult to effectively target overseas talent. 

Lack of bandwidth

Aside from salary levels, there are multiple other factors that go into crafting compensation packages: Local labor laws, hiring practices, and administrative overhead all must be taken into account, and gaining familiarity with these new and complex factors is time-consuming, requiring resources that a human-resources department may not have to give if they are focused on hiring U.S.-based talent. As a result, companies may pull back from international hiring, unsure if it will be an effective use of company resources.

Lack of trusted resources to consult

For all of the information above, U.S. companies can’t be sure that available resources are trustworthy and accurate, since they lack the local knowledge or connections to determine that. These resources can include online information, overseas law firms, and immigration services that may tout themselves as labor experts, or consultants whose background or expertise is hard to evaluate.

Administrative overhead

Hiring overseas introduces a complex layer of hurdles related to doing business in another country. A large time-zone difference may make it difficult to connect or schedule interviews with candidates, or communicate promptly and efficiently. Language barriers may make it difficult for hiring managers to effectively evaluate candidates’ skills. 

What choices do companies have for international hiring and compensation?

Given these challenges, U.S.-based companies have a few different paths they can take to global employment.

Pay everyone the same, regardless of where they live

This would be the easiest solution—simply treat overseas employees the same as U.S.-based employees from a hiring and compensation perspective. This is not ideal, however. Companies taking this path run the risk of overpaying employees in countries where the cost of labor is much lower. This can have a cascading effect on a company’s overall compensation structure, inflating overall salary levels and causing U.S.-based employees to believe they are underpaid compared to far-flung colleagues. 

Create discount rates from U.S. data

A better approach is to apply an appropriate discount rate derived from U.S. data; for example, salaries in a particular region would be reduced by a given percentage from U.S. salaries, based on the best available data on cost of labor and other factors in that region. 

Ideally this discount rate would apply to individual countries, although some companies may choose to apply the discount rate to groups of countries that share demographic or economic characteristics, or even a flat discount rate to all locations outside the U.S.

Use local market data in each country

This is a valid approach but suffers from data availability issues: Data can be sparse, vary widely from source-to-source, and can be expensive to obtain, especially if you operate in multiple countries and pay for local labor surveys. Surveys that you pay for will generally cover one country, so if you have 10 international employees scattered across five countries, you would need to purchase five separate surveys.

If a company decides it wants to invest the time and resources to make accurate, successful offers and hire valuable employees overseas, it can decide to dig up salary benchmarks itself. Sources to consult may include Google searches or sites like Glassdoor or LinkedIn.

While it’s preferable to arm yourself with actual salary data to guide your international hiring, such data remains spotty online and could still lead to offers not commensurate with local salary levels. 

Companies could also decide to hire an overseas hiring consultant, although this approach could incur significant expenses, and expertise levels may vary widely or be hard to evaluate. 

What is an Employer of Record (EoR)?

U.S. companies may choose to utilize an Employer of Record (EoR)—a third-party organization that handles many of the legal and administrative duties involved in hiring and managing global employees. This can include onboarding, payroll and tax services, drafting and maintaining local contracts, and generally making sure the U.S. company is compliant with all applicable laws in a country. The U.S. company retains full management control of the employees. 

This type of service can enable a company to avoid setting up local legal entities or dealing with unfamiliar bureaucratic processes. Companies should consider how much international hiring they are planning and whether an EoR could be a good option for them.

Hiring international contractors

Some companies may opt to hire an international contractor, rather than an employee, especially if they have a very narrow scope of work to be done. From the company perspective, there may be certain advantages to hiring a contractor: The company may not have to pay for health and other benefits, offer vacation time, or provide equipment and office space. For the contractor, advantages may include flexible work hours, better hourly wages, and the option to work several jobs at once. 

While this can be a good option for companies, it’s important to be aware of the need to classify employees accurately. The line between employee status and contract status can become blurry, and in the U.S. the distinction typically revolves around how much control the company has over the worker’s time, duties, where and how the work is performed, and how they are paid. Misclassifying workers can result in fines, penalties, or back wages owed. 

This is compounded when hiring international contractors in countries where laws are different than they are in the U.S. or may change without the employer’s knowledge. Companies must stay on top of local labor laws to avoid problems. 

How Carta can help solve the global payroll problem

Carta has access to real data points on salary levels around the world, either through our products used by thousands of companies and including data on more than one million employees, or through direct integration with our customers’ human resources information systems. The platform then uses data from non-U.S. employees to create custom geo-adjustments for international markets.

Using this equity and salary data, Carta is able to provide discount rates for more than 40 countries. These benchmarks are updated quarterly and geo-adjustments are updated annually to reflect changes in the global market and overall cost of labor.

>> Learn about Carta’s database of international salary and compensation data

International adjustments will be available for the following countries: 

Armenia

Australia

Austria

Belgium

Brazil

Bulgaria

Canada

China

Colombia

Costa Rica

Denmark

Estonia

Finland

France

Germany

Guatemala

Hungary

India

Indonesia

Ireland

Israel

Italy

Japan

Latvia

Lithuania

Mexico

Netherlands

New Zealand

Philippines

Poland

Portugal

Romania

Russia

Serbia

Singapore

South Africa

South Korea

Spain

Sweden

Switzerland

Turkey

UK

Ukraine

United Arab Emirates

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