Paying People

Posted on Tue 04 February 2020 in blog • 4 min read

In my now almost 10ish years of first running my own company, and then managing a team in the company I sold my company to, I have very frequently struggled with what’s a “fair” way of paying people.

I’ve come to the conclusion that when it comes to hiring distributed, and thus hiring people living in different countries, there is no such thing. At least not one that everyone agrees on to be fair. The best thing we can hope for is an approximation of fairness.

How much do you earn?

If I ask you how much you make, you’ll either

  • be very offended at the invasion of your privacy, and refuse to answer, or
  • give me an answer straight away.

Which it is, is likely going to be determined by your culture and your upbringing. I am Austrian, I have interacted a lot with Americans, and now I work with Swedes — I can tell you, there are very different views on this.

Whether or not you choose to answer, you’ll likely have a number in your head. And again, there are multiple ways you’ll think of that.

  • It could be your annual salary, before income tax.
  • It could be your monthly salary, before income tax and public healthcare and pension payments.
  • It could be really weird, as in Austria: you’d think of your “monthly” salary, but in reality that’s 1/14th rather than 1/12th of your annual salary, because you’re paid a double salary in June and November.

But whichever it is, you’d probably think of a number, in your home currency.

Equal work, equal pay. Right?

I hope we generally agree that two people who do the same (or equivalent) work should be paid the same. And as long as you’re comparing two people, living in the same place, whose salary is paid out in the same currency, that’s easy.

But what about people from different countries? We can even assume that those two countries use the same currency, to facilitate the discussion. (Talking about different currencies makes things even more murky, and is perhaps a topic for another article.)

What’s the actual “worth” of the money you make?

There’s no correct answer for this. There are two possible approaches, both of which are “wrong” in a way and “right” in another. Let’s say we’re talking about two people being paid 3,000 euros a month, one living in Finland, one in Greece.

  • You could say that a euro is a euro. Thus, if you’ve got € 3,000 in your hand in Finland, that’s the same as having € 3,000 in Greece.

  • Or you could look at the question, what does that euro buy? If you’ve got € 3,000 in Finland, that will buy you things that, on average, you need to spend only about € 2,080 euros on in Greece.

So look at two people, one living in Finland and one in Greece. You pay them both € 3,000 for the same work. Are you paying them equally, or not?

I think you wouldn’t. If I had a person working for me in Finland, and I paid that person € 3,000, and another person in Greece that also made € 3,000 for the same work, I’d be massively short-changing the person in Finland.

But you can argue that € 3,000 is € 3,000 and that’s the end of the story. I tend to think that economists are on my side — that’s why the concept of purchasing power parity (PPP) exists —, but you can certainly be of the opposite opinion.1

And then there’s the problem that most PPP conversion rates are per-country. And they may be way off if you compare, say, someone living in Athens to someone living in Äteritsiputeritsipuolilautatsijänkä, to stick with the Greece and Finland example.

The fact of the matter is, neither approach is perfect, and I can only choose one approach or the other. And the approach that I’ve chosen, in the distributed team that I run, is to make PPP adjustments. Others opt for a different approach. Neither of these is right, or wrong. They’re both an attempt to treat your people equally, and neither is perfect.

  1. I will put forward one small thought though: if you are convinced that the money you earn is just that number in your currency (as in, € 3,000 is € 3,000), then I posit that you should also stick to that opinion in the face of inflation. Under that assumption, then € 3,000 next year is still the same € 3,000 it was this year, regardless of whether inflation was maybe 5%.