Considerations for pricing remote technical talent in nearshore markets

It has become increasingly popular in recent years for US venture-backed companies to use both offshore and nearshore markets as a means to optimise payroll costs, with many eagerly looking to escape the astronomical wage inflation of technology professionals in New York and the Bay Area.

Companies that are able to take on greater operational and administrative complexity will often build their own offshore technology offices. Those more risk-averse and cost-conscious might instead choose to partner with a local staffing provider to test out a particular market with offshore team augmentation, before committing to building a more permanent physical presence.

Historically, this distributed hiring trend was more common for larger, late stage companies, but in recent years, it’s been adopted by early stage Y Combinator and OnDeck startups. Due in part to the accelerated adoption of remote work following COVID-19, remote hiring has rapidly increased in the US, and across the world. IT talent markets have been globalised and the better value markets of South America and Eastern Europe have enabled many VC-backed companies to run far leaner organisations, much to the delight of their shareholders.

However, the Western eagerness for hiring in offshore markets can at times be blind, giving rise to a number of oversights. Operating in any new market away from HQ has its difficulties but one of the biggest struggles is correctly pricing technical talent in these fast-changing markets.

How much should a NY-based Series B startup pay a product designer in Bogota, or a public US Fintech pay an engineering manager in Warsaw? What's the split of cash compensation vs. equity?

Location-indexed salaries vs. confirmation bias

The majority of Blockchain startups and a small handful of remote-first companies, like DuckDuckGo, don’t index salaries based on location, regardless of the country they’re hiring in. But it’s more common to find companies, like Meta, that granularly index salaries to the specific city or country of each hire. While there are merits and downsides to each approach, bigger issues start to arise when hiring in offshore locations.

In their search for lower cost global talent markets, many companies looking to build nearshore teams are prone to an underlying yet strong confirmation bias: offshore markets must have 'cheap' talent. Some are overly quick to validate their market research of local compensation data, leaving them open to damaging errors in judgement and increasing the execution risk of building a lasting offshore presence.

What are the reasons for the market compensation data inaccuracies?

In the US, and most developed Western markets, large verified data on developer compensation is available on platforms like Levels.fyi. In emerging markets, such data isn’t so universally aggregated. Although anonymised comparison platforms like Glassdoor do exist, their limited use reduces their statistical significance. Detailed, accurate market salary bands are, for the most part, largely opaque. And the rough compensation data that is available, is prone to further wrong signalling due to the way it has been aggregated and refined.

The problem is that various sectors or sub-sectors are often wrongly grouped together in the data gathering process. Tech, or IT, is a very broad category. In the US, it’s almost considered synonymous with household names like Meta, Airbnb and Netflix, and the thousands of VC-backed product-driven companies. However, in most emerging markets, tech is primarily composed of IT services businesses, in particular those providing offshoring and outsourcing services.

This is perhaps unsurprising given the history of these markets. Countries like Poland, Romania, Ukraine and India all share a great educational focus on STEM subjects. When coupled with relatively lower labour costs, this gave these markets a significant comparative advantage for becoming go-to destinations for IT outsourcing services. While local product-driven technology businesses like UiPath and DocPlanner do exist, they account for less than 30% of the market in terms of hiring volume, even when accounting for the developer talent working in satellite offices for global companies.

These sub-sectors have different business models, value propositions and margins so they pay their technical employees different salaries. Software engineers working for IT outsourcing companies are, on average, paid as much as 50% less than their counterparts at product SaaS-driven companies. Added to this is the fact that the engineering talent in these countries is employed by the outsourcing industry. Therefore, the compensation data sold by market research firms exhibit a large degree of negative skew.

The rapidly growing global trend of hiring remote contractors across South America and Eastern Europe has further increased the standard deviation of developer compensation in these markets. Most global companies that hire in the region don’t index their salaries based on the local market, or at least not as acutely, which substantially inflates the compensation bands of a segment of the talent pool.

Why does this matter and how is it relevant?

The problem arises when foreign companies, unaware of these local market idiosyncrasies, commit to hiring technical talent in these countries. The inaccurate salary data coupled with the underlying confirmation bias that emerging market talent is 'cheap' gives many companies the false impression that market comp is far lower than it really is.

This misconception may pose an execution risk to the overall success of building an engineering department or simply assembling distributed teams in these markets. However, some might argue that this widening standard deviation of compensation is a blessing. Companies like Binance, Stripe and Snowflake, already accustomed to actively hiring in Eastern Europe, could simply target the local pool of engineers that work for traditional (IT) outsourcing providers, and capitalise on a ~50% discount, even at local levels.

Not all talent is created equally

While companies certainly could try this approach, it’s unlikely to provide the results many technology leaders are looking for. Securing a pipeline of thousands of inbound applicants wouldn't be a problem but the relevance and quality of such applicants would be questionable.

Although there are exceptions, it's unlikely that candidates coming from traditional outsourcing backgrounds would pass the technical bar expected by tier 1 technology companies in the US. Their technical capabilities are, on average, subpar due to the lack of complexity in the outsourced work such developers have been exposed to. Another, arguably greater, factor in their unsuitability comes from the lack of product-focused work such talent has been exposed to due to the siloed nature of their outsourced project-based engagements.

Can't global hiring companies figure this out themselves, and let the market dictate competitive compensation?

Of course they can. But this takes time, and time is something which fast-moving companies don’t have an abundance of in the competitive war for market dominance. Accruing hiring data, understanding the weaknesses in the talent acquisition funnel and then decisively acting on it can take an HR department of a 500+ person company as long as 18 months. Even then, there’s a chance a pivot may not yield the expected results given the arguably greater local emphasis on employer brand. Employer reputation and candidate experience carries a lot of weight ,  especially given the herd theory of talent so prevalent in most emerging talent markets.

Ensuring an effective and de-risked GTM of building a satellite office away from HQ requires diligent planning. Unfortunately, the majority of these DIY satellite offices end up failing to achieve their desired result. Two of the three satellite offices which global fintech, Stripe, attempted to build in recent years have failed. And they are far from alone in this statistic.

Know your target market

When hiring technical talent outside Western HQs in either nearshore and offshore markets, it’s important to consider local nuances when calculating payroll costs and correctly pricing talent. Although reliable compensation data is accessible in the US, salary data inaccuracies across South America, Eastern Europe and Africa are pronounced. The lack of available raw data in these markets, as well as the unstructured and unsegmented nature of it, makes it lag behind the true market while also creating a misleading skew. The substantially lower salaries offered by local IT outsourcing providers has a large effect on what little data there is available, making it difficult for new market entrants to identify competitive bands.

Further contributing to this skew, is the growing global trend of hiring full-time contract or freelance workers in many of these markets, often without overly location-indexing compensation. These factors, coupled with the inherent confirmation bias that "emerging market talent is cheap", make budgeting for and successfully assembling distributed tech teams in these markets difficult. This is especially true for the companies that attempt to do so without the support of an experienced local technology hiring partner that understands market nuances and is specialised in remote hiring.

Carbon is the go-to staffing specialist for Eastern European and North African technical talent. Trusted by the biggest names in technology and venture capital, Carbon’s hyperlocal expertise makes entering new talent markets for value-seeking global companies possible.

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