Cost of Living Adjustment (COLA): How Remote Companies Adjust Pay by Location
Also known as: COLA, location-based pay adjustment, geographic pay differential
A modification to salary based on the cost of living in an employee's location, commonly used by remote companies to adjust compensation for workers in different cities or countries.
A Cost of Living Adjustment (COLA) is a salary modification based on where an employee lives, used by remote companies to pay workers differently depending on their location’s cost of living. Adjustments typically range from 10-50% above or below a benchmark salary. About 65% of remote companies use some form of location-based pay, though the practice is controversial—some argue it’s essential for sustainable global hiring, while critics say equal work deserves equal pay regardless of location. Companies like GitLab publish their location factors openly, while others like Basecamp pay everyone the same regardless of where they live.
cost-of-living-adjustment
A Cost of Living Adjustment (COLA) is a modification to an employee’s salary based on the cost of living in their geographic location. In the remote work context, COLA policies adjust compensation up or down depending on whether an employee lives in a high-cost area like San Francisco or a lower-cost area like Austin or Lisbon. These adjustments account for differences in housing costs, taxes, goods, and services across different regions and countries.
What Is COLA in Remote Work?
Cost of Living Adjustment in remote work refers to the practice of varying employee compensation based on their geographic location. Unlike traditional COLA (which often describes annual inflation adjustments to salaries or benefits), remote work COLA specifically addresses the significant cost differences between locations where distributed team members live.
When a San Francisco-based company hires remote workers, they face a fundamental question: should they pay a developer in Boise, Idaho the same $180,000 they’d pay someone in San Francisco, where the cost of living is roughly 80% higher? COLA policies provide frameworks for answering this question systematically.
The practice emerged as remote work scaled beyond occasional telecommuting to become the primary operating model for thousands of companies. With employees spread across dozens of countries and hundreds of cities, companies needed consistent approaches to compensation that accounted for vastly different economic realities.
How Companies Calculate COLA
Zone-Based Systems
Many companies group locations into tiers rather than calculating precise adjustments for every city. A typical zone system might look like:
Tier 1 (100% of benchmark): San Francisco, New York City, Seattle, London, Zurich Tier 2 (90% of benchmark): Los Angeles, Boston, Sydney, Singapore, Amsterdam Tier 3 (80% of benchmark): Austin, Denver, Dublin, Berlin, Toronto Tier 4 (70% of benchmark): Phoenix, Raleigh, Lisbon, Prague, Mexico City Tier 5 (60% of benchmark): Most of Latin America, Eastern Europe, Southeast Asia
Zone systems are simpler to administer and explain to employees. However, they can create odd situations where employees on different sides of a tier boundary have significant pay differences despite similar costs of living.
Location Factor Systems
More granular approaches assign specific multipliers to individual cities or metropolitan areas. GitLab pioneered public location factors, publishing multipliers for hundreds of locations. Their system considers:
- Rent Index: The primary driver, weighted heavily in the calculation
- Cost of Living Index: Broader measure including groceries, utilities, transportation
- Local Purchasing Power: What salaries can actually buy in that market
- Competitive Market Data: What other employers pay in that location
Under this model, an employee might have a location factor of 0.85 for Austin (85% of San Francisco benchmark) or 0.55 for Lisbon (55% of benchmark).
Data Sources Companies Use
Companies typically rely on multiple data sources to calculate location adjustments:
- Numbeo: Crowdsourced cost of living data comparing cities globally
- ERI Economic Research Institute: Professional compensation data
- Mercer Cost of Living Survey: Enterprise-grade location cost analysis
- Glassdoor and Levels.fyi: Market salary data by location
- Government Statistics: Bureau of Labor Statistics (US), Eurostat (EU), and national equivalents
Many companies blend multiple sources, recognizing that no single index perfectly captures cost differences relevant to knowledge workers.
Real Company Examples
GitLab: Transparent Location Factors
GitLab operates one of the most transparent COLA systems in the industry. They publish their location factors publicly in their handbook, allowing anyone to see exactly how location affects compensation.
GitLab’s approach:
- Uses San Francisco as the benchmark (1.0 location factor)
- Calculates factors for hundreds of metros worldwide
- Updates factors annually based on cost data
- Allows employees to request factor reviews if they believe data is outdated
- Applies factors to base salary while keeping equity grants location-independent
A GitLab engineer with a $150,000 San Francisco-benchmark salary would earn approximately $127,500 in Austin (0.85 factor) or $82,500 in Lisbon (0.55 factor).
Buffer: Published Salary Formula
Buffer takes transparency further by publishing their complete salary formula. Their approach includes:
- Role base salary determined by market data
- Experience multiplier based on seniority
- Location factor based on cost of living tier (four tiers)
- All salaries published internally and externally
Buffer’s formula: Base Salary = Role Base × Experience Factor × Location Factor
Their location tiers (as of their public documentation) range from 100% for “High Cost” markets to lower percentages for “Low Cost” regions, with specific cities assigned to each tier.
Basecamp: Location-Agnostic Pay
Basecamp represents the opposite philosophy—they pay San Francisco market rates regardless of where employees live. Their reasoning:
- Equal work deserves equal pay
- Location-based pay penalizes employees for personal choices
- Simpler administration and clearer expectations
- Attracts talent who value fairness over location optimization
Under this model, an engineer earns the same whether they live in San Francisco, Chicago, or rural Montana.
Automattic: Hybrid Approach
Automattic (the company behind WordPress.com) uses a nuanced approach that considers both market rates and cost of living. They’ve evolved their policy over time, generally trending toward more location-independent compensation while still acknowledging some geographic differences.
The COLA Controversy: Is It Fair?
Cost of living adjustments remain hotly debated in the remote work community. Both sides present compelling arguments.
Arguments For Location-Based Pay
Sustainable Global Hiring Without COLA, companies either overpay relative to local markets (unsustainable) or underpay in expensive markets (can’t compete for talent). COLA enables hiring globally while remaining competitive in all markets.
Reflects Economic Reality An $80,000 salary in San Francisco barely covers a studio apartment, while the same amount in Lisbon enables a comfortable lifestyle. COLA acknowledges that compensation isn’t just a number—it’s purchasing power.
Prevents Wage Inflation in Developing Markets When companies pay US rates in lower-cost countries, it can distort local labor markets, making it harder for local companies to compete and creating inequality within communities.
Business Sustainability Especially for startups and smaller companies, paying top-tier salaries regardless of location may not be financially viable. COLA allows companies to hire talent they otherwise couldn’t afford.
Arguments Against Location-Based Pay
Equal Work, Equal Pay If two engineers contribute identical value, why should one earn 40% less because of where they choose to live? The work product doesn’t change based on location.
Penalizes Personal Circumstances Employees might live in expensive areas for family obligations, healthcare needs, or community ties—not by choice. COLA effectively penalizes them for these circumstances.
Creates Perverse Incentives Location-based pay encourages employees to game the system—living in low-cost areas while collecting higher-cost area salaries (sometimes dishonestly) or avoiding moves that would benefit their lives but hurt their pay.
Administrative Complexity and Inconsistency Determining fair location factors is complex and often arbitrary. Why should someone in Brooklyn earn more than someone in Jersey City when they’re 20 minutes apart?
Reduces Mobility Employees may avoid relocating or visiting family because it could trigger a salary reduction, effectively reducing their freedom.
Negotiating When COLA Applies
If you’re interviewing with a company that uses location-based pay, you have several strategies to maximize your compensation.
Before Applying
Research the company’s policy thoroughly. Many companies publish their location factors or at least describe their approach. Understand whether they use zones or precise factors, and how they handle edge cases.
Consider your location strategically. If you’re flexible on location, understand how different moves would affect your compensation. Sometimes a city with a slightly higher factor offers significantly better quality of life.
During Negotiation
Negotiate the base, not the factor. Most companies won’t negotiate location factors—they apply consistently across employees. Focus your negotiation on the underlying salary level, which multiplied by your factor determines actual pay.
Highlight comparable market data. Research what similar roles pay in your specific location. If the company’s factor seems low relative to actual local market rates, present this data professionally.
Ask about factor reviews. Some companies review location factors annually or upon request. Understanding this process helps you plan for potential adjustments.
Negotiate location-independent components. Equity grants, signing bonuses, professional development budgets, and other benefits often don’t vary by location. Negotiate these aggressively.
Clarify relocation policies. Understand what happens if you move. Some companies adjust salary immediately, others have grace periods, and some lock in your rate for a year or more.
After Accepting
Document your location clearly. Ensure the company has accurate information about where you’ll be working. Ambiguity creates problems later.
Understand the review process. If your location’s cost of living changes significantly, know how to request a factor review.
Consider the full package. A lower nominal salary with better purchasing power might be more valuable than a higher number that covers high costs.
Industry Trends
The remote work compensation landscape continues evolving. Several trends are shaping how companies approach COLA:
Movement Toward Simplification Many companies are reducing the number of location tiers, finding that overly granular systems create administrative burden and employee dissatisfaction without proportional benefits.
Increasing Transparency More companies are publishing their compensation frameworks, including location adjustments. This transparency helps candidates make informed decisions and builds trust.
Hybrid Approaches Some companies are experimenting with floors (no salary below a certain threshold regardless of location) or caps (no salary above a certain level regardless of location), creating bounded location-based systems.
Role-Based Variation Some organizations apply different location adjustment philosophies to different roles. Engineering might be location-independent to compete globally, while other roles use location factors.
Focus on Compensation Philosophy Companies are increasingly articulating why they’ve chosen their approach, recognizing that the reasoning matters as much as the specific numbers.
Frequently Asked Questions
What happens to my salary if I move to a different city?
This varies significantly by company. Some adjust your salary immediately upon relocation, others have 30-90 day grace periods, and some lock in your rate for a period (often one year) regardless of moves. A few companies only adjust upon your next performance review. Always clarify the policy before moving—surprises here can be significant. Some companies require pre-approval for relocations that would affect compensation.
Can I negotiate my location factor?
Generally, no. Most companies apply location factors consistently across all employees to maintain fairness. However, you can: (1) negotiate the underlying base salary, which determines your actual pay when multiplied by the factor; (2) request a factor review if you believe the data is outdated for your location; (3) negotiate location-independent components like equity, bonuses, or stipends. Focus your negotiation energy on elements that can actually move.
How do I find out a company's COLA policy before applying?
Check the company's careers page, handbook (if public), and job postings for salary range information. Search for the company name plus 'compensation philosophy' or 'location pay.' Review Glassdoor and Levels.fyi for salary reports that often mention location adjustments. Ask directly during initial recruiter conversations—this is appropriate and expected. Many companies are upfront about their approach when asked.
Do companies verify where I actually live?
Practices vary widely. Most companies require you to provide your work location for tax, legal, and payroll purposes. Some verify addresses through background checks or payroll documentation. Working from a location that doesn't match your stated location can create serious problems—tax compliance issues for the company, potential termination for you, and in extreme cases, legal consequences. Always be honest about your actual work location.
Is location-based pay legal?
Yes, location-based pay is legal in most jurisdictions. However, companies must ensure their policies don't create illegal discrimination based on protected characteristics. If a COLA policy disproportionately affects a protected group, it could face legal challenges. Some jurisdictions require equal pay for equal work, which could create complications, though these laws typically focus on discrimination rather than geographic differences. Consult local laws if you have specific concerns.
How does COLA interact with cost of living increases over time?
Companies typically handle these separately. Your location factor determines your salary relative to a benchmark location. Annual cost of living adjustments (inflation adjustments) apply to all employees and adjust the benchmark salary that factors multiply against. So if the benchmark increases 3% for inflation and your location factor is 0.80, your salary increases 3% as well. Some companies review location factors annually to account for changing relative costs between cities.
Master Remote Work Vocabulary
Get weekly insights on remote work terms, trends, and best practices.