> Is there that much of a network effect with talent being in one region that companies would rather pay a 4x compensation premium that relocate to new or lower cost locations?
Yes, it's pretty strong.
Employers want to be where the employees are, and employees want to be somewhere where there are other jobs.
> "why should geographic location dictate my salary relative to my peers?"
It doesn't. Your unwillingness to relocate does.
Everyone has their own reasons for where they're willing to look for work and why. But those reasons, your reasons, have a price tag attached. To you, your reasons + your salary is equivalent to a SV salary. (Else you'd relocate.)
Similarly, companies who are unwilling to allow remote workers and/or choose not to build remote teams aren't paying more because of their location. They're paying more because they value having their employees at their location and that value is greater (to them) than the difference in SV salaries vs the midwest.
> Not only does a an employee's location not change the employers' demand, the moving also does not change the supply available to employer. Moving or not, the employer could always find a new employee abroad if supply was indeed plentiful.
The company tolerating remote workers changes the supply to the company.
The people moving immediately are seeing the first effect here, but if it becomes permanent, the people who don't move will inevitably get the same paycut. Why pay $200K for someone in SF when someone in Des Moines will take $140K, but wasn't willing to relocate five years ago?
> You enable a certain amount of profit for your employer, regardless of what you do with your pay. Regardless of how much rent or mortgage you pay, and regardless of where you pay it.
Then why would companies bother hiring people in expensive locations if they can hire another developer in a foreign country for half the price?
In practice, companies that adopt location-independent salaries don't automatically pin their compensation to the most expensive locales. They pick a midpoint compensation that is good enough to attract remote workers who can't do any better locally, but they turn away a lot of developers in expensive places like Seattle or SFBA who know they can do better locally.
> Companies who are willing to pay the same amount regardless of location will obviously have an advantage in recruiting
I'm not sure that is accurate. Companies that pay the same regardless of location are likely to pay less than the going rate in high COL areas, and more than the going rate in low COL areas. As a general rule of thumb, a company can't unilaterally pay more for things than it's competitors and expect to compete; so paying the high COL rate to all employees, regardless of location, is not likely a long term viable approach.
>But this implies that people in big cities can expect to see their pay go down to match the greater competitiveness of remote workers, not the other way around.
It really depends how fully remote a company goes. To the degree there's still some company advantage to anchor locations that some employees come into on a semi-regular basis, a company might still want to pay some premium for employees to live in that area. However, to the degree that a company were fully remote (and ignoring that some functions will still be physically close to customers), then high CoL vs. low CoL becomes purely an employee decision, it's hard to see the company paying those premiums. So, leaving aside real world messiness, the expectation would be that salaries head towards one (country-wide) value for a given set of skills.
> Can someone explain the rationale behind geographically based pay in remote-first companies?
How much you are paid depends on how much they have to pay you before you decide to quit. The lowest pay you’ll accept before you decide to quit is based on what you think you can get if you quit. That’s heavily influenced by geography. As geography and job markets become uncoupled compensation will become more uniform regionally and then globally.
> But if the firm is purely remote, why tolerate this? Ignoring the issue of pay cuts for moves, why pay $200K for someone in SF instead of $100K for someone just as good in Pittsburgh?
Well, I guess it depends on exactly how fungible you think employees are.
If you set a lower ceiling on the salary for a position, you're more-or-less excluding many of the largest concentrations of available labor from consideration.
For that matter, for more senior positions, you're possibly excluding the candidates that have the most relevant experience (depending on your industry) wholesale.
> The firm receives no benefit from the employee choosing to live somewhere expensive.
The firm may receive some benefit from the employee being embedded in a community that has a high concentration of practitioners, but that's a bit speculative.
When it comes to engineering (and software engineering in particular) many businesses are not shopping for the most cost-effective labor per-se, but for the best labor they can afford (or so they think).
There are a bunch of reasons for this, some of which are based on myths or misunderstandings, but what it comes down to is that so long as there is an extant belief that better candidates are clustered in particular regions, you'll see a salary premium for candidates located there.
> (A) location-based pay is justified because of location-based cost of living
Cost of living doesn't justify location based pay. It happens to correlate, but if a company could offer you an less pay in a high COL area without you declining the offer, then they might. They could even move their entire operation to an area with 1/4 the labor rates, like the Philippines, but there are big reasons they don't.
> then is car-based pay justified
Car based pay doesn't exist AFAIK, so what's the point? Companies pay what they have to pay to hire/retain the employees they want. There are a myriad of factors affecting any labor market, including all sorts of day to day personal costs like housing and transportation, but those are distilled through the personal choice of the employee. The main input to what employers pay is what other employees pay - it's a feedback loop at an unstable local equilibrium.
That said, if a major company or three decided to move to globally uniform compensation (the same pay in Czechia as Chicago), well that would be an interesting experiment to watch, though I wouldn't want to work there.
> I work remote and get a fair market rate (for the value I add, not based on where I live)
Unfortunately there are two misconceptions here: 1) that companies pay based on added value and not on replacement cost, & 2) that "a fair market rate" does not vary with location, when in reality different locations have different labor markets.
The reason SV companies pay so much is because their candidates expect it, and part of why they expect it is the high cost of living in the area. A company that pays less than average will get worse/fewer candidates, thus a local labor market. For a remote company, paying an SV employee the same rate as a midwest employee is to effectively compensate the latter much higher, and what's fair about that?
> I get it if location based pay is used for jobs that require in person. But how can the employer have it both ways? Why would the employer want to subsidize more expensive lifestyles for a remote position?
Employers don't pay high because CoL is high; they pay what the market allows them to pay.
> while your competitor says I can live anywhere and remote in
I think most companies still consider your location when determining your pay. Facebook does for instance, even going as far as tracking your IP to make sure you're being honest. If you choose to move to a lower cost city, they'll adjust your wage. Not sure about the other way around.
That'll probably eventually change, but it could be a useful indicator. The median employee that chooses to live in X may be more productive that the median employee that chooses to live in Y. But that's yet to be seen
> In reality companies had to pay a premium in order to demand that an employee lives in certain geographic area so that they show up every day in a certain office building. Depending on the location of the building, the premium can be very high.
100% agreed with this. I personally see no issue in paying a premium if an employer is asking for something extra, like being in a specific location, or working odd hours, paying a premium is reasonable. There are many reasons why a company may want someone to be on-site in a specific city; this applies if the city is SF, or a small city.
The issue that I personally have is when location is not a factor, but is still factored in to "location dependent pay". Pay someone in SF more because it's important to you for them to be phsycially present? Sure. Pay someone in Oklahoma less than someone in Austin, despite the fact that neither of their locations makes a difference to their work? Now you're openning yourself up to implicit discrimination and "unfair" conditions.
> Will developers working remotely for SV companies from LCOL areas be compensated the same as those in SV?
Some will, some won't! Truth is, those who decide to offer compensation based on value added instead of a magic HR approved formula will get interest from everyone else. I expect some companies to use this CoL-based compensation as a way to let go underperformers and others to attract talent that was previously unavailable.
> Will smaller firms elsewhere have to raise salaries to compete with locals taking non-regional salaries?
> But if a company is fully remote, why should it adjust for costs of living at all? Candidate A lives in an expensive place and Candidate B has an expensive hobby. Neither is the company's concern, is it? The bottom line is that each is worth $X to the company and wants $Y in compensation.
Because if it wants to hire workers that live in SF, it has to pay SF wages. It doesn't have to pay SF wages to workers living in Tulsa.
Think about it flipped around a bit. Let's say that instead of hiring employees, you're buying candy bars. Someone running a bodega in NYC isn't gonna give you a discount just because you're going to have the candy bar mailed to Oklahoma.
The bottom line is not the $X value and the $Y compensation. It's a lot more complicated than that. Just like the company's bargaining position is a complex mixture of the value that different employees provide and the opportunity cost of leaving a position unfilled, the employee's bargaining position is affected by the salary the company is willing to provide and the opportunity cost of accepting this job offer instead of another.
> You only need to pay remote employees competitive local rates
I completely disagree. Employment is a two-way marketplace - I'm looking for an employer, and employers are bidding on what I'm selling: time, knowledge, and experience. They are bidding against not only employers local to me, but with all remote employers as well. They're free to choose someone else to work for them and I'm free to choose someone else to work for.
"Competitive local rates" are appropriate for people whose choices are local. As a developer, my choices are global. Those are very different markets.
I live in Harrison, Arkansas and I make significantly more working remotely than I could make locally. When negotiating salary at my current job, I recall my exact statement to this effect: "I'm not expecting an offer with a base salary equal to what you'd be offering me if I were in Santa Monica - but I'm also not willing to accept an offer that's the same as what I could make working for a local company. I'm confident that we'll be able to meet somewhere between those numbers."
> you might find that the company is willing to pay more because they want a given skilled worker to be co-located with the team
That's making a big assumption — that the team is in an HCOL area, such that "colocated with the team" is synoymous to "costs more."
There are a lot of companies who are headquartered in LCOL areas of the world; but still do location-adjusted pay, such that they might be paying someone working remotely from an HCOL area more than they pay the local team.
It seems that one of the arguments the author is making is that that an employee’s cost of living isn’t what’s in play but the competitiveness of the employee’s compensation at that location. That your buying power is more in SF than in London, because a good amount of people just as talented in London would take a lower pay cut compared to SF, for example.
That seems to make sense, but I wonder why the opposite isn’t just as likely to happen, more employees ask for more, if companies paid more for remote workers
> Large COL adjustments make no sense to me. So I work for a remote company and choose to live somewhere cheaper and they think that the value I'm providing is less? The end result of this is that remote devs get screwed on average, while the best remote devs avoid companies like this, rightfully so.
Well, that depends where the company is headquartered and how much the local employees make.
Let's say the company is headquartered in SF, and the local employees make an SF-typical salary. If the company pays all remote employees what they pay their local employees, then that's a very nice deal for remote employees in low COL areas. If the company uses COL adjustments for remote employees, then employees located in lower COL areas take a pay cut, and your argument holds.
But imagine if the company was instead located in a low COL area like Phoenix and the local employees make a Phoenix-typical salary. If the company is paying all remote employees what they pay their local employees, then remote employees in high COL areas won't make enough money to live on. So in this case, using COL adjustments for remote employees is the only way for it to be worth it for people in high COL areas to consider working for them.
> You are paid based on how difficult you are to replace. Hence the location based pay
You're partially right. Pay is very much about how difficult you are to replace. However Location in many industries is no longer the dominant input.
Location is the dominant input in an office-centric model, but isn't in a Remote model. In an office centric model, the company would have to pick where to locate the office and that location would have a "commute radius" in which they could effectively expect their employees to willingly come in to the office from. This meant that any physical office's "commute radius" was effectively its talent pool.
So if you put your office in a high cost of living area, you now have to pay enough for people to live in that area or be willing to commute in from lower cost of living areas. This reality is the foundation for the "location based pay" detente between Labor and Capital.
It's worth noting that these things are also interdependent and self reinforcing. Eg: An area (like Silicon Valley, or any other business cluster) has a higher density of talent, which is more attractive to employers, which means more employers want to be in that area. More employers means more competition for that talent, which drives wages up. As those wages then filter into the market you see the price for supply constrained necessities (houses typically) go up, and often times that will drive cost of living up.
In a remote work world, this entire cycle is dramatically disbursed and the core foundation of the "location based pay" detente between Labor and Capital is shattered. What this ultimately means is that Capital no longer pays for Talent + Location + Competitive wages within that location. Instead they pay for Talent + Availability (timezones mostly, but internet connectivity is in there as well). This should, in theory, drive a larger talent pool, which, depending on demand for that talent, might lower wages in a given "Availability". If it does, then the cycle starts anew as Employers start to seek out ways to be in that "Availability".
The big question one needs to ask is whether there is enough demand to suck up all the talent within the workable "Availabilities". If there is, then wages stay the same or go up. If there isn't, then wages go down.
My personal opinion is that any company doing "location based pay" in a remote work world is shooting themselves in the foot (unless they have market power in those locations).
Yes, it's pretty strong.
Employers want to be where the employees are, and employees want to be somewhere where there are other jobs.
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