Handling Remote Salaries

October 14, 2020

Large tech organizations are announcing permanent “work-from-home” policies. Companies are announcing that they will be “remote first”. As employees chose to move out of high cost of living areas, companies are introducing compensation adjustments. This is a very complex topic.

Overall, I feel that location-adjusted compensation for location-independent work is, at best, fundamentally unfair to employees, and at worst, discriminatory.

Note that I am focusing on remote-within-the-United-States. When looking internationally, there are more variables at play, which makes it a more complex discussion. My opinion is still that adjustments are over-done.

But is it always unfair?

This is not to say that location-adjusted compensation is always bad; there are many situations where paying an employee a premium to be in a specific location makes sense. For example, if you run a company and explicitly want your staff to live in a high-cost-of-living area in order to work in a specific office, you will likely have to pay a premium for your staff to move there. In a similar vein, if you require an employee in a very remote location, you will have to pay a premium for it. In these situations though, you are paying a premium to have an employee do something that you want. Employees are offering you a different value, and are compensated differently. Their compensation is not being driven primarily by who they are, and more importantly, does not drastically vary between individuals doing the same job.

If I recall correct, a couple years ago some companies would pay an annual bonus to employees who lived within a given radius of their main offices. This bonus was almost exclusively to offset the higher rent costs associated with living in downtown San Francisco.

This is a fair example of a location-based salary adjustment.

How is it discriminatory?

The problem comes when you are paying different people different amounts for the exact same work performed. It will often be the case that you are giving a higher compensation to someone simply because they were better off to begin with. People who started in higher socioeconomic situations are likely to have support systems in higher cost areas, and are less likely to have responsibilities/obligations which require them to move back to a lower-cost area, and thus be hit with a “cost of living adjustment”. It is, in my opinion, discriminatory if your salary adjustment practices disproportionately affect a given group of individuals.

I have heard the argument here that “Well if those people are underpaid, and are worth more, than that sounds like a market opportunity for someone to pay them more”. The same argument would have been made against other groups which faced employer discrimination in the past. Society determined it was not acceptable then, and it shouldn’t be acceptable now.

Cost of Living is different. Adjustments are totally fair.

It is true that some living costs do adjust based on where you live, with rent being a large one. The problem is that it is the main one that is considered. Many other extreme costs, such as education, vehicles, healthcare, and vacations, do not change based on where you live. If I get cancer, and my max-out-of-pocket on my insurance is 50k, I will be paying 50k if I live in San Francisco or Augusta, Maine. If I were to pay college tuition for a child, it is not 40% cheaper just because I am from a poor neighborhood.

Unfortunately, we see companies using location-based adjustments lowing compensation by up to 40%. Gitlab’s Compensation Calculator lists a Staff Backend Engineer benchmark at $224k/year. If you instead live in “Everywhere else, Maine” your compensation is adjusted by a factor of 0.65; or a new compensation of $145.6k/year. This is a difference of 78,000/year, or 6533/month. There is no reasonable excuse that $6500/month is needed due to “cost of living”. If we assume a 35% tax rate, this is ~50k/year in additional savings/investments. Assuming a 7% rate of return, our SF-based employee is almost $700k richer. Over 20 years? 2 million dollars. This is not a cost-of-living adjustment. This is paying for a private college education 10 times. This may not matter as much if both of these individuals lived in totally isolated markets, but they don’t. They both live in the United States, which has free travel and commerce within it. Considering these as different markets for employment, but not different markets for the highest cost goods and services, is at best dishonest.

Note that this difference only grows as the “benchmark” salary increases.

A Path forward

It is obviously that companies can not pay San Francisco salaries everywhere, and that if they were to pay “everywhere” salaries in San Francisco, they would never be able to hire people there (or in other high-cost-of-living areas). I will be the first to admit that there is often a benefit to living in these areas, and to having employees there. Social networks are a valuable tool, and your employees being in a location which allows networking with others in the industry is important. The problem is on the scale of the “adjustments” relatively to life expenses.

I would propose that we being to approach remote salaries with a benchmark that applies everywhere, and then actual cost of living adjustments for high-cost-of-living areas (SF, NYC, etc). The end goal would be that 2 individuals who are doing the same job, with relatively similar expense categories, will end up with relatively similar “disposable” income. Yes, we will still see some difference in compensation, and some will complain that “company’s shouldn’t be subsidizing employees living in expensive places, they should pay for it themselves if they want to live there”, but we will not see the same 20-40% difference that seems to be the current norm.

In a “remote first” or “virtual first” world, where an employee’s location has almost no impact on the work that is done, adjusting compensation based on the location that they are Zoom-ing in from is about as arbitrary as adjusting their compensation based on their favorite color. It’s completely meaningless, and worse, is more likely to lead to discrimination by proxy.