Again, if it's just the cost-of-living bonus (like, all our engineers get $80K, plus $X/month where X is average rent and groceries, plus Y% for taxes) then it's fine. Otherwise it's valuing someone less purely on their geographical location.
Edit: Also, really, overpaying so they might be unhappy? "We're giving you less money for your own good!" Presumably if they're a world-class engineer and can work remotely at one place, they can find another remote job, too...