I'm the first person to admit that if I was to run a company, I wouldn't allow people to work remotely only.
But as an employee, there's no way I'm going to drag my ass into an office ever again on a regular basis, when I can just as well work from exotic beachfront homes.
This is going to work out just like companies who cut compensation work out. You'll be left with the mediocre engineers and everyone who's able to choose to work remotely will eventually do so. If you don't permit that, you're left with the chaff.
Besides, isn't it kind of the managers job to help keep output in check? If my output was down I'd expect a friendly note telling me to quit slacking.