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Can someone explain the rationale behind geographically based pay in remote-first companies?

I don't necessarily disagree with it, but I don't know what aspects of the issue companies are actually looking at to decide that geo-based pay is the way to go.

> 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.

There's a name for that kind of thinking, but I can't recall what it is.

Essentially you're minimizing cost by paying the lowest possible local rate, but isn't it just as valid for someone else to maximize quality by paying a competitive rate for the most expensive locale? Presumably both would be pushed to a middle (location independent) wage because the company minimizing price will (presumably) have issues hiring all bottom-of-the barrel employees, while the company optimizing for quality will have issues paying top dollar when it only provides marginal gains over a high-average wage.

Game theory

I meant the thinking that tries to minimize cost and aims for "how much they have to pay you before you decide to quit".

Profit maximization. You make the point that companies can choose to hire employees that aren’t the bottom of the barrel but then you’re selling a different product to those who really are squeezing every penny. CostCo and Walmart are both successful superstores but one sells many more products, in smaller minimum purchases, and hires lower quality employees while paying less. These kinds of differentiation factors lead to what’s called oligopolistic competition[1]. They’re not in separate markets but they’re it selling the same product either.

[1] https://www.monash.edu/business/marketing/marketing-dictiona...

It's a relic, and a bad one.

I run a remote-first, remote-only company and we pay everyone based on experience and merit. Not location. If you want to stretch $150k in San Francisco go for it. Good luck having to live with 3 other roommates.

However, if you want to take that same $150k and live like a king in the middle of Kansas that's an option as well. Adjusting someones pay simply because they're logging onto their computer from a different location is perplexingly stupid in a world where people can work from wherever.

Maybe someday all tech employers will be remote-first and pay will be the same everywhere. But if you don’t compete with Bay Area offers now, you filter out everyone who relocated to the Bay Area to benefit their career.

That's my point. Your baseline should be bay area numbers. Don't change that number simply because the person you're hiring lives somewhere else.

It also leaves the company open to gaming. If I know I can make significantly more than my peers just by having an address on the bay area I could find a way to get an address while living somewhere else.

And hey, if you had started at Brex prior to Sept 1st, you wouldn't even have to game the system. But your coworkers _would_ (and would also likely be at risk of being terminated for cause if they got caught, not to mention state-tax issues).

If your company has your address in the wrong state (and withholds there) you can still correct it when you file your taxes for a full refund in the state you didn't actually reside. Though you'd maybe be penalized in the proper state for underwithholding unless you manually paid quarterly estimates in that state as well.

Thank you for this. I don't understand why people have such a hard time thinking this way. Many people are very elastic and flexible about where they live (especially when it's 'anywhere in the US') and as someone with a job in the bay area, I don't understand why I should take a pay cut to move somewhere cheaper to do the same job. The employer ends up incentivizing me to stay in the most expensive area that also happens to be the easiest place to get a competing offer... makes no sense

I don't see it as a relic, or a bad one. Some people can't just up and move to a cheaper location for a job they don't know they'll have in a year's time. How do you decide what to pay? Paying based on "experience and merit" needs to be anchored on something, so you just end up either massively over-paying someone in a location that's cheap, or massively under-paying someone in an expensive area. If you want to pay everyone like they live in Zurich, then more power to you but doesn't seem sensible from a business management standpoint and the person in North Carolina would probably be over the moon at half that. Any company with shareholders is accountable first to them (for good or bad) and I'm not sure your board or CFO would agree that paying peak makes sense

> Any company with shareholders is accountable first to them (for good or bad) and I'm not sure your board or CFO would agree that paying peak makes sense

Good thing I have neither a board or a CFO.

But to respond directly, I think you're down playing how much of an advantage over paying (as you've put it) can be for acquiring great talent. Great companies are built by great people. Paying them well for the work they're doing regardless of where they live shouldn't be a controversial opinion.

In a post-covid, SaaS based world I just don't see how location matters at all. If I'm in Omaha Nebraska I pay the same amount for an item on Amazon as someone living in downtown San Francisco. The internet flattens.

I understand the ideal of it, but the main reason why it doesn't work is simple supply and demand. Your employment opportunity will seem compelling for folks that live in LCOL areas, or folks trying to escape HCOL. But for the 5x as many programmers that live in HCOL areas, your pay isn't competitive.

If you want to reduce your candidate pool by 70 or 80%, by all means, go for it, but there's a clear market reason why folks are paid geographically.

This is the reality, it’s supply and demand, not “fairness”

Where are you sourcing your stat from? It's hard believe that the millions of developers in China, India, SE Asia, East Europe, etc. are outnumbered by people in New York and San Francisco.

Cripes, US$150k is good money in London and that's a considerably higher cost location than rural Kansas.

Usually remote means US only for US based remote companies.

I agree that the internet flattens distance. Thank you for paying employees like it's 2020, not 2000.

One thing it does not flatten is time zone. When two team members have 11 hours difference, their ability to collaborate is very limited. It's reasonable to discount the pay of employees who are too far in time. Alternatively, avoid hiring people outside of +/- 4 hours from the mean (unless they are the best in the world in something).

I generally agree with you, but I do struggle with the amount of risk taken by paying the top end salaries. Great companies are made by great people, yes, but great salaries are made by all kinds of people.

Then do you have to pay US salaries at all?

I agree with this.

From a cashflow perspective a lot of "remote first" companies just use cost of living adjustments because, well, it's cheaper and employees are happy to oblige. This the dirty little secret.

Here's the reality - the profitability of a tech company is directly related to the amount of total cost of running the business (duh) and human resources is typically one of the largest (usually at least 40% of the overall revenue on avg in my experience). If the same engineer is working remotely from NY versus Kansas City, their output doesn't change as a result of where they live, so profitability only changes if the company renegotiates their package (their revenue contribution stays constant, so only cost changes the profitability measure).

The only reason the salary is higher in NYC to begin with is that the increase in demand for living in places like NYC is much higher than KC, which is directly correlated (on average) to the quality of talent.

The assumption that top talent is coming from top tier cities has been challenged for the last decade and is only accelerating because of COVID.

My prediction is that there is going to be a convergence of salary values that are location agnostic. The only thing stopping this convergence is information asymmetry (e.g. companies know remote employees are happy to oblige to lower salaries because they lack negotiating acumen/power). This will change.

Agreed. We're also building a remote-first, remote-only company and after much discussion landed on uniform salaries, regardless of geography in the U.S.

FWIW 150k is plenty to live comfortably, without a roommate, in SF. SF is expensive but not that expensive. Even a 4k 1br (rounding way up, especially these days where you can get a 1br for < 3k) would be 48k/year, and assuming half your money goes to taxes, you could swing it while still putting money away.

It's not a relic, it's a way to price labor effectively. You're not paying for work, you're paying for the candidate to choose you over a competitor. If you're competing against local Bay Area or high CoL companies that are local, you will have a lower offer and will likely lose out on talent. That's OK as a strategy, but you may just be selecting out of low-CoL areas and limiting your pool of labor.

The alternative, which sounds like a relic, is offer your 150K and a reasonable upward CoL adjustment certain areas. Small enough that someone from a low CoL place wouldn't want to move, but high enough to keep your company competitive in high CoL places. If you have enough labor supply, you many not have an issue, but if you are having trouble finding skilled people and assume that skilled people are unevenly distributed in high-CoL places, it's a reasonable path to go down.

It doesn't seem that effective to me, because it makes some assumptions about employees' willingness to move or engage in location arbitrage.

For many employees without children and especially those who are single, moving areas is not a dealbreaker. For those who save a lot, really you just end up incentivizing them to move to expensive areas.

It's basically based on the model of thinking of "we should pay this employee the minimum it takes for them to work for us" rather than "we should pay this employee what it takes for working for us to be worth it to them"

It makes more sense to lock someone's CTC (cost to company) if they're remote and then let them live anywhere. This allows them to fully realize the remote benefit of being able to live wherever they want. Especially if other companies stick to the old model of adjusting pay based on COL, this makes working remotely in a low COL a better offer at no price difference to the company for someone who is willing to move whichever place is most economically efficient for them.

If you have to pay $200k to get talented engineers in the Bay Area, and find out you can get equally talented people in the Midwest to work remotely for you for $130K, obviously it makes sense to set waters geographically.

But what happens when your competitors realize this as well? Now you can no longer get the same level of talent in Iowa for $130K, soon it’s $150k, then it goes up again. You aren’t paying for work, you are competing for talent.

I think the market ends up being bifurcated, where working locally in-office gets a premium when it’s worth a premium, but remote pays the same no matter where you are outside of time zone issues.

It's basically signalling that the company doesn't value employee output.

The fact is that having an employee in New York City, in the average case, is worth more than having an employee in Mongolia. They can talk to a customer more easily, given that your customers are more likely to be English-speaking Yankees fans in the Eastern Time Zone than Mongolian speakers in Ulaanbataar. They can go to an event more easily, since there are more conventions in NYC than Mongolia. They can fly to the company retreat more quickly and more cheaply. They can culturally align a product/brochure/email to a target customer more easily than their counterpart because the target customer is most likely to be in a high cost of living area (that's why they're high cost of living... lots of people with lots of money to spend on salaries or SaaS applications). If you need to read a bunch of English text, such as reading through a competitor's annual report or developer documentation, the New Yorker will likely be able to do so more quickly. They are more likely to understand "rich people" references that target customers make, like "I was at the regatta last weekend so I missed your call." There is an advantage to global diversitt for a company serving a global audience, but there are also a lot of reasons to, software engineering skills being equal, prefer the New York employee.

James Clark, open source programmer and standards expert, lives in Thailand https://en.wikipedia.org/wiki/James_Clark_(programmer) he can probably speak adequately with English speaking Yankees fans - although time zone might be a problem.

That said, I think the whole recruitment/interviewing phase of the whole tech world is geared towards local employees and not sure if it can all be moved remote first at any time.

It’s easiest to understand when you realize that the company is not going remote to pay SF salaries everywhere, they’re going remote to pay rock bottom salaries everywhere. Geographic pay is a temporary patch to give extra to people in SF while they wait for SF engineers to decamp to the boonies or be replaced by people who do.

Lowering salary costs is one reason. The other potential reason is to vastly increase the talent pool.

If it's only about the first reason then management will cut salaries as deep as possible, if it's only about the second then they'll keep salaries at the same level and just change the job description. I suspect for most companies final pay scales depend on the weighting of two reasons. A lot of companies will try to have their cake and eat it too with location-based pay, but that approach will neuter the benefits of opening up for remote work, and its efficacy will only degrade further over time.

If you were already bought into and budgeting for 4 years of an employee at price X, it seems opportunistic and irrational to then try to cut them to price Y due to an unexpected factor.

As some other CEOs have chimed in, I'll say that my relatively small startup (6 people, but growing) just pays people what they're valued at, regardless of location or business expenses. I budgeted for those salaries - if someone moved to a cheaper area I wouldn't cut their salaries because their location hasn't changed anything for me. Everyone makes enough to live in the bay area comfortably, which means they'll be just fine elsewhere.

The biggest question is how you determine 'what they are valued at', given that you would get drastically different numbers in different markets.

Can someone explain the rationale behind geographically based pay in remote-first companies?

Profit.

I think it all comes down to competition.

If I'm hiring a remote team globally, then you are competing against people I can hire anywhere. A great engineer in Brazil could cost...I don't know...$45,000. An engineer with the same exact skill set who lives in California might be $160,000 and one in Chicago might be $110,000.

If an employer paid $160,000 for every employee then they aren't using their capital very efficiently when they could have saved $115,000 on the employee in Brazil and potentially hired two more people for the team.

My guess is this. Many companies are thinking about geo-readjustment. The true primary reason is that they want to lower their costs, given that a significant portion of their employees reside in high cost of living location (Bay Area, Seattle, or any European capital). However, my bet is that this is going to pan out poorly in the next couple of years and the scheme will need to be abandoned or thought over. First, there are plenty of people who will want to live in San Francisco, New York or London even when they are no longer required to do so for work. This means that their high cost of living stays with them. This means they can only accept job offers that support it. Another thing may turn out to be true. When employees are informed that their salary will be lowered when they move to another location, this may not sit well with them. So they may not move or they will have a strong sense of resentment. Basically in 1-2 years, we'll realize that what works in theory creates too many unnecessary problems and is not the way to go forward.

I would just consider it a perk of having started at the company earlier, like having more vested stock.

What sucks though is if you started at the same time as another employee in SF, but you are in the SLC office and are stuck on a lower relative pay band for 4 years.

Sounds like a way to incentivise new employees to move to the highest COL locations ASAP, to take advantage of the salary bump for things such as 401k contributions, any matching 401k company contributions, and Social Security earnings calculations.

If they were to scale the adjustment by 25% until Sep 2022, 50% until Sep 2023, 75% until Sep 2024, and then 100% thereafter, that would create a bunch of pay drops and they would probably be more likely to lose employees at those dates.

If they linearly interpolated the drop across the next 26*4 biweekly paychecks, would that be better.. or worse?

I don't know if it's better or worse. As I said, there are many ways to think about it. I do think that explicitly creating 2 different classes of employees probably wouldn't even make it to my short list.

As well, I don't think that the early employees, who are already golden-handcuff-d (based on the growth in their valuation), are likely to be leaving Brex based solely on their salaries being adjusted if they explicitly choose to move.

Honestly, I think the actual adjustment is likely to be a moot point, at least in the short term. Based on my experience chatting with people at Brex 18-ish months ago, my impression was that everyone there was very much in the "SF-or-bust" camp. Not only did it feel like they were very against remote, it felt like they were against people who didn't explicitly want to move to SF. I suspect that a majority of their staff that is already in SF is not going to permanently move out of the city in the next year or so. In 4 years? Who knows, but it's kind of why this 4-year window feels odd.

Sounds like a great way to guarantee losing most of the people relocating when 2024 hits.

Is this because of contracts including stock options? Harder to dial those back?