Should remote employees be paid based on location?

Now that some companies are committing to long-term remote work post-pandemic, there's a lot of discussion about how to set salaries for remote employees. Should people be paid based on the cost of living in their area, or should everyone be paid the same regardless of their location?

I keep seeing people say, "workers should be paid based on the value they create, not where they live." Maybe it's how things should work. Also french fries should have zero calories. But that's not how things do work.

Pricing and markets

Let's start with how pricing works. People love to talk about "value-based pricing" but in a competitive market at equilibrium, no one pays based on value. If that worked, restaurants would charge your entire net worth because food keeps you alive, so its value is unlimited. But of course if a restaurant tried that, you'd just go to the restaurant next door. This is how markets work. There's competition.

Prices end up being closer to the cost of providing the product/service than the value created.

This applies to employee compensation. Employees are selling a service to companies. The value of that service might be very high, but there are many people capable of providing that service, so prices are driven down. I'm not saying this is good, it's just reality.

It's a bit more complicated because there are multiple companies competing to hire employees, so there's leverage working in both directions. This is why location-based pay happens. In competitive hiring markets, employees have more leverage than in less competitive markets.

In both cases, employees are being payed less than the value they create. They're just being paid what the market demands.

Fairness

Which brings us to our second point: Most companies just aren't going to pay employees more than they need to. To say otherwise is denying reality.

Most companies are very clear that they exist to "maximize shareholder value". You might disagree because companies often have aspirational mission statements and post uplifting Pride and Juneteenth photos on Instagram. They do those things in pursuit of their main goal: Maximizing shareholder value.

This isn't true of all businesses (e.g. Less Annoying CRM explicitly isn't trying to maximize shareholder value) but public companies especially are pretty much forced by their investors to put shareholders first, and that means putting everyone else (customers, employees, community) last.

So when we talk about how to compensate remote employees, it's almost irrelevant what should happen. What will happen is the market will set prices. Some companies will fix pay regardless of location, and they'll get the best employees in low cost-of-living areas, but most companies will pay market rate.

Can it be any other way?

Trying to change this systemic reality by asking individual companies to do the right thing is a completely ineffective approach. It would be like trying to reduce police violence by asking them to be nicer or reducing financial inequity by suggesting low-income people work harder.

The only way change happens is if the system changes. I can think of two ways to get companies to do what's fair rather than whatever maximizes shareholder value:

  1. Different (non-greedy, non-sociopathic) people need to be running business, and they need to not be bound by shareholder interests.
  2. The government needs to force "good" behavior via regulation (e.g. minimum wage).

The first option just isn't going to happen on a large scale. The characteristics that cause people to start successful companies are strongly correlated with the characteristics that cause people to be greedy assholes after their companies are successful.

The second option is often done clumsily and ineffectively. I'm not optimistic regulations will meaningfully change things (although I support the effort as futile as it is).

So we're left with the reality: Employee compensation is set by the market, and it's not particularly related to the value employees create. Without that systemic change, arguing that companies should go against their very nature and pay employees based on fairness rather than market dynamics seems like yelling at the sky to stop being blue.

Is this even the right thing to be arguing about?

Closing thought: If you do care about employee compensation being more fair, can I suggest that a better issue to take up than remote knowledge worker compensation is how all the other people at the company are paid? The cleaning crew, cafeteria workers, customer service, etc.

I wrote about this in my post about the thriving wage. Most tech companies have two classes of employees right now: Well-paid knowledge workers who get incredible benefits and autonomy, and low-paid contractors who are treated like dirt. Sure, let's fight for both, but I wish more people in tech cared about the non-tech workers.

Have thoughts on this post? I'd love to hear from you! I'm @TylerMKing on Twitter.
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