Katherine Bindley at the Wall Street Journal uncovered an important and complicated issue last week that I hadn’t thought about in decades: pay differences to reflect cost-of-living differences. The issue is in the news because longer-term remote work may allow more people to live someplace different from where they are employed.
In her article, Bindley explained that some Silicon Valley firms were thinking about offering (or depending on your perspective, threatening) to let employees work remotely in the long-term but would cut their pay if they moved to a place with a lower cost of living. At the same time, there are also companies that have “geographic differentials,” as they seem to be known, and some are thinking about abandoning them now.
What was the reason we had these geographic differentials in the first place? They became a standard part of compensation practices when employers moved people around, especially when they did so internationally. Driving this was a fairness issue: If we are telling you to move to China for three years for the good of the company, you should not have to suffer financially from the higher costs of living as an expat there.
Companies are rarely requiring people to relocate these days. So, if we aren’t making them move to expensive locations, what’s the argument for having these geographic pay differences?
This may not be surprising, but the concern is no longer about compensating people to live in areas with a high cost of living. It is now about being able to cut the pay of those who want to move to places with a lower cost of living.
If that sounds OK to you, here are some things to ponder. The reason the tech people in Silicon Valley make a lot of money is not because their company thought it would be nice to bump up their pay to cover the expensive housing. It is because the company had to pay that much to get them, because they wanted the best talent, and if they didn’t pay that much, someone else would.
The folks talking about cutting Silicon Valley pay have the causal argument reversed. They think that pay is high because it is an expensive place to live. In fact, pay is high because those employers want the best talent, and that is the market price. It is an expensive place to live because a lot of people want to live there, in large part because of those jobs, and communities of high-paid people compete for and up housing prices.
Suppose you think the goal should be to try to have everyone doing the same work in your company have the same “real” wage—that is, adjusting for cost-of-living differences. So, if you decide to live someplace cheaper, we will cut your pay. If you really believe that, then how do you deal with employees in San Francisco who decide to commute from two hours east in order to get a cheaper house? Their cost of living is lower—so, are you going to cut their pay? Or, suppose that someone wants to work remotely but is moving to Aspen, Colo., where the cost of living is about the same. You won’t cut their pay—but, if they move to Stockton, Calif., which is cheaper, you would?
People have preferences about where to live, and we don’t expect that our employer will equalize out those preferences. My MBA students want to go to New York and San Francisco, for example, in part for the job market but in part for the excitement and interest of being there. You could pay them the same salary they were getting in New York to move to Iowa, where it is hugely cheaper, and they aren’t going to go.
There are people right now in Silicon Valley—or, indeed, in many places—who will take a pay cut to move someplace they really want to live because there are no better options in those locations. As an employer, you can probably get away with that. But you are just bargaining them down because you can. Don’t dress this up as some kind of fairness. Expect at some point that another employer will pay them the market wage—and they will be looking—and then you will lose them.