I completely don't get location-based pay. I provide you with some work, that's worth some amount of money. Why does my location change the value of my work? Do I suddenly become better if I move to SF?
I get that some people have arguments for it, I just entirely disagree that any of them are valid. Whether I'm in a city that costs a lot to live in is no more the responsibility of my employer than whether I like to drive Ferraris.
I don't disagree that it's silly but the common misconception is that salary is based on some kind value exchange, it's not. Salary is the minimum amount of money it will take to get someone to work for you. Of course there are exceptions, but most salaried workers are not the exception.
Maybe that price gets driven up because of HCOL, or maybe it gets driven up by market competition, or skills scarcity (putting the employee in a position of bargaining). But it also gets driven down by the opposite effects. In the global market there are people with lower costs, lower market competition, but the same skills, and they are going to accept a much lower amount.
Take insane wages in SV as a great example, HCOL causes people to not accept lesser amounts, as does market competition. The fact that someone is getting paid more in SV is not because they add more value, it's because they won't accept any less.
And cost of living is also driven by how much local industries can pump up the salaries.
In a way it's a system designed to extract the most of the value generated by a local industry, "taxing" it at every layer, first you give some money to a engineer that then has to part a good chunk of it for rent and then even plumbers get their cut (who in turn spend it elsewhere), etc.
The key insight here is the word "local" in "local industry".
As the industry itself starts to be less local, this mechanism breaks down.
People making this argument forget it works both ways. Why would I go to the company that does COL adjustments and pays me less than the one that doesn't?
That still works in the worldview I laid out, because you simply won't accept less. I guess part of my point was that it's not a bout COL specifically, it's about how low people in the market are willing to accept. If you have high COL you simply can't accept less, and if you have low COL but are in a spicy market, you don't have to accept less if you don't want to.
Sure, but I can replace "high COL" in your sentence with "like to drive Ferraris" and it is equally valid, and I don't think anyone will claim that the employer has to pay for my Ferrari affinity.
If you absolutely must get paid in Ferraris, you can go ahead and reject any job offers which don't offer them. However, the market of labor which must be compensated with Ferraris is non-existent, so employers don't have to offer this benefit to compete for talent. Everyone has a COL however, so employers do need to adjust for it to attract employees in a given location.
> Why would I go to the company that does COL adjustments and pays me less than the one that doesn't?
All other things being equal, you don't have a reason to accept a lower offer but that's completely separate from the question of COL adjustments. If the best offer you get is from a company that has a COL adjustment policy, well... that's still the best offer that's available to you.
I live in Kathmandu, Nepal. Same here. A cousin of mine in Seattle bought a similar sized home for less than what one of my relative spent in Kathmandu.
Care to elaborate, share some details? This is really interesting comparison. What does N amount get you in Seattle and what in Kathmandu? How about other things, is this for general COL or just real estate? Because real estate prices often have life of their own, not always tied to, say, price of bread.
Salaries don't differ because of cost of living. They differ because of supply and demand.
A software engineer in SF probably has a higher BATNA than one in Delhi. Not in every case, but in most cases. So the amount you'd need to pay her to accept is higher than the amount you'd need to pay the engineer in Delhi.
You could decide you'll pay them both the same. Or you could decide you're not willing to pay SF salaries and will only hire people outside the US.
But, even if you do this, would you be willing to pay every employee at each level the same amount as the highest paid employee at that level?
If the answer is 'yes', what's the most expensive city you've visited? How much was a typical restaurant meal there? Do you pay that amount at every restaurant you visit, wherever in the world you are? I mean, the value of each meal is the same, right?
> But, even if you do this, would you be willing to pay every employee at each level the same amount as the highest paid employee at that level?
No, I'd negotiate. I'd get the cheapest ones first, then raise my offered salary until I couldn't find anyone, then again, then again. Note how none of this has to do with their location, because the engineer in Delhi will get a higher salary just because all the cheap ones have been taken.
This indicates to me that location has nothing to do with salary, it's all market forces, and trying to insert COL adjustments into the mix is awkward and easily refuted.
"This indicates to me that location has nothing to do with salary, it's all market forces, and trying to insert COL adjustments into the mix is awkward and easily refuted."
That's exactly what I said at the start of my comment:
"Salaries don't differ because of cost of living. They differ because of supply and demand."
Your proposed method of setting compensation ("get the cheapest ones first, then raise my offered salary until I couldn't find anyone") will end up paying people in Delhi less, because their BATNA will tend to be lower. So, even if that's not your intention, you will end up with location-based pay. And if there are significant differences between different same-level employees in Delhi? The lower-paid one will ask why. So you'll institute some sort of pay band that only applies to Delhi or India overall. So you'll end up with location-based pay bands.
> Your proposed method of setting compensation will end up paying people in Delhi less, because their BATNA will tend to be lower
I disagree, the company will just avoid SF engineers. Then, because nobody artificially adjust your salary based on location, salaries will equalize, so someone in Delhi and someone in Madrid will make the same, regardless of their location.
We're talking remote, you can't mix remote and on-site in the same conversation. The BATNA of both is the same, because they're competing in the same global market.
> We're talking remote, you can't mix remote and on-site in the same conversation.
You must consider both because, for now at least, people's BATNA is affected by local opportunities as well as remote ones.
> The BATNA of both is the same, because they're competing in the same global market.
The BATNA is different. The SF-based engineer can choose from a remote job or one in SF. The Delhi-based engineer can choose from a remote job or one in Delhi.
If the BATNA for both were the same, then you wouldn't be able to hire an engineer in Delhi for less than 80k USD (or whatever today's entry level engineer salary is in SF). But you can. This proves the BATNA is not the same.
We might want the BATNA to be the same. But today it is not. As a result, market conditions don't require companies to use the same pay grades everywhere.
When I lived in China, I worked for two different FANG companies (in Beijing and Shanghai). In both cases, the compensation bands for folks in China wasn't the same as those in the US West Coast. My total compensation was lower than I would have accepted had I been based in the US. But it was reasonable compared with the other options available to me without needing to move out of China. So neither company had an incentive to pay me more.
> Why does my location change the value of my work? Do I suddenly become better if I move to SF?
Plumbers charge more in SF than in rural Idaho.
A plumber that moves from Idaho to SF starts charging more because 1) they need to to compensate for the high cost of living and 2) to keep up with market rates.
SF would have no plumbers if they all thought it was immoral to charge more than their counterparts in Idaho for the same work.
And SF would collapse economically if all salaries in all industries across the city were suddenly paid based on a national average, independent of cost of living.
Right, but that's because if you live in SF, you need the plumber to physically be in SF. A plumber in [far away, cheap locale] is of no use to you, even if for free.
If this hypothetical plumber had a hypothetical way of traveling to SF for very little money and time, and would hence be able to charge much less than the local plumber, while having the exact same skills, which would you choose, and how much would you pay? If this hypothetical plumber now moved to SF for [reasons], would you pay more for his exact same service?
You’re not paid for the value of your work. You’re paid the necessary amount to hire you and keep you on board. That amount changes depending on where you’re located.
It's not about the value you produce, that part is your compensation ceiling; it's about supply and demand. Cost of living is directly correlated with average pay in an area. If you are aiming as an employer to be in the top 10% of compensations, then that value will change based on whether the area average compensation is 50k or 150k (assuming a roughly similar distribution). Sure, you could pay the people from the low compensation area the same as the people from the high compensation area, but why would you? It would cost you a lot more while not meaningfully changing your recrutement pool since you are already at the top.
So, they pay less based on location because they can, your alternatives to a 70k salary are 50k salaries, and they know that. On the other hand, in the high paying area, the alternatives to that same 70k salary are at 150k, so you would never hire anyone. I think the more interesting question is why companies hire people at 150k when people at 50k exist (but this is a different question which has already been discussed plenty of times around here).
Well if your employer is based in NYC and they expect you to come to the office then presumably they can’t pay you Indonesian median pay. How is that hard to understand?
If you’re talking about remote, maybe the argument stands up more, but I’d add that if a remote worker adds less value to the company (which I believe as a rule to be true, like for like), then you would pay them accordingly by that reasoning.
Typically your pay reflects the company outbidding other offers. If you are able to work locally for large tech companies (in SF or NYC), then you get higher offers, which even the remote companies need to outbid.
When you're shopping for something, do you pay what you think it's worth, or just the cheapest you can find (within some level of effort that may be just buying the first one, depending what it is)?
You probably do - you're probably hanging out with other programmers more, maybe you can meet up with colleagues sometimes - or, even better, suppliers and clients.
And you have more options for other employers, so you can capture more of the spread as producer surplus rather than consumer surplus.
Also, with a large pool of developers, employers get better matched with employees, creating more value. (At least this is true hypothetically. Maybe it was true before 2012.)
People from SV like to convince themselves they deserve more money because they happened to squat in one of the most absurdly expensive places in the country.
I agree, as a resident of Gold and Diamond Castles Avenue.
I get that some people have arguments for it, I just entirely disagree that any of them are valid. Whether I'm in a city that costs a lot to live in is no more the responsibility of my employer than whether I like to drive Ferraris.