Should remote companies pay differently based on where you live?

Reasons why remote companies should not pay people differently based on where they live.

Should remote companies pay differently based on where you live?

Short version: no.

Longer version: still no, but here’s why.


Let’s start with what exactly I am talking about.

Most tech companies have more and more remote positions, which is an amazing trend, however they tend to have little caveats around it that say things like “compensation based on location”.

Here’s Facebook doing it:

There are many more, but I’m going to use Facebook, because

  • you’ve heard of them
  • they’re evil
  • and they illustrate the point I’m about to make beautifully

There are a lot of people who are unhappy with Facebook’s decision, see:

Let’s look at this from a business perspective though.

The business

What IS a business? Besides the dictionary definition I like to think of businesses as a separate legal entity that exists so the owners can achieve some goal they set out to achieve. In order to do that in today’s capitalist world, the business needs money because things cost money.

The “things” here include, but not limited to:

  • running costs like office rent, internet fees, equipment purchase / lease, raw materials if the business is manufacturing, electricity, gas, water
  • legal costs like insurance, taxes, professional memberships
  • taxes
  • employee costs

That last one is important.

The business owner

People are motivated by different things, but businesses in the end are fairly easy to explain: is it worth running it?

Let’s disregard all of the non-monetary reasons why having a business is beneficial, and focus on money.

If the business does not make money, it doesn’t make sense to run the business. You don’t want to do a job where you have to pay to do the job.

That means that in order for the business to live and survive, it needs to make money.

It makes money by taking in more money than it’s paying out.

Therefore, the only time it makes sense to hire another employee is when the their work leads to more income for the business than what the business is paying for them; otherwise the business owner might as well just not hire anyone.

The budget

When a business makes the decision to hire an employee, they start by running the numbers. They check how much cashflow ((incoming - outgoing) / time) the business is making  and what sort of a cost they can attribute to the employee.

I’m saying cost, because an employee isn’t merely their salary. There are a bunch of other associated costs for the business that the employee doesn’t get to see.

In our theoretical example, the company has come to a decision that they can spend $80,000 per year on an employee. That’s within their budget, so they advertise, but wording it as “depending on location”.

”Depending on location”

A number of applicants come in, but for simplicity’s sake, let’s limit them to two people: one from San Francisco, United States, the other from Budapest, Hungary.

They are both excellent candidates, they have the necessary skills and experience, and the only difference between them is where they live.

The company decides to go with the candidate from Budapest, because they can pay them $40,000 a year and the candidate would still be happy due to much lower cost of living there.

It is unethical.

Ethics in paying people

The value produced by either people didn’t change. The company is making an extra $200,000 a year from either people’s work.

The only reason there is a difference in pay is because the company can legally get away with paying someone less for the same work - after all, less cost = bigger profits!

Let’s suppose they did hire the person in San Francisco, and they get $80,000 a year, and half a year in they decide to move to Budapest, Hungary. Would the company half their salary after they’ve been paying $80k for half a year? Of course not! If they would, the employee would rightfully feel cheated.

It is none of the company’s business how the employee gets to spend their salary. What does it matter to the company if the employee spends 75% of their salary on rent in SF or only 15% in Budapest? It’s up to the employee to figure out how to budget their own life, and they are also in “profit maximalisation” mode, though in their case it’s called “disposable income”.

A lower salary means “I value you less” from the company. A person’s work isn’t going to change value when they move to a place with lower cost of living, so why does the perceived value change from the company? Unless it’s not about value, but exploitation.

Objections from companies

The business will likely respond with market forces, and it’s not their fault that people living in places with lower cost of living are willing to work for less.

I’ve also seen companies say “we don’t adjust the salaries down for people in lower cost of living places, we adjust them up for folks living in expensive cities” which is a wonderful way of saying “we do have the budget to pay more for the same position as you, living in an average cost of living place, we just don’t wanna”.

Then there’s the “we have a total of $500,000 budget for our people collectively, so if someone’s more expensive, we need to get someone who’s cheaper”. The solution to that is easy: get the folks in expensive cities to move to a cheaper city, and the company is going to stay within the budget. Or, I don’t know, they could rerun the numbers for business viability and standardise the pay regardless of place of living.

What can you do?

As a prospective employee, you can ask the company you’re interviewing with and have a conversation about this. Obviously this is hard because bills need paying and you don’t want to choose between working and not working, but if you do have the privilege of turning down jobs, it can be a powerful motivator for businesses, especially if a lot of people start having these conversations.

As a business owner you could revise your salary plans and tell people what you can afford to pay them, and then not change that based on where they are.

As a regulator you could make it into law to abolish wage difference based on living situation, though this would only work within the region that you’re responsible for. International law is hard.

Photo by Rezal Scharfe on Unsplash