On Twitter the other day, David Anson asked:
If someone works 100% remotely, why should their salary be tied to which city they are in? They do exactly the same job if they are in a big city or village. A cost-of-living adjustment is applied when work forces people to work somewhere; here it is not relevant.This sparked a lively discussion.
Several people have suggested that the cost of living and local market rates require different charges depending on where the person lives. I disagree. Yes, compensation today is driven by local market rates, but as teleworking grows, rates in local markets for telecommuting talent are becoming volatile.
My opinion is based on several assumptions.
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So if my assumptions are correct, in the long run, I expect more and more companies to ignore location when considering compensation. If my assumptions are wrong, then you can ignore all this. I just saved you a lot of reading time!
The reason for this trend towards geographic equilibrium of compensation is described by an economic principle called the Law of One Price (LOOP). I will come back to this later.
How companies determine compensation
Let's start with an important question. How do companies define compensation? Is it based on a moral idea of what a person needs or deserves? Is it based on the cost of living? Or are they throwing a dart at the payroll?
The answer is that companies pay as little as possible. This is not a cynical observation. There is no value judgment in this statement. Nor am I talking about what companies should pay. Rather, it is an observation of the general trend of companies in our current economic system. There may be exceptions, but they are few.
What a company can get away with depends on a number of factors, but the most important one is how much other employers pay. In other words, The Market.
A thought experiment can clarify this point.
But before we get to that, I need to make some assumptions for the pedants and people who are "well, actually." In this post, when I compare compensation, take all other conditions into account.... For example, a company with amazing perks can get away with paying at market prices versus a company with crappy perks. Plus, startups that aren't yet profitable won't have enough cash to compete with established payroll companies. But they can offer a larger share of the company in the form of options than a profitable company. Yes, this is harder to compare with the set salary because it comes with much more risk, but also much more potential reward. For the purposes of this discussion, I am assuming full compensation that takes into account options, benefits, risk, and other non-monetary factors. Also, when I compare developer rewards, I assume that developers are of the same type, level, capabilities, etc. Here I am comparing apples to apples. Thanks,that expressed doubts to me. You can continue.
Imagine that you are a company in a city where the average developer salary is $ 100,000 per year. You decide to pay the developers $ 75,000. All things being equal, it will be difficult for you to hire developers. Good developers will flock to companies that pay $ 100,000 or more. This explains why the market sets a floor on wages. Companies cannot get away with paying a market rate that is too low.
Now, suppose you decided to be generous and paid $ 125,000. You will have no problem hiring developers. But there is also a downside. By paying much higher than the market rate, you'll run out of budget faster and won't be able to hire as many developers as you might otherwise. This can lead to too few developers on your team. If you paid closer to the market rate, you could hire more developers.
This is why there is a natural tendency to pay at rates close to market rates, rather than too much higher or lower.
Sometimes companies have the brilliant idea of conspiring to keep wages low. This happened a few years ago with some well-known companies and they got caught.
Apple and Google have settled a massive lawsuit involving allegations that they colluded with two other tech giants to keep Silicon Valley wages low and avoid hiring from one another ...Companies also use information asymmetries to keep wages low. Companies have better salary data than individual employees. Employees often do not realize that their remuneration has not kept pace with the market over time. Or that they are paid less than their peers.
In contrast, calculation based on average wage increases supports this requirement.
If you work for the same company for more than two years on average, you earn about 50% or more less throughout your life.If companies are tracking the market, then the difference between leaving or leaving within ten years should be negligible. If they paid above market, then employees would be rewarded for their loyalty. Instead, the facts show that companies are punished for loyalty. Why? Because they can get away with it due to information asymmetry.
Keep in mind that 50% is a conservative number at the very low end of the spectrum. This is assuming your career only lasts 10 years. The longer you work, the greater the difference in your life will be.
How teleworking is changing the market
Again, while many factors come into play in determining compensation, the market is the most important factor. Today the market is mostly local. The compensation to developers in San Francisco is much higher than in Seattle. And those in Seattle are still higher than those in Columbus, Ohio.
I choose these cities not to choose them, but because I was familiar with their data from Radford in the past, managed employees in each of these cities and personally saw the difference in wages. Radford provides compensation data to a variety of companies who use the data to determine their compensation levels.
These differences persist due to market friction. The Columbus company may continue to pay Columbus' salary because local developers don't have easy access to better options. There, it is difficult for a developer to move to San Francisco with a higher pay. Likewise, it is very difficult for San Francisco companies to build an additional office there to access cheaper talent. Salaries in these cities are in line with the local market.
This makes sense when companies require people to take their seats in the company's office. But what happens when more and more companies are moving to remote work and letting their employees live where they want? Hold on to your asses!
For companies employing a remote workforce, the talent market extends beyond their current geographic boundaries. This leads to less and less friction in the talent market. A San Francisco company looking to have remote workers now has no problem hiring a developer in Columbus. They don't need to build or rent office space in this city. The cost of hiring a developer is negligible here than in San Francisco. Although the cost of compensation is completely different!
This is where the law of one price comes into play.
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So how does this apply to developer compensation and remote work? Once again, let's plunge into the magical world of hypotheses.
Imagine a future in which teleworking will become the dominant form of work in the United States. Developers can work in any company, anywhere in the country. However, developers are still compensated according to the local market in the city they live in. In this scenario, San Francisco developers make $ 200,000 and Ohio developers $ 100,000. What will happen over time?
Well, smart companies in San Francisco will find that they are overpaying developers. They would be tempted to squeeze $ 125,000 in front of Ohio's top developers and lure them all away. Faced with this competition, Ohio companies will need to start raising wages to retain their best employees. At the same time, wages at SF will begin to fall as SF developers compete with developers in Ohio and across the country. The general trend is that developer salaries across the country will move towards equilibrium. It follows the law of one price.
Wrench on the market
Does this mean that all developers of the same level and capabilities in the country will be paid the same amount. Can we achieve a complete balance in developer compensation?
No.
First, frictionless markets are a theoretical environment. There will always be some friction. For example, for many companies, time zone differences will be a source of friction. While I believe the discipline required for successful teams to operate across time zones provides many benefits, it remains a challenge for many companies.
One of the conditions of the law of one price is the absence of legal restrictions. Today, different states have different legal requirements and policies for hiring employees within the state. This can become an obstacle to the overall balance in the country. For example, I know that some companies have a list of states from which they will not hire employees. Over time, these companies tend to add more states as legal issues are resolved, but this adds friction.
Another condition of the law of one price:
buyers or sellers do not manipulate prices.
As mentioned earlier, tech companies have conspired in the past. There is no reason to believe that they will not try again in the future. But there is also no reason to believe that they will be able to support such a collusion in the long run.
Racism and sexism also continue to lead to inequality in pay.
There will always be some friction in the developer market. But friction over geography will lessen over time as companies move to telecommuting. And this reduction in friction will lead to a tendency towards equilibrium between locations. The city you live in will not be an important factor in your compensation.
It's good?
I am not an economist by training, but I would like to play one of them on television. I looked at these trends impartially to conclude where they were heading.
However, it is important to ask the question: is this all good or not? Answer: hard to say. You see, the great economist's answer. Accurate, but unsatisfactory. Let me try.
When it comes to the rise of telecommuting, there are people who lament the lack of human contact and casual interactions that involve being physically present with colleagues. This is a serious problem, but not as bad as you might expect.
Another problem is the lack of investment in local communities, which may lead to. Many business owners take pride in running businesses that employ people from their own communities. This can be mitigated by the fact that remote workers in this community may have more opportunities and better wages, and therefore more disposable income they can spend in the community.
Another problem is that this will cause companies in the United States to move all of their jobs to cheaper countries. I have no doubt that many companies will try to move more work overseas, but this trend started long ago with mixed results.
However, contrary to popular belief, the results of many businesses have been mixed at best. According to several studies, half of the organizations that have moved their processes offshore have not been able to obtain the expected financial benefits.Hiring employees in other countries presents new risks and all sorts of legal issues and regulations that need to be considered. In addition, there are cultural barriers and problems with time zones. Sending jobs overseas is difficult. I don't expect a massive exodus of job losses as a result of using remote work.
For developers, remote work offers a lot of flexibility, especially for working parents. Telecommuters can live anywhere and have more control over their schedule. Developer salaries in low-paying markets can increase as they join a larger market. Developers' salaries in the highest paying markets may drop slightly, but they will have the opportunity to relocate to less expensive areas of the country.
An argument about fairness should also be made. If two developers provide the same value to the company, shouldn't they receive the same compensation? As a manager, I found myself in a situation where one employee earned 50% more than another, even though they were of the same level and skills simply because one lived in a level 1 city and the other in a city Level 3. For example, a company like Microsoft makes a profit of $ 273,000 per employee. Is this profit magically reduced if an employee moves from San Francisco to Columbus? Then why do they need compensation?
There are many benefits for companies. Many companies will reduce the amount of expensive office space rented. They will have access to more talent across the country. Some companies may face difficulties. For example, companies in the lowest-paying markets can face challenges as talent prices rise by larger, better-funded companies. But this can be compensated if they can sell their products and services in a larger market.
In the end, good or bad, it doesn't matter. It's unavoidable. As more and more people and companies see the benefits of working remotely, I don't see any sustained backlash.
Therefore, if we agree that teleworking is the future, it is in our best interest to see how to mitigate the damage to those affected and act accordingly.