Why localized compensation in a work-anywhere world isn’t so simple

Last Thursday, Mark Zuckerberg told Facebook’s 48,000 employees that he expects upwards of 50% of the company will be working remotely within 10 years. After outlining many of the advantages that remote work confers — including to “potentially spread more economic opportunity around the country and potentially around the world” — he added that those who choose to move to other places in the U.S. or elsewhere will be paid based on where they live.

“We’ll localize everybody’s comp on January 1,” Zuckerberg said. “They can do whatever they want through the rest of the year, but by the end of the year they should either come back to the Bay Area or they need to tell us where they are.”

Facebook isn’t pioneering something entirely new. The concept of localized compensation has been around for some time, and it’s used by tech companies like GitHub that have primarily distributed workforces. Still, questions about whether it’s fair to pay employees based on their location are sure to grow as more outfits adopt remote-work policies.

Despite Facebook’s uncharacteristic transparency about its thinking, not everyone thinks the tactic makes sense.

One longtime Bay Area recruiter who typically focuses on executive searches calls “disparate pay for the same work” a “dangerous place to be.” Explains the recruiter, Jon Holman, “Even if you invoke the geographic disparity arithmetic based almost entirely on housing costs, what if a new openness to telecommuting means that more women or people of color can aspire to some of these jobs? Are you going to pay them less than the mostly white and Asian-American engineers in the Bay Area? I doubt it.”

Determining how to adjust salary bands based on where an employee lives could potentially prove tricky, too. For example, one tool that the job-matching site Hired.com uses for analysis in its annual reports is Numbeo, which considers cost-of-living factors like rent, real estate, utilities, groceries, local taxes and transportation. Such data is helpful in showing that the cost of living in cities like Austin and Denver enables one’s salary to go much further. But that data changes as cities rise and fall, and those shifts could be happening at an accelerated pace right now, given how many businesses have shut down in recent months and may never recover.

Expensive urban hubs were already falling out of favor with some. Hired CEO Mehul Patel says that when candidates join Hired’s platform, they’re asked to select their preferred job markets, and Hired has seen a 5% year-over-year increase in candidates listing “other” as their preferred markets. That means they’re less keen to work in one of the 14 major cities in which Hired already operates, including London, New York, LA and Seattle, and more interested in up-and-coming locations, including, specifically, Charlotte, N.C.; Portland, Ore.; Pittsburgh, Pa.; and Berlin.

Of course, perhaps the most impactful aspect of all of this is how tech talent at Facebook and elsewhere will respond to the idea that their salary should be adjusted according to where they live.

On this front, Hired has “actually spent a lot of time in the last month talking to the candidates on our platform to get a sense of how remote work impacts their salary expectations,” says Patel. He says that the world has been changing so fast that Hired is “still analyzing that data.” In just the last couple of weeks alone, Twitter, Square, Shopify, Coinbase and Box have announced policies around permanent home work, turning a lot of earlier data on its head.

Presumably, some Facebook employees facing reduced pay will decide to stay put.

Others may look elsewhere for work, depending on how much their compensation packages change. In fact, Holman thinks pay calculations will become meaningless as more companies go remote, because remote employees will suddenly have more options. “If a good AI or machine learning engineer is working elsewhere and demand for those skills still exceeds supply, and his or her company pays less than for the same job in Palo Alto, then that person is just going to jump to another company in his or her own geography.”

Put another way, companies’ individual philosophies may not matter much a year or two from now.

Either way, with Facebook adopting the policy, many more companies are likely to follow suit. “I wouldn’t be surprised if we see smaller companies adopt a similar approach,” says Patel. “We often see the rest of the industry follow the lead of these tech giants because these are the same companies they’re often competing against to recruit top talent.”

It’s a “bit early to say definitively that salaries will decrease for employees outside of the Bay Area and other expensive tech hubs like New York and London,” he adds, but — for better or worse — he thinks companies that are making these moves will look to Facebook for leadership on the issue.