What is the point of an employer to adjust the salary of an existing employee based on actual remote work location?

Question

These two articles mention the fact that Facebook is comfortable with remote work, but might adjust salaries based on the actual location used for doing the work:

Facebook CEO Mark Zuckerberg said Thursday that most Facebook employees can work from home wherever they want. But they should not expect to get Silicon Valley salary levels if they relocate to less-expensive areas.

"We'll adjust salary to your location at that point," Zuckerberg said during a livestream, according to CNBC. "There'll be severe ramifications for people who are not honest about this."

The pandemics also created an opportunity for some those who can work 100% remote where I live (Eastern Europe), but I haven't heard of anyone adjusting the salaries due to working outside of a major city (metropolitan area).

I am wondering what is the rationale behind this. I am asking because this involves some costs (tracking your employees by location, possible demotivation due to salary reduction).

Question: What is the point of an employer to adjust the salary of an existing employer based on actual remote work location?

Note: This is very similar to this question, but the important difference is that here I am asking about existing employees.

Answer 1

A huge portion of any market salary is the cost of living for that market. It's no different than the living wage being different in different countries. Clothes and shoes are made in specific countries because the salary costs for those countries is lower. Software and other "remotable" jobs are no different. Facebook and other companies pay a premium to individuals based on the location. Individuals in Seattle and San Francisco have significantly higher living costs and so make a higher pay rate. It's absurd to pay a bay area salary to someone living in Wichita.

One might attempt to argue that salary is the value of the work, but when you examine actual salary it's the value of the work weighed against the market the worker is in. The people who need to begin worrying are the people in those high pay rate areas. If these jobs are capable of being fully remote without significant degradation to quality or timeliness, why would companies continue to pay a premium for those areas when they could save millions in payroll?

As a note for the very specific question of existing employees: salaries are reviewed and adjusted to market on a regular basis. Many companies provide an annual "cost of living" adjustment at the beginning of a year. Promotions and raises in place are regular reviews of salary against the market. If the employee's market changes it's not unreasonable that the market adjustment will go down.

Answer 2

The reality of the world is that some areas are more expensive to live than others. I'm not saying that's right or wrong, only that it is true. Without a global economy and shared global currency, it would be impossible to pay everyone the same.

If a company said to someone working in Silicon Valley, "I'm only going to pay you $X because that's all someone living in Eastern Europe gets", that person probably wouldn't take the job, and would probably soon be homeless and starving if they did. Conversely, someone working in Eastern Europe on a Silicon Valley salary would probably be able to live a life of luxury far in excess of their colleagues in Silicon Valley on the same money.

Why does the company pay the person in Silicon Valley more? Because they have to, if they want them to work for them. Why doesn't that same company pay someone in Eastern Europe a Silicon Valley salary? Because they don't have to: someone can live a comfortable life in Eastern Europe on a lot less money, so who is going to hold out for a "life of luxury" salary when someone else in the same town would take the same job on a "comfortable" salary?

Personally, I would be quite surprised by someone who moved from an expensive area with high costs of living and high salaries, to a cheap area with low costs of living and low salaries, and who expected to keep the high salary, or whose morale dropped as a result of losing the high salary. It just doesn't work that way.

(Here in the UK, this is frequently specified in employment contracts or even in law - consider for example this page which shows how teachers' pay varies depending on whether they live and work in London.)

Answer 3

I suspect companies are not as sold on remote work as they claim

There was this wave of cheers a couple months into the pandemic that “remote was the future” and “everything was just as efficient.” Anecdotally, those cheers are gone now as teams now have people they have never met due to turnover. There are now people I only know as chat boxes on the screen on my team and learning how to work with them is more difficult. That is a challenge for my team. On a team a friend is on, the bug count has increased as they are used to having requirements discussions orally and are now learning how to write them down.

To be sure, those challenges can probably still be overcome to allow remote work to continue. But there are challenges and management may want a way to be able to reverse work from home easily in a year or two if they decide those challenges are insurmountable. Over the prior 5 years, many companies were trending towards reducing remote work, not increasing it, even if it had been a staple of the company for decades.

That’s a lot easier to do if 80% of them haven’t left San Francisco for somewhere cheaper.

Answer 4

The thing to remember is that salaries are set by market forces. Specifically the competition between buyers (employers) and sellers (employees).

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Compensation for a position ends up as a range between 2 numbers:

A floor, below which nobody would agree to take the job

And a ceiling, above which leaving the position empty costs the company less than the salary would.

For a Junior Developer in the Bay Area, those numbers are probably something like a floor of $80k (because the cost of living is so high), and a ceiling of $300k (Facebook makes $2.4 Million of revenue per employee. Even for junior developers, the cost of not having an employee to fill a position that needs filling is probably hundreds of thousands of lost revenue).

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Imagine a theoretical auction. Usually, there is just one thing being sold and multiple people trying to buy it, so they end up bidding each other up to the highest price any of them is willing to pay (the Ceiling).

Now imagine a different auction where there is just one buyer and multiple people trying to sell them the same thing. The dynamic is reversed and now the buyers are going to keep offering lower and lower prices until they get to the lowest any of them is willing to sell it for (the Floor).

The same dynamics happen in the jobs market.

When there are more jobs than people who can fill them, you get intense competition among companies and they end up paying salaries near their Ceiling.

When there are more people than jobs, you get intense competition among employees and they end up settling for numbers near their Floor.

Taking Facebook again, the current salary for a junior developer in California is $110k which means salaries are only slightly higher than the cost of living.

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Ergo, if an employee moves somewhere where the cost of living is cheaper, their Floor is going be lower (because cost of Living is lower) and Facebook can negotiate them down to their new Floor, knowing that the employee will accept it.

If you were earning Cost of Living + $20k in California, then you'll probably accept earning Cost of Living + $20k somewhere else as well.

Facebook knows this, and negotiates accordingly.

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If it were the other way around, and companies were desperate for workers, then there would be no reduction because salaries would be being driven by companies' ceilings which have nothing to do with the Cost of Living.