LinkedIn hit the news today, announcing that most of their employees would be allowed to continue working remotely if they desired, although they noted that employees who move to cheaper cities would have their pay adjusted (or “slashed,” as the New York Post somewhat pejoratively put it). This follows moves from companies like Facebook, who have adopted similar policies. A hue and cry was raised when Facebook set their policy, and I expect LinkedIn will receive similar commentary. I wanted to try and offer a non-opinionated backgrounder on these policies.
Many companies include geography in their pay calculations, including the initial offers made to prospective new employees. That’s simply because some areas of the world cost more to live in. Even within the US, a single country, we have a vast range of cost-of-living levels as you move between different regions, states, and even counties and cities. For example, it is much more expensive for me to live in Las Vegas than if I lived my Nevada’s capital, Carson City. I couldn’t live on the salaries commonly offered to people in my position in Carson City.
So let’s imagine three people living in Alabama, California, and Maryland, each making a $100,000 gross salary per year.
Obviously, these folks pay Federal income tax as well as Medicare and Social Security contributions. We’ll assume they all take the standard personal deductions for a family of three, and that they don’t have enough other deductions to bother itemizing. That’s $12,334 in income tax and $4,724.40 for the other stuff, or $17,058.40 total for the Feds, leaving our three folks with $82,941.60 take-home pay.
But wait! Now we need to consider their state income taxes. States differ drastically in terms of the personal exemptions and deductions they allow, so I have to be a little fast and loose with the numbers, but broadly speaking:
- Alabama: $3,810
- California: $4,197
- Maryland: $3,567
Maryland also has local taxes (e.g., for the city or county), but that’s so variable I didn’t feel I could include it. Therefore, our three folks have this much left to spend after taxes:
- Alabama: $79,131.60
- California: $78,744.60
- Maryland: $79,374.60
Already, you can see that it’s cheaper to live in some states regardless of how much anything actually costs. But “what things cost” is important, because housing and commodities differ drastically.
One way to look at this is gasoline.
AAA hosts a chart of average gas prices across the US. Let’s assume for a moment that we have three different people, all living roughly the same lifestyle and in roughly the same financial situation—a home mortgage, a couple of children, and a couple of cars. They’re likely paying an effective Federal income tax of about 20% (we could do this with pre-tax dollars, but income taxes do become important later, so we’ll just level-set with an arbitrary 20%).
So let’s look at this gas prices in three states (prices are as of this writing and do not update):
- Alabama: $2.87
- California: $4.39
- Maryland: $3.07
The reasons for this wide spread are numerous. States impose their own varying gas taxes, transportation costs from refineries are obviously distance-dependent, and so on.
So lets consider our three folks buying nothing but gas for an entire year. How much could they buy?
- Alabama: about 27,572 gallons
- California: about 17,937 gallons
- Maryland: about $25,855 gallons
Now, presume our three people are employed int he exact same job, in the exact same company, but all working remotely. Because they’re paid the exact same $100,000 salary, they wind up with very different amounts of spending money, don’t they? Sure, their pay seems equal, but it is equitable? I imagine the Californian would argue that they deserve to have as many gallons of gas as their colleagues in Alabama, and should have a raise to bring them “up to snuff” with everyone else. And most companies who implement these geo-programs have said they’ll do just that, offering to increase pay for people in higher-cost areas.
So for our Californian, they’re going to need to make half again as much money, or about $150,000, to be able to afford the same gas-rich lifestyle as their Alabamian coworker.
Now let’s say that the Californian gets tired of all the sun and blue skies, and moves to Alabama to experience real humidity and giant mosquitoes. All of a sudden, they’re effectively richer than their Alabama colleagues, because they’re now able to buy over 40,000 gallons of gas—because their base salary is 50% more! What companies like LinkedIn and Facebook are saying is no, we’re going to try and maintain a sort of equality by reducing your pay accordingly. You’ll have the same “spending power” no matter where you live.
And it’s not just gas, it’s everything. Housing, movie tickets, milk, eating out—all of these things are financially different as you move between areas. You read all the time of high-earning workers in San Francisco who can barely afford a run-down one-bedroom apartment in Dogpatch, who then move out East someplace and buy a seven-bedroom mansion for less than they were paying in rent per month.
There are other factors at play with decisions like LinkedIn and Facebook make as well, and it’s based on free-market economy concepts. In some areas of the US, you can’t hire a software engineer to save your life—they’re rare, meaning there’s a low supply. As a result, they’re expensive when you can find one. In other areas, they’re more plentiful, and so it’s more of a “buyer’s market,” meaning companies don’t have to pay as much to hire someone. If you move to an area of less scarcity, your role is “worth” less. Not you; your role. Most large tech companies buy salary data from specialized analysis firms (Radford is one), so that they can understand how much a given role is “worth” in any given local market.
Some companies are actually known for hiring in specific areas because the talent they need is less expensive in those areas. There shouldn’t be anything wrong with that—people shop at Family Dollar because the things they need are less expensive there. There are US tech companies who’ve invested heavily in recruiting and skilling-up technology professionals in the South, for example, because people there don’t need to make as much in order to live a comfortable lifestyle. Done well, that hiring tactic can dramatically increase a company’s diversity and inclusiveness, by opening the company up to labor pools that have traditionally not been able to get a foot in the door. One potential blessing of all the “perma-remote” work is the ability for companies to hire from anywhere, meaning they can start reaching into communities that have otherwise been ignored. But that’s a bit of a tangent; there’s no telling if Facebook, LinkedIn, or other companies will avail themselves of that opportunity or not.
Ultimately, I’m not trying to make a judgment call on Facebook or LinkedIn. Not for this discussion at least; I have plenty of judgement about both companies overall! I’m just trying to explain some of the background thinking that goes into these decisions. You can decide for yourself if that’s “right” or “wrong.” Ultimately, I believe the market itself will inform these companies’ future decisions on salaries and geography. If they start bleeding critical talent over these decisions, they’ll revisit them. If they don’t, then that’s a “market message” that what they’re doing is acceptable, and our economy runs entirely on those “market messages.”
But look, I also get it: moving from Silicon Valley to Tulsa and being told you’re getting your pay cut by 50% (based on this calculator) sure doesn’t feel good. But the idea is that you’d be able to live the same lifestyle (with the addition of free tornadoes) that you had in the Bay Area, just for a lot less money. Provided companies are doing the reverse for Tulsans who move to the City by the Bay, then they’re at least being consistent in their pay philosophy.
Knowing that this discussion is a bit political, I certainly welcome your polite, professional perspective on the subject! Drop your thoughts in the comments below.