Today, most tech companies pay differently depending on where people are based. According to salary.com if you’re a software engineer in San Francisco, you’ll get a median salary of $125K, but if you’re in Detroit you’ll be closer to the median of $102K and if you are in Latin America that number will be even lower although the three engineers are probably doing the exact same job and creating the same amount of value for their employers. Many companies have taken advantage of this geographic arbitrage and built offices in lower cost states or abroad to lower their cost structure.
In general this pay inequality seems normal and acceptable because it’s the way most businesses have operated historically and we are simply used to it, but when we take a closer look and ask why? We realize that for many professions, particularly those that can be done remotely, adjusting compensation by location does not make sense.
Concentrating Around Tech Hubs
Tech hubs like Silicon Valley, Boston or New York have existed for a long time. In the past people concentrated in a city to make use of common physical infrastructure like factory machinery or lab equipment. This in turn, attracted capital, services and of course other like minded individuals who would collaborate and build things together. It’s no surprise that many of the innovations that we use on a daily basis like the Internet, the personal computer or the mobile phone came out of companies that were started in these hubs. As demand for housing and other services rose, so did prices as well as the cost of living. These high end cities became expensive but also a symbol of progress.
In the era of cloud computing, virtual collaboration and remote work, there is a new generation of digital workers who no longer need to be physically colocated to be productive and in fact many times they are more effective and lead happier lives by working wherever they choose. Among these, software developers are uniquely positioned to lead the charge and help disruption of the old model of location based pay.
At Telescoped we believe that in the next 20 years, compensation will be location blind:
If two engineers are doing the exact same work, working the same hours and creating the same amount of value for the company, why should they be compensated differently just based on where they choose to live?
Still, many argue that companies need to adjust for cost of living, but once again for remote workers that does’t make sense. If a software engineer is working from home, why should the company care about where they are located and adjust their salary accordingly? If the person decides to live in a very expensive location, that’s a personal decision just like deciding to live with a roommate or to start a family. These are all personal decisions and companies shouldn’t get involved. The only time companies should adjust salaries according to cost of living is in the infrequent scenario when they are forcing someone to live within a given radius of a physical office (think expatriates).
The Perfect Storm for Salary Equalization: Tech Boom, COVID and Remote Work
The Tech Boom
Over the last decade, through the post-global financial crisis bull market which started in March of 2009, software and technology companies exploded. The amount of venture capital injected into these companies translated to increased pressure for growth and speed. This in turn forced leaders to scale their teams at all costs, creating a demand spike in search of tech talent – it was the best time to be a software engineer in a tech hub.
COVID-19 and Remote Work
As things were heating up in the US tech scene, we got hit by a global pandemic that sent everyone into lockdown and the world into disarray. With everyone staying at home, two important things changed. First, technology companies soared even higher as they worked overtime to serve the physical deliveries and virtual needs of billions of people. Second, remote work became prevalent for many professions from software engineers to architects and psychologists.
This series of events created the perfect storm for companies everywhere to open their doors to software engineers abroad. This ripple effect meant that all of the sudden a new population of engineers entered the market. However, the demand still far exceeded the supply and companies were fighting to tap into the best engineers within this new talent pool. Companies like Telescoped started to grow as recruiting and hiring great software engineers in LatAm and in other places became more critical. With these new market dynamics, salaries for engineers abroad started to increase as more and more amazing engineers started to access first class opportunities directly with US companies.
The Future of Remote Work Compensation
As we emerge on the other side of the COVID pandemic, “the times are a changin'”. Big companies are trying to go back to the office, but emerging startups and disruptors are advocating for a distributed or remote friendly approach. The most forward thinking ones like Airbnb already are pushing towards location-blind equal pay model to attract the best software engineers and the best remote teams:
“We want to hire and retain the best people in the world (like you),” Chesky wrote in an email to staff. “If we limited our talent pool to a commuting radius around our offices, we would be at a significant disadvantage. The best people live everywhere, not concentrated in one area. And by recruiting from a diverse set of communities, we will become a more diverse company.”
In the early innings of the tech boom, disruptors saw remote work as a growth hack to attract the talent they needed. They did this by hiring outside of the US and took advantage of the cost arbitrage that came with it. Now, these same companies are moving from an arbitrage around cost to an arbitrage around the best talent. They are the driving force behind the revolution of remote work because what was once a hack, has become the only way to access the best talent in the tech industry.
The pandemic accelerated the global demand for technical talent and forced salaries abroad to increase. The world is not going back to its past state. Even through the current correction and slow down, the demand for engineering talent is at an all time high and the only rational path forward is to go towards an equalization of salaries across the globe.
The best companies will do whatever it takes to find the best people. As long as a remote engineer is great at what they do, the only other things that matter are excellent communication skills and being able to work within the same timezone to allow an overlap for meetings and calls.
Location is becoming more and more irrelevant.Telescoped
A Peek Into the Future
The asymmetry of information between companies and workers is disappearing. More and more companies are building products and services to accelerate towards a future in which the best engineers and the best companies can meet and work together in a frictionless way. Today, there is a lack of transparency and liquidity in the market. This is evidenced by talented people missing out on opportunities and companies missing out on amazing candidates, but we can already see the changing tide as it’s becoming easier and easier for the talented people of the world to stand out and connect with amazing opportunities regardless of their location.
As hiring across borders becomes seamless, the best talent will gravitate towards companies that are improving the world. These best places to work have clear missions and strong cultures. They always value diversity and they want to treat their employees in a fair and equitable way. Location-blind equal pay is an inevitable step towards technology enabling the best people, no matter where they are to collaborate and build the future together.