The engineer loved her job. Fully remote, challenging work, great team. Then she moved from San Francisco to Austin—partly for family, partly because Austin was more affordable, partly because she could work from anywhere.
Her company adjusted her salary down by 15%. Same role, same responsibilities, same output—but her new location had a lower cost of living, so her pay dropped.
"I don't understand," she told her manager. "I'm doing the same job. Why am I worth less because of where my apartment is?"
Her manager didn't have a great answer. The policy said location-based pay; that's what it was. But the conversation stuck with him. When the engineer left six months later for a company that paid the same regardless of location, he wondered whether the savings from the pay cut were worth the cost of losing her.
Geographic pay differentials have become one of the most contentious issues in remote work. Before remote work went mainstream, it was simple: you paid local market rates because you were hiring in a local market. A San Francisco company paid San Francisco wages. A Kansas City company paid Kansas City wages. Engineers moved to where the jobs were, and compensation reflected local norms.
Remote work broke this model. Now a San Francisco company can hire engineers in Kansas City without anyone relocating. Should they pay San Francisco rates (what the company is used to paying), Kansas City rates (where the employee lives), or something in between? Companies have made different choices, and each choice has consequences for recruiting, retention, fairness, and cost.
At SmithSpektrum, I've advised dozens of companies on compensation strategy for distributed teams[^1]. There's no objectively correct answer—reasonable people disagree, and different choices fit different situations. But understanding the arguments, the tradeoffs, and the practical implications helps you make an intentional decision rather than defaulting into something that doesn't work.
The Case for Location-Based Pay
Many companies, including major tech employers, pay different rates based on where employees live. The arguments for this approach are substantive.
Cost of living varies dramatically. An engineer making $200K in San Francisco has less purchasing power than an engineer making $150K in Austin. Housing, taxes, and local expenses consume different amounts of salary in different places. Location-adjusted pay means employees in different places have similar standards of living despite different nominal salaries.
Market rates vary by location. The market for engineers in San Francisco is different from the market in Kansas City. Salaries are higher in SF because companies compete fiercely for local talent; they're lower in Kansas City because competition is less intense. Paying market rates means paying what you have to pay to attract talent in each location.
Cost savings enable hiring more people. If you can pay $150K for an excellent engineer in a lower cost area instead of $200K for the same quality in SF, you can hire more engineers. Location-based pay expands what you can accomplish with a fixed budget.
Parity feels fair to many people. Paying the same to someone in San Francisco as someone in rural Arkansas—where the SF salary goes much further—can feel unfair to the SF employee. They're doing the same work but experiencing a lower standard of living. Location adjustment addresses this perception.
This approach is defensible and widely practiced. But it has real downsides that companies often underweight.
The Case Against Location-Based Pay
Equally compelling arguments support paying the same regardless of location.
Equal pay for equal work is a fundamental fairness principle. If two engineers do identical work with identical output, why should one be paid less because of where they live? The work creates the same value for the company regardless of the engineer's zip code.
| Location Tier | % of SF/NYC Base | Rationale | Controversy Level |
|---|---|---|---|
| Tier 1 (SF, NYC, Seattle) | 100% | Highest cost of living | N/A (baseline) |
| Tier 2 (Austin, Denver, Boston) | 85-95% | High but not peak cost | Low |
| Tier 3 (Other US metros) | 75-85% | Moderate cost of living | Medium |
| Tier 4 (US non-metro) | 65-80% | Low cost of living | High |
| International | 50-100% | Varies dramatically | Very high |
Employees moving locations creates awkwardness. When someone moves from a high-cost to a low-cost area, do you cut their pay? When they move from low-cost to high-cost, do you raise it? The engineer whose pay dropped when she moved to Austin felt punished for her personal life choices. These dynamics create resentment.
Location-based pay incentivizes dishonesty. If you pay less for Kansas City than San Francisco, some employees will claim to be in San Francisco while working from Kansas. This creates compliance problems, trust issues, and awkward enforcement situations.
Top talent has options and knows their worth. The best engineers understand that their work creates value regardless of location. If you pay location-adjusted rates, top talent in low-cost areas will find companies that don't—and you'll lose them. You keep only the engineers who can't command market rates elsewhere.
Location data is genuinely ambiguous in a remote world. What does "location" mean? Where someone sleeps most nights? Where their apartment is? Where they're registered to vote? Digital nomads might be in a different country every month. The lines that make location-based pay administratively tractable are arbitrary.
Administration and communication are complex. You need different pay bands for different locations, policies for handling moves, systems to track where everyone is. Explaining why two people doing the same job make different amounts is hard. The complexity creates overhead.
What Companies Are Actually Doing
Practice varies across the industry, and different choices reflect different priorities.
Large tech companies have mostly adopted location-based pay. Google, Meta, and others adjust compensation based on where employees live. They segment the world into tiers—major tech hubs get top rates, lower cost areas get lower rates. The adjustments can be substantial—20% or more between highest and lowest tiers.
Many startups and remote-first companies have adopted location-agnostic pay. They pay the same for the same role regardless of location, often benchmarking to a high-cost market like SF. This simplifies administration, aligns with fairness arguments, and helps attract talent in competitive markets.
Some companies take a middle path—location-adjusted pay but with narrower bands. Instead of paying Kansas City 70% of San Francisco rates, they might pay 90%. This acknowledges cost differences while not creating such large disparities that employees feel undervalued.
Some companies pay based on home office location rather than employee location. If the company is headquartered in Denver, everyone gets Denver rates regardless of where they live. This simplifies the model while still being location-influenced.
The market hasn't settled. Different companies make different choices, and the choices affect who they can hire.
Impact on Recruiting
Your compensation philosophy affects who you can attract.
Location-based pay helps you compete in expensive markets and save money elsewhere. You can pay competitive rates in SF (which you have to do to hire there) while paying market rates in lower-cost areas (which saves money). The downside is that top talent in lower-cost areas has other options—they can find location-agnostic pay elsewhere.
Location-agnostic pay gives you an advantage in lower-cost markets. If you're paying $180K regardless of location, you're offering above-market comp to engineers in Austin, Denver, Raleigh. You can attract strong talent who might not be able to get those rates locally. The downside is that you're paying more than you strictly have to.
The recruiting implication depends on where you're trying to hire. If you're focused on expensive markets, location-based pay is probably fine—you're matching market rates. If you want to tap talent pools in lower-cost areas, location-agnostic or narrow-band pay helps you compete.
One consideration often overlooked: engineers talk. They compare compensation. If your location-adjusted pay creates large disparities for the same work, it affects morale across the entire company, not just in lower-paid locations.
Impact on Retention
Compensation structure affects who stays and who leaves.
Location-based pay can create departure triggers. When someone moves and their pay drops, they have a specific moment to reconsider whether this job is still the best option. That moment of reconsideration often leads to job searching, especially if they feel the pay cut was unfair.
People in lower-cost locations are more likely to leave if they feel undervalued. An excellent engineer in Kansas City making $140K knows they could make $180K at a location-agnostic company. The longer they stay, the more they wonder whether they should leave.
Retention data from companies with different models suggests that location-agnostic pay correlates with better retention in low-cost areas—no surprise, given that employees are better paid relative to their local market. Whether this retention benefit outweighs the cost depends on how hard employees are to replace.
Philosophical Considerations
Beyond the practical implications, there are genuine philosophical questions about what pay is supposed to reflect.
One view holds that pay reflects the value of work to the company. If work creates $300K in value, the company can pay some portion of that regardless of where it's done. The engineer's living costs are their concern, not the company's.
Another view holds that pay reflects the employment market. Companies pay what they have to pay to attract talent; employees accept what they can command. Markets are local; therefore pay is local.
A third view holds that pay should enable similar standards of living. If you want employees equally motivated and not worried about money, they should have similar purchasing power. Location adjustment achieves this.
These philosophical frames lead to different conclusions. The first suggests location-agnostic pay; the second suggests location-based pay; the third also suggests location-based pay but for different reasons.
Most companies don't think through the philosophy explicitly. They default into a position based on what they've done historically, what their advisors suggested, or what major tech companies do. Thinking through your actual beliefs helps you make a more coherent choice.
Making the Decision
If you're designing or redesigning your compensation structure, consider these factors.
Your recruiting needs should inform the decision. Where are you trying to hire? What's the competition like in those markets? If you need to tap lower-cost talent pools, location-agnostic or narrow-band pay helps.
Your budget constraints matter. Paying location-agnostic rates at SF levels is expensive. Can you afford it? Would the money be better spent on more headcount? The arithmetic should be part of the decision.
Your company values should be reflected. If you have strong beliefs about equal pay for equal work, those beliefs should show up in policy. If you believe market-based pay is fairest, that belief should show up too.
Your administrative capacity matters. Location-based pay requires tracking where people are, handling moves, explaining disparities. Do you have the infrastructure and management capacity for this? Location-agnostic pay is simpler.
Your market position influences what you can get away with. A highly desirable company with strong employer brand can pay location-adjusted rates and still attract talent. A less known company competing for the same engineers might need to offer location-agnostic pay to win.
Implementation Considerations
If you choose location-based pay, several implementation decisions matter.
How many tiers? Some companies use three (high-cost, medium-cost, low-cost metro areas); some use many more gradations. More tiers means more precision but more complexity.
What triggers tier changes? Does moving between tiers change pay immediately? After a period? Only for new hires? These policies need to be clear.
How do you handle ambiguous locations? Someone who lives in a lower-cost suburb but works in a higher-cost city—which rate do they get? Digital nomads who change locations frequently?
How do you communicate the policy? Transparency about how pay is set helps employees understand decisions. Secrecy breeds resentment.
If you choose location-agnostic pay, you still have decisions.
What location do you benchmark to? SF rates? NYC rates? A composite of tech hubs? Your benchmark determines your overall cost structure.
How do you handle extremes? An employee in a very high cost of living location might struggle on rates benchmarked to somewhere else. An employee in a very low cost location is expensive relative to the local market.
How do you communicate? Explaining that the company pays the same regardless of location is straightforward, but you'll still get questions about why competitors pay differently.
The engineer who left after her pay cut? Her former company eventually changed its policy.
They didn't go fully location-agnostic—the cost difference was too substantial—but they narrowed their bands significantly. Now the gap between highest and lowest tier is 10%, not 25%. They stopped cutting pay for existing employees who moved; instead, moves just changed what band applied to future raises.
The policy change was expensive but cheaper than turnover. The message it sent—that the company valued the person, not just their location—mattered for culture.
"We realized that saving money on someone in Austin doesn't help if the best people in Austin leave for companies that pay more," the head of compensation told me. "The math has to include retention, not just headcount cost."
References
[^1]: SmithSpektrum compensation advisory, geographic pay policy, 2020-2026. [^2]: Levels.fyi, "Location-Based Compensation Analysis," 2025. [^3]: Buffer, "Transparent Salary Formula: Location Factor," 2024. [^4]: GitLab Handbook, "Compensation Philosophy."
Designing compensation for distributed teams? Contact SmithSpektrum for compensation strategy and market analysis.
Author: Irvan Smith, Founder & Managing Director at SmithSpektrum