An interesting long article in Business Insider, “There’s a battle brewing over salaries for remote workers — and it could change the way everyone gets paid”, explores a scenario that I am seeing reflected in many other places, mainly in North America: the consequences of a growing number of workers have made the decision to move to places where the cost of living is cheaper, then finding that their company now intends to cut the part of their salary that contributed having to live in a very expensive city such as San Francisco or New York.

Typically, before the advent of a pandemic that has brought about massive changes in the way we work, companies approached employee compensation in two ways, both of which took into account geographic location: either a cost-of-living or a labor-cost model.

In the former, using statistical models computed on a national basis, wage benchmarks were established based on where the employee was to work, estimating, as had been done until now, that the employee would have to reside reasonably close to the company’s offices. Thus, companies in expensive cities tended to pay higher wages than those located in cheaper locations, on the basis that their workers would have to assume an equally higher cost of living. In the second, more common model, salaries were set according to how competitive the company wanted to be in its market: those looking for the best talent set a high percentage level within a range similar companies usually paid or would take a more frugal approach if they invested heavily in training their employees, meaning they would pay a little less than the competition.

As said, in both cases, the models depend on location: companies that wanted to hire highly skilled people had to offer them a competitive salary that would allow them to live comfortably in the city where they were going to work, either calculated on the cost of living in that city, or by paying above the norm in their sector’s salary range. If they hired someone in a different city who could perform their job from there, they calculated their salary based on either the cost of living in that city or what was needed to be, for example, above 80% of the companies hiring similar profiles in that city. The result was similar: if you lived in a cheaper city, you were paid less than somebody who lived in a more expensive one.

What happens now, in a market that assumes a certain level of flexibility and balance between supply and demand? Many people inexpensive places like San Francisco or New York are now moving to smaller and cheaper cities with better housing and where they can live like kings with their expensive city salary. As a result, some companies such as Google, Microsoft or Facebook are starting to recalculate their salaries downwards, with the problems that this entails. Firstly, because many employees say they are doing the same job as before and at the same level and that salaries are not renegotiated on the basis of changed circumstances; and secondly, because such a policy is not easy to put into practice. In many cases, when particularly valuable workers threaten to leave, the company will renegotiate. In other situations, the company will kick the can down the road by respecting the current salary, but freeze any future raises.

Other companies like Reddit, Spotify, or Mmhmm have approached the issue more radically and have ended the geographic relationship once and for all, instead of paying all their employee's big-city salaries. This allows them to be more competitive in attracting talent, obviously at the price of a higher wage bill but accepting that after the pandemic, the new normal will be that employees will work from the city of their choice and that this will not affect their salary. However, this creates another problem for the future: the imbalance in smaller, cheaper cities, created by the arrival of workers with big-city salaries, leading to the cycle of gentrification and soaring house prices already happening in places like Portland, Oregon.

Traditionally, when companies sought talent far from their headquarters, they did so in search of salary cost savings. What happens now when their Indian engineer returns home but with a San Francisco salary, or the company hires an engineer already based in India and offers him the salary he would receive if he worked and lived in San Francisco? What happens if an engineer hired in New York years ago whose salary was calculated under the previous policy and that now matches another who has moved back to the Big Apple or is hired there under the new policy that ignores geography?

A model that has been in place for many years looks set to fall apart, potentially sparking all kinds of consequences. Companies based in low-cost locations may find it impossible to access high-level talent that expects to obtain the salaries offered by companies that do not take this factor into account. And all this, of course, bearing in mind that we are only talking about people able to work from home, who are highly educated or trained, thus creating an even greater disparity between them and manual workers or those whose job requires them to be in a specific physical location either because it consists of direct interaction with other people, or because it involves the use of specialized machinery.

It’s going to take a long time before a new model emerges, depending on the characteristics of specific labor markets. In the United States, where the workforce of many companies have been working from home for many months and where the labor market allows people to leave one company and find another easily, the problem is emerging right now and giving rise to the so-called Great Resignation. In contrast, in less efficient markets such as Spain, where companies and their managers are much more conservative, companies began telling their workforce to return to the office many months ago, but people are reluctant to leave their position for fear of not finding another one, things will take even longer to play out, with all that this entails of possible talent drain to other more competitive economies that pay better or demand positions more actively.

The future promises to be very interesting.