Tech companies can still save on payroll by hiring engineers in cheaper cities. But the geographic wage gap in tech is shrinking in the U.S., especially for senior roles, experts say.
For senior software engineers, the pay gap between the most expensive U.S. cities and the least expensive shrank by two-thirds between 2019 and 2021, according to data from the compensation data provider Pave. By the third quarter of last year, the gap between Tier 1 salaries and Tier 3 salaries had narrowed from 18.1% to just 5.9%.
“There are startups that are applying pricing pressure in this free market, where now you don’t have to be in a seat in the office to get the same amount of output,” said Matt Schulman, Pave’s co-founder and CEO.
A larger data set from the compensation software maker Payscale looked at pay compression across software engineers of all levels of experience. It showed the same compression across regions, but not to the same degree as Pave’s data on senior software engineer salaries.
Payscale found that since 2019, median engineer pay has increased 7.1% in San Francisco and 8.9% in New York. But in Dallas, it’s increased 15.2% and in Minneapolis, it’s up almost 17%.
“What we are seeing now is a decline in wage growth in high-tech metro areas as companies expand their recruiting efforts for technical talent into metros with a lower cost of labor,” said Amy Stewart, a senior content marketer and analyst at Payscale. “However, increasing competition nationally could impact wages over time.”
The rise of remote work and geo-neutral pay — the practice of offering similar compensation regardless of location — are rejiggering what it costs to build a tech team. While distributed work opens up a less expensive talent pool, it’s no longer as much of a discount to hire outside expensive cities.
Geo-neutral pay is gaining steam
While FAANG and other big tech companies are largely sticking to geo-differentiated pay — Airbnb, Reddit and Zillow are notable exceptions — Schulman said many startups are going geo-neutral.
While typically large companies are still differentiating pay based on location, their openness to remote candidates is also driving up tech salaries in lower-cost cities, according to Julia Dow, vice president of Services at the compensation benchmarking software maker OpenComp.
And tech workers’ moves out of high-cost cities — San Francisco alone lost 6.3% of its population between 2020 and 2021 — have also pressured companies to offer geo-neutral pay, Dow said.
“Companies wanting to stay relevant to top talent are embracing geo-neutral compensation strategies, and the trend is likely to stick,” Dow said. “Companies of all sizes are choosing not to apply geographic rules to compensation to retain a competitive edge with technical talent in the same way they do with [non-technical] roles.”
In some cases, startups allow workers who move to a lower-cost area to keep their big-city pay — but limit their pay increases going forward.
Engineer pay is also rising globally as more companies outsource. “I have a lot of founder friends at earlier-stage companies, and a lot of them are just saying, ‘You know what? We’re going to pay the same amount of compensation to an engineer in Poland and San Francisco and Rio,’” Schulman said.
A few months ago, Schulman looked into hiring engineers in Mexico City, but found that “it’s not that much cheaper,” he said.
Even outside of the tech industry, many remote IT jobs now offer geo-neutral pay in the U.S., according to Christian Burney, managing partner at the recruiting firm Magee Resource Group.
“We are, for the most part, getting pay across the board, it is what it is, whether you live in San Francisco or you live in Iowa. The pay is going to be the same,” Burney said. “I think some are actually using it as a tactic to save money, because they don’t have to pay the San Francisco prices anymore to get the best people.”
Geo-neutral pay can also be more expensive if companies are paying San Francisco salaries nationwide — hence the wage compression.
Senior engineers can make bank anywhere
Pay compression is more dramatic in senior roles, Schulman found. According to Pave’s data, P5 engineers in San Francisco and New York only make around 3% more than their counterparts in third-tier cities, compared to an 11% gap for entry-level engineers.
“The more senior you get, the less of a geographic disparity discount,” Schulman said. “Which makes sense. If you’re hiring executives, they’re just more highly sought after. It doesn’t matter where they’re located.”