TFW you thought you were capital but turns out you're labor

We are once again debating remote work and how to accordingly compensate employees. There are two schools of thought here:

  1. Value-minus: an employee generates $X of value for the company, and if X does not vary with their physical location, then they should be paid anything up to $X. But importantly, this line of thinking implies that the employee’s salary should be the same if they live in San Francisco as it should be if they live in Tulsa. 

  2. Cost-plus: an employee needs to earn $Y to live “comfortably” (i.e. have in-unit washer/dryer and shop at Whole Foods) in a location, and that $Y varies dramatically by locale. Therefore, their salary should be lower in Tulsa than it would be in San Francisco.

As a somewhat simplistic framework, we posit that tech worker compensation is a function of their value-generation and their living costs, i.e. true compensation ($C) will be between $X and $Y. The difference between the value generation and the base cost of living is what we can consider “surplus value” and one way to measure the relative strength of labor is to see where that surplus value goes, to the company or to the workers.

Tech workers love the value-based pricing model -- you mean I can get paid Bay Area FAANG comp while living on a SE Asian beach / Colorado ski resort / suburban Ohio mansion? Employers obviously favor the cost-plus model -- in tech, employee compensation is by far your greatest expense. Historically wages have been the hardest lever to pull in cutting costs, because people respond very negatively to losing any amount, more so than they would respond positively to gaining the same amount (econ brains call the phenomenon “wage stickiness”). However, covid has created an opportunity for businesses to throw their hands up and reconsider any now inconvenient agreement.

I think a shift to permanent remote work represents a further shift of surplus value extraction to tech employers from workers.

Telos of Control

The history of industrial capitalism since Frederick Taylor and Henry Ford has been one of chipping away worker freedoms in pursuit of efficiency. A shift to remote work represents an opportunity for workers to take back some of those freedoms but is logically one that companies will pay less for, in response.

The office grants the company significant control over the employee’s working schedule. They can’t force you to work (as any Googler will tell you), but they can keep you in the office. Companies offer infinite “perks” that all ultimately boil down to the “any second not spent working is a wasted second.” Don’t worry about what to eat, we have food; don’t worry about what to wear, we have free shirts; don’t worry about wasting your best years chasing a staff engineer role, we have egg freezing. The mothership provides.

Remote-by-default employees then have certain elements of their life that their employer can’t control. Compared to a 9-5 in the office work schedule, the abilities to pick kids up on their schedule or to walk your dog in the middle of the day are luxuries that the company will not give up willingly. Large companies, especially public ones, are inherently focused on the short-term: performance is reported quarterly to shareholders, managers have must-hit metrics, and most individuals are so insignificant to the company that the “resume-driven development” is optimal. 

Speaking of short-sighted environments:

Zuckerberg says that Facebook is "mostly going to rely on the honor code for this"—but not entirely. Facebook will check IP addresses to help detect people who lie about where they're living.

This quote reminds me of my favorite FB intern story, when a manager used their internal security systems to check if some interns had logged into work laptops on a given day, and ended up finding out they had gone camping together. Come on, this kind of bonding is exactly what you want your interns to do if you want them to take return offers or speak nicely to their friends! Treating them as replaceable cogs in a machine does not bode well for your long-term prospects, if you believe that attracting top talent is essential to your business.

Facebook famously paid employees a $10k bonus to live in Menlo Park, close to the office, pulling away from SF. From the company’s perspective, they know people want to live and work in San Francisco. The $10k is compensation for living in the middle of nowhere and the additional hours you work, between a short commute and a lack of bars, unless you like places called “Flights” which serve 4 mediocre half pours beers for $20. I can personally attest that commuting from San Francisco to South Bay burns out even the most ambitious 22 year olds quickly, and I wasn’t even paid well! But the tradeoff made sense at the time because of the social life that comes with living in a city.

Facebook is the largest company so far to announce that remote pay will be employee-location dependent.

"Our policy here has been for years—is already—that [compensation] varies by location," Zuckerberg said. "We pay a market rate, and that varies by location. We're going to continue that principle here." … 

This statement is notable given that Facebook is one of, if not the, best paying employers for engineers and other product development roles. While pay has varied by region, Facebook’s largest US engineering offices are in the Bay Area, New York, and Seattle, and my understanding is that compensation is normalized across each of these regions.

Remember that federal indictment for salary collusion? That behavior was (allegedly) illegal, but illegal because there were joint policies to not cold call employees, coordinated between multiple companies. It wasn’t illegal to want lower salaries, it was illegal to make company-to-company agreements to not compete. It was also a really bad look when the Google CEO, allegedly, 

In one incident, after receiving a complaint from Steve Jobs of Apple, Schmidt sent an email to Google's HR department saying; "I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can. Thanks Eric". Schmidt's email led to a recruiter for Google being "terminated within the hour" for not having adhered to the illegal scheme. [...] According to a court filing, another email exchange shows Google's human resources director asking Schmidt about sharing its no-cold-call agreements with competitors. Schmidt responded that he preferred it be shared "verbally, since I don't want to create a paper trail over which we can be sued later?"

The workaround is to publicly announce your intention to pay remote workers according to cost of living publicly, rather than negotiate with other companies privately, and instead allow other companies to coalesce around that decision. Uber and Lyft played the same game in their first few earnings calls, each saying, “we do not expect to continue competing on price and rather compete on experience.” These public announcements are not illegal but have the same intended collusive effect of reducing subsidies and increasing prices. 

Who gets the surplus value?

The greatest trick tech companies ever pulled was to convince employees that their RSU compensation meant that they belonged to the capitalist class, and not labor. 

Tech companies have historically paid out relatively low amounts of their profits to their employees, even compared to the “vampire squid” bulge bracket banks. This may come as a surprise; how could companies routinely paying $300k to 25 year-olds be ungenerous? Because the tech firms are making 5x that in revenue per employee, and there is no pressure to pay more. In fact, Apple, Google, and other companies were federally indicted for collusion to reduce competition and keep salaries low.

Take a hypothetical Google or Facebook engineer who comes up with a 1% improvement to an ad selection algorithm, which is worth billions in incremental profit. But that engineer will not be paid billions, they’ll get an “exceeds expectations” and a nice bonus, but the vast majority of that revenue will accrue to the company and its shareholders instead. Proportionally, the engineer can expect more than a 1% raise for their efforts, but they cannot hope to accrue even 1% of their incremental revenue for the company.

Part of the reason is that, with very few exceptions, the work you do at a tech company is not easily transferable to others. Broad skills are certainly transferable, but the work and actual impact is very much based on internal tooling or data - the architect of Facebook’s feed algorithm can’t recreate the impact of that algorithm elsewhere because of unequal access to data.

Contrast this with finance, where the skills and abilities are often transferrable. Quantitative traders know which strategies are profitable and can replicate those strategies at any desk (I know the caveats). High level investment bankers are paid for their connections and rolodexes, which, again, are usually not tied to the name on the building. Low level investment bankers are paid for their fancy degrees and ability to take abuse, which is definitely not unique to any particular institution. The finance workers still do not get all of the incremental value they “create,” as they do not fully participate in the downside, but profit sharing agreements offer quite a bit more of the incremental value than in tech.

The incentive structures in finance are thus more aligned to the employees: very large bonuses tied to employee impact, percentages of the profit and loss, at the tradeoff of strict non-competes to reduce the risk of jumping ship. “Spend your salary, save your bonus”: the salary should cover a comfortable-ish lifestyle, but to live the real banker life, you have to get a good bonus and generate value for the firm.

The upside is that startups have an opportunity to compete with bigcos for top talent now: flexibility and freedom is the one thing that a bigco won’t give up, and workers who learn that they actually value freedom could be convinced towards these startups. Post corona startups that reorient themselves with truly worker-focused incentives could have a huge recruiting and retention advantage moving forward.

So this is the aspect of the remote work debate that I think is somewhat left out: tech workers are mostly just labor, but we’ve been convinced otherwise. Some of that is structural (eg data and network effects) but not all of it is: stronger worker solidarity and recognition that we do not actually accrue much of the incremental value we generate can help improve outcomes for all.