> It also incentivizes putting as much of the compensation in salary as possible, and as little as possible in other benefits.
Both of these to a pretty ridiculous degree. You would have issues with companies like Amazon (who pay reasonably well and so far as I know don't abuse the H1-B system) getting screwed because they either don't pay as much in cash (they like a stock heavy comp model) or because they aren't paying people bay area money.
They could also expand their presence in their SF office, if somehow an area costing a lot to live in would become an advantage. Unless there's an assumption that Amazon has some sort of unalienable right to hire foreign workers at less than local market rates, there really isn't anything unfair about it.
As a bonus, it means that the minimum wages aren't relevant, since supply and demand of skilled international workers will set the lowest wage that gets admitted to the US.
This rule would unfortunately favor employers in high cost-of-living areas over low COL ones. Employees are approximately ambivalent between taking home $5k/mo and paying $2k/mo in rent, and taking home $4k/mo and paying $1k/mo in rent. But, the higher rent + higher pay scenario will get admitted well before the lower rent + lower pay.
It also incentivizes putting as much of the compensation in salary as possible, and as little as possible in other benefits.