It's based on rent. Each city is punished in proportion to how much cheaper its rent is than the rent in NYC. As NYC is one of the top 5 most expensive cities worldwide for real estate [0], any city marginally more reasonable is going to get pummeled.

[0] http://www.globalpropertyguide.com/most-expensive-cities

Perhaps it's that there is lots of cheap housing in the suburbs here, and in the greater metro area but that is outside the city proper. But most of the tech / startup activity ie concentrated in one small gentrifying neighborhood where rent is much higher (+50–100%), so coincidentally people in tech aren't buying those houses because the commute is so far from the core.

I wonder if any of these indexes breaks down a city by zip code. A good analogy for here would be if you averaged all rent over the neighborhoods in Brooklyn then used that number for a bunch of candidates in Williamsburg.

It really penalizes living in a third- / fourth-tier startup hub, for example, vs either a first- / second-tier hub or a non-hub.

Taken from another perspective maybe it's an intentional filter on the candidate pool to specific cities or countries. That wouldn't seem to be consistent with most remote philosophies but it's something to consider.

Interestingly, Buffer's salary calculator is almost the opposite with a relatively small percentage difference between Nashville or Austin vs SF or NYC for instance.