Isn't H-1B contingent on compensation in line with the local median for the role?

It is contingent on you documenting your going through the motions of pretending to keep compensation in line with "the local median".

After graduating college I joined a company that paid generally below-market for everyone and had a significant number of H-1B employees and contractors.

The benefits were legendary but the pay was 20-30% lower than what was around.

I don’t have evidence of wrongdoing but I’ve occasionally wondered if it was some kind of scheme.

“Legendary” benefits (especially healthcare) are extremely expensive. It’s plausible that the average total compensation was the same, or even more, than other companies. The trick is that not everyone gets the same value from those benefits.

It's a bit of a catch-22 because if you add enough lower compensated employees you shift the local median lower. If "everyone" in the local area is hiring more cheaper H-1Bs that gives you a chance to hire even more H-1Bs for even cheaper. Averages can be a fun game that way.

Even if you try to pin it to the median that does not include H-1Bs, you still are letting the market compete on labor cost and that competition can still affect the local median. Companies decide all the time that they could hire, for example, 2 H-1Bs for the cost of one "senior" local developer, encouraging that local developer to maybe only ask for 1.5x "an H-1B" to remain competitive in that market. Iterate that enough in hiring decisions and companies still have more control of that local median than labor does.

I don't know if there is a "fair" way to set the cost of labor for an H-1B, but "local median" or any other average-based math is probably not it.

The compensation is only measured in terms of salary (and maybe bonus).

Stock compensation is completely ignored. Since stock compensation can be a large fraction if not the majority of the compensation, this means that many H1-Bs may be underpaid compared to their coworkers, while appearing to the government to be the highest paid in that company and job role.

The other ignored aspect is effective hourly pay. Software engineers are nearly always exempt employees, so they don't receive hourly pay. But a manager can demand more from H1Bs, even if it would mean work during nights or weekends, and there's little the H1B can do. Local employees can more easily change jobs if that happens, and moreover, the threat that they can change jobs disincentivizes such abuse.

This has been "proven wrong" by geniuses pointing out that Americans who work in the same jobs as the H1Bs are also making peanuts.

Then restricting the supply of workers ready to work for peanuts will force companies to raise their salaries to hire.

Or if the job is an outsourceable one that can be provided as a service then they will outsource it to a company overseas and still pay peanuts. The only reason they'll raise wages is if they have to, aka the service cannot be done elsewhere or automated.

A lot of jobs require or are better done on-premises, which is why they hire H1-Bs. Outsourcing is already cheaper, by far, especially if you want to go to the third-world.

A lot of people really hate RTO and love WFH

If your company doesn't need domain experts/doesn't change to the point these people can be remote... you are a zombie company and will be replaced by someone that does utilize domain experts/dynamically changes all the time with conditions. Even with just a factory, when I moved from dev to IT, getting my people to understand our users by going out to the floor and sitting with people we were able to greatly improve efficiency in a way no remote IT could.

They already are... Generally insourcing is to reduce the friction of doing so, because application managers and product owners don't want to relocate to the countries they're doing the outsourcing with.