The company doesn't want the developer to live in Silicon Valley. The developer already does and that means any company that hires him/her will have to pay that premium because his/her market value is higher.
The problem with this is that it sends unpleasant signals to the other developers.
If the SV developer's value to the company is the same but they get paid more, then you're saying to all the other developers who work there, "You produce enough value that we could pay you this much, but we don't want to. We prefer to pay you less, simply because we can."
This is, of course, their right, but that sort of thing tends to make people unhappy, and unhappy employees tend to be unproductive, and then gone.
If the SV developer's value to the company is the same but they get paid more, then you're saying to all the other developers who work there, "You produce enough value that we could pay you this much, but we don't want to. We prefer to pay you less, simply because we can."
This is, of course, their right, but that sort of thing tends to make people unhappy, and unhappy employees tend to be unproductive, and then gone.