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Alternative approaches to expatriate compensation

25 Nov 2010


ECA’s Lee Quane and Barry Rodin take a look at alternatives to the home-based international pay method, why they are being used and some of the issues that can arise.

Recent ECA policy surveys have highlighted the continued high demand for talented mobile staff as well as greater use of intra-regional assignments. This has contributed to increasingly cosmopolitan assignee workforces at different stages of their careers, originating from countries with varying living standards. These factors, along with the growing variety of business reasons for international assignments and diversity of assignment types, mean that there are now a greater number of variables and issues for international employers to manage.
 
Consequently, although the home-based expatriate compensation approach remains dominant (52% of companies surveyed in ECA’s latest Expatriate Salary Management Survey applied this method to all assignments), a growing proportion of employers are using different pay methodologies as part of their mobility policies to support the many different assignment objectives and mobility requirements.
 
Variations to pay policy may be subtle. For example, companies might use the home-based approach but withdraw or reduce certain allowances (notably the expatriate allowance) when the assignment is seen as less business critical or is part of an employee’s career development. In other cases the difference is more profound, with companies using a home-based approach for some expatriate employees, for example, and a host-based approach for others.
 

A growing proportion of employers are using different pay methodologies to support the many different assignment objectives and mobility requirements

To explore this more fully, ECA’s Alternative compensation and benefits approaches for international assignments survey was undertaken earlier this year to identify when, why and how four specific alternative compensation approaches (defined below) are applied by organisations employing foreign nationals in China, Hong Kong Singapore and UAE; locations where there has been increasing interest in these approaches.
 
Although there are a number of ways that a company can compensate expatriate staff instead of through the build-up approach, the survey focused on the following four main approaches:
 
  1. Local national plus: Local national salary, plus benefits typically provided for foreign assignees/expatriates.
  2. Local national: Local national salary, plus benefits typically provided for local nationals.
  3. Expatriate market rate: Both salary and benefits are based on an established expatriate market-rate.
  4. Third country salary structure: Salary structure is based on a third country (ie neither the employee’s home nor host location; eg a headquarters country or an offshore territory).
 
Of these, the local national plus approach is the most commonly applied alternative method in Hong Kong (used by 53% of surveyed employers adopting alternative pay approaches) and Singapore (56%). Salary levels for nationals of these locations deliver a relatively high buying power, especially compared with most other Asian countries. Adding benefits typically given to expatriates generally results in attractive packages for most expatriate nationalities.
 
In the UAE and China, the expatriate market rate method is the most commonly applied alternative method, used by 57% and 49% respectively of employers adopting alternative pay approaches.
 

What about the 'plus'?

Regardless of the benchmark chosen to determine the expatriate’s cash compensation, it is common to grant benefits to assignees above and beyond those provided to the local labour market. This can vary considerably. According to the survey, 84% of companies provide allowances for children’s education in China compared to 51% in Hong Kong, for example, and while 98% of companies in Singapore who use the local national plus approach provide assistance for housing costs, this falls to 89% in Hong Kong. Since Hong Kong is amongst the locations in the region with the highest local market salary levels, it is understandable that companies there don’t feel the need to be as generous regarding benefits provision as elsewhere.
 
The benefits typically granted to international assignees but not to their local peers are housing, children’s education, relocation assistance and home leave. The provision of such add-ons can give rise to debates regarding inequity, especially for multinationals managing assignees in many countries. For example, our experience shows that expatriates employed in Europe and North America on a permanent basis will generally have their compensation and benefits based on the local market. Providing additional benefits to expatriate staff would be inequitable and, in some locations, illegal. However, it may well be that these same multinationals will take a different approach in the locations explored in the survey and this may well be easy to justify: foreigners in Singapore, for example, do not have access to cost-effective housing like their local peers do. Similarly, schools in some locations will charge higher fees to the children of foreigners so extra financial assistance would be necessary for expatriate staff. Data from ECA’s latest Benefits Survey shows that school fees for international students in Singapore can be 80% higher than what locals are charged.
 

The area of pensions and social security is particularly challenging. When expatriates are employed on local contracts in any of the countries surveyed, they are often ineligible to remain in their home country social security schemes. This has a major impact on retirement provision…

Pensions and social security

The area of pensions and social security is particularly challenging. When expatriates are employed on local contracts in any of the countries surveyed, they are often ineligible to remain in their home country social security schemes. This has a major impact on retirement provision and this may not be solved locally since local schemes may not be available or may be subject to residence restrictions. For example, fewer than 25% of companies compensating expatriates using a local plus compensation approach in Singapore or an expatriate market rate approach in China enrol these staff in a local social security scheme partly due to residency restrictions. If no private pension is possible this can be the most difficult problem to overcome. Solutions we have seen used in cases like these include enrolment in an offshore personal pension, trying to enrol the employee in a local pension scheme or simply providing cash in lieu of pension provisions.
 

A cheap option?

While companies may be attracted to adopting any of these four alternative compensation structures in order to save on costs, they may not always make the savings they expect. The gap between local and expatriate salaries in these locations tends to get narrower from middle managerial positions up. Therefore, using a salary structure which is based on local benchmarks may produce a salary similar to that if the standard home-based approach had been used. Furthermore, the value of benefits is likely to be the same for expatriates compensated using the home-based approach as those compensated on any of the alternative options. Add to this the fact that the home-based approach normally applies to assignments of a period of three years, whereas a host-based approach is more likely to apply to a longer term, or even permanent move, then these compensation options may not save companies money in the long-term particularly if they have no transition strategy in terms of fully localising an employee.
 

Looking for equity

This would suggest that companies are using these approaches for reasons other than as a cost-saving tool. In the four locations surveyed, a growing number of companies are employing expatriates on a long term or permanent basis. Ideally in such scenarios companies should endeavour to base the compensation and benefits provided to foreign staff on the same benchmark as that used for local nationals – for equity if for no other reason. However, in cases where such packages are unattractive or impossible to deliver (e.g. low salary levels in the location of employment or the inability of expatriates to participate in host country social security and pension schemes) companies will need to consider other salary benchmarks.
 
Companies are increasingly drawing from talent bases globally to fill local skills gaps. Even in China, with the largest population in the world, a combination of underdeveloped skill levels and a declining working population means that one way in which companies are trying to overcome the war for talent at managerial level and above is to move skilled people in from overseas on a long-term basis. Providing the same compensation to every nationality of expatriate (as opposed to the home-based approach) can help to establish equity amongst the expatriate employees.
 

Are these alternatives for you?

Certainly, for companies employing expatriates on a permanent or one-way basis, removing the link to compensation levels in the employee's home location makes sense. Employing an expatriate on a permanent basis on a home-based compensation approach can be expensive and administratively burdensome – annual revisions need to be made to cost of living allowances and the salary delivered in more than one location, for example. If a company is sending junior staff on assignment in order to give them international experience – and this is increasingly the case – they may well feel that one of these alternative approaches is an appropriate compensation method. Other reasons for adopting these methods include the growth in the hiring of foreign nationals who are already in the location of operations and more assignments to locations where the local salary may be attractive enough to encourage mobility among certain nationalities. Furthermore, if the company's aim is to achieve equity amongst its expatriate staff in any of these locations, these alternative methods would make sense.
 
One thing to be aware of is that these are locally determined policies and as such it is difficult to have a uniform policy globally. The fact that when not using the home-based approach companies benchmark assignee salaries against the local market in Hong Kong, but against the expatriate market rate in China, for example, shows that any alternative compensation and benefits policy has to be designed to reflect a number of factors. These include where you wish to use this policy, why you are employing expatriates in these locations, where you are drawing them from and for how long you wish them to remain in their locations of employment. For assistance with any of this, don’t hesitate to contact us.

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