Even in today’s uncertain economic climate, global mobility remains integral to the way businesses operate and grow. This poses a difficult challenge for multinational companies who seek to increase the number and variety of international assignments while working towards more stringent budgetary targets. In response, international HR managers are considering the host-based salary system as a potentially cost-effective alternative to the traditional home-based build-up. But while the host-based approach can work to reduce costs in certain cases, it is not a practical approach for all assignments. Clearly understanding the advantages and disadvantages of using host-based packages is key to successfully implementing this alternative method of expatriate remuneration.
Of the various types of host-based salary systems used by multinational companies, the local plus approach is the one that tends to attract the most interest. This approach is based on a salary derived from local pay levels, which is supplemented by additional expatriate benefits and allowances, typically free host country housing and education for accompanying children. Other less commonly provided ‘plus’ elements include car provision, club membership and home leave trips. Pay is typically delivered in the host country currency and the assignee is liable for any reduction in purchasing power relating to home country expenditure caused by currency exchange rate movement. The employee is also usually responsible for all tax liability.
Because the host-based package is aligned to the salaries of local staff, using such an approach may cause a change from the pre-assignment purchasing power if there is a disparity between home and host country pay. Consequently, the host-based system is most commonly used for postings to countries with similar or higher pay levels, standards of living and economic development. It is less likely to be used for assignments into low wage, less developed or hardship countries.
Where the host-based approach is more prevalent
ECA’s MyExpatriate Market Pay 2012 Survey highlighted a regional trend whereby Asian-headquartered companies are the most likely to use the host-based approach, especially for transfers within the Asia-Pacific region. Graph 1, shows the popularity of local salary systems among Asian headquartered companies for assignments into Hong Kong, Singapore and China. Unsurprisingly, host-based systems are most commonly used for assignments to Hong Kong and Singapore because of relatively high wages and living standards in these locations. Fewer companies currently use the host-based system for assignments to China, where salaries still lag, but that is likely to change with rapid economic growth causing substantial wage rises and improved living standards.
In Europe, on the other hand, there is little evidence of European-headquartered companies using the host-based approach. According to ECA’s MyExpatriate Market Pay survey, just over 5% of European companies compared with 18% of Asian companies use host-based systems for assignments to the UK and even fewer to Germany, despite comparable local and expatriate salaries in those countries. The reason for these differences is not entirely clear but it might be because European companies are typically more experienced in global mobility and have the HR systems in place to administer the more complex home-based build-up. European companies also generally employ the greatest number of different nationalities (See ECA’s Expatriate Salary Management Survey) and therefore operate a wider variety of international assignments making the versatile home-based system a more attractive and consistent approach.
A more cost-effective approach?
The main cost savings associated with the host-based approach derive from a leaner package of assignment benefits. ECA’s MyExpatriate Market Pay survey shows that companies using the host-based approach will typically provide fewer assignment benefits than those using the traditional home-based system.
Graph 2 compares the differing assignment benefit and allowance policies of companies using home and host-based packages in Hong Kong. It shows that, in addition to a local base salary, the host-based package typically includes the ‘plus’ elements of free host country housing and assistance with the cost of education for accompanying children. The home-based package, on the other hand, is more likely to include other additional benefits, such as a car. This latter typically includes a cost of living allowance, expatriate incentive and a location (hardship) allowance, all of which are rarely paid to assignees on host-based packages. Furthermore, the benefits that are provided to assignees on host-based packages are often of lower value than the same benefits provided by companies using the home-based build up. ECA's MyExpatriate Market Pay survey data on accommodation costs supports this point. Graph 3 compares the average cost of accommodation provided to assignees on host- and home-based packages with the average for the entire sample in Hong Kong by ECA point job levels. To achieve an accurate comparison, this analysis only includes accommodation allowances that are intended to cover the total cost of host country accommodation or amounts paid direct to landlords as a benefit-in-kind.
It shows that in Hong Kong, companies using the host-based system provide a markedly lower level of financial assistance for host-country housing, which translates into a significant cost saving because of the high rental costs in this location. The average accommodation cost for executives at 140 ECA points on host-based salary packages is approximately 30% lower than that paid to home-based assignees, a saving of over 285,000 Hong Kong dollars. Unsurprisingly, companies using the home-based salary system tend to provide the highest level of financial assistance for host-country accommodation, paying around 18% above the overall average at 140 ECA points.
The reason why companies using the host-based approach provide less generous housing assistance may be down to their different perspective. The host-based approach is based on the premise that international assignees can 'live like a local'. Therefore, the areas and accommodation they are housed in should, in theory, be comparable to those of local employees of a similar job grade and family status. International assignees on the host-based system are therefore less likely to be housed in expensive ‘expat areas’ which produces greater equity with local peers and in turn, potentially large cost savings for the company.
Where to use the local plus approach?
One of the major advantages of the host-based approach is that pay is related to that of local peers. Therefore, not only is it a potentially lower cost approach but it is also more equitable because assignees will receive the same level of compensation in a particular host location, irrespective of their nationality. But, as a result, pay is no longer related to the home country compensation structure and is therefore not comparable to home-country peers. Moreover, local approaches do not protect the purchasing power of the assignee and thus discourage inter-country mobility, except to locations with equal or higher buying power.
Consequently, host-based approaches are most commonly used where there is a close affinity between local and expatriate pay. Graph 4 shows that within Asia, the host-based approach is most commonly used in developed, typically high income locations such as Hong Kong and Singapore. They are least commonly used in emerging economies where local pay is currently much lower than the expatriate market rate, such as in India where local pay is just 38% of the current expatriate market rate. The salaries used in this comparison are for senior managers at 110 ECA points.
This shows that companies using the host-based salary system are not generally doing so simply to reduce assignment salaries. This would be counterproductive and lower the likelihood of employees accepting the assignment offer, especially if there is a significant reduction in not only salary but more specifically purchasing power. Companies may also want to avoid using the host-based approach for assignments from low to high income countries if they are worried about employees being reluctant to accept repatriation or a new assignment unless to a country with equal or higher local pay. This explains why companies typically use the host-based approach when there is a close alignment between home, host and expatriate pay.
There are of course a few exceptions to this rule. The host-based system can be an effective remuneration approach for longer-term or permanent assignees in the majority of scenarios. In these cases, the link to the home-country compensation structure is broken and the 'plus' elements are provided for a set time during the transition period of localisation. The host-based package may also be more widely applied for junior staff on career development assignments. These assignees typically have fewer ties to the home country and are more likely to accept a lower assignment package to take advantage of the career development opportunities being offered.
In summary, the local plus approach can be a cost-effective alternative to the traditional home-based build-up because of the leaner and less costly benefits package, but it does have its limitations. To use the local plus method of expatriate remuneration successfully, companies need to know the locations and assignment types where it is most effective.