Although companies have evolved many different remuneration methods to determine the salaries they offer to employees who are being sent on long-term international assignments, most expatriate salary systems can broadly be defined as host-based, home-based or some combination of the two.
In this post we look at the host-based approach.
What is the host-based approach?
The host-based approach uses the market rate of the host country to determine the salary on offer. This could be the salary which local employees receive or, particularly in countries with large expatriate populations, it could be based on the salary received by other expatriates in that country. If the company has a local subsidiary, the host country HR is usually responsible for determining the salary based on the local pay structures they use.
The salary paid to the employee is usually quoted gross and the assignee pays the tax and social security contributions required in the host country. Most companies will also quote and deliver the salary in host country currency, but many continue to use home currency or implement split pay.
What is “local-plus”?
In reality, over 70% of companies who use the host-based approach do not pay just a local salary but add in some additional benefits or allowances; some typical add-ons are shown below. This is known as a local-plus system. The ‘plus’ element is the additional benefits provided, usually to make up for the additional costs that an expatriate employee has to bear compared to a local, e.g. ongoing home country housing costs and international schooling costs for children. If the local salaries in the host country are significantly higher than in the home country, this may not be necessary, but local conditions also need to be taken into consideration, such as the availability and suitability of local housing and schooling for foreigners.
Percentage of companies providing additional benefits in a host-based system
© Employment Conditions Abroad 2020
Why use the host-based approach?
Consistency: As companies deal with increasing diversity in the home and host countries of their assignees, the consistent way in which all employees are treated using the host-based approach, regardless of their different home countries, is an increasingly important consideration.
Cost-saving: The potential for cost-saving is one of the main reasons companies choose to use this system but it is important to note that it is not always the cheaper option, especially when the cost of the benefits provided when using the local-plus approach are taken into consideration.
Simplicity: The host-based system is usually simpler to administer than other approaches, assuming that the company has a host location entity.
When should you use the host-based approach?
Using the host-based approach tends to promote moves into countries with higher, or at least similar, salaries compared to the home country as employees are more likely to accept a pay rise than a pay cut. A company that operates in a broad range of countries may therefore find itself with “good” and “bad” postings if using the host-based approach. This system can also inhibit repatriation as employees may be reluctant to return to a lower-salary home country. However, there are a number of scenarios for which this approach is suitable.
Where relative buying power is higher in the host country: In order to accurately assess whether the salary in one country is higher than in another, it is important to compare not just on a gross or even net salary level but using the relative buying power (RBP). By factoring in cost-of-living differences between the countries, this gives a true comparison of what each salary can actually buy.
The chart below illustrates how misleading a simple comparison of gross salaries can be and why buying power rather than gross salary is the key to determining the suitability of a host-based salary. In the example below, the higher gross salary in Denmark compared to Mexico actually provides a lower buying power because of higher taxes and living costs. This makes Denmark an unappealing destination for Mexican workers when offered a host-based salary.
© Employment Conditions Abroad 2020
It is worth pointing out that relative salary levels vary significantly with seniority; a junior manager in Brazil, for example, earns less in RBP terms than a counterpart in Belgium but at executive levels this situation is reversed and the employee in Brazil is relatively better off.
Permanent transfers and localisation: By providing equity with other employees in the host country, the host-based system is particularly suitable in situations where the employee is expected to remain in the host country permanently.
From low-salary to high-salary countries: When moving employees into developed countries from countries where very low salaries are paid, using the host-based system should ensure that minimum salary requirements for visas are met. Salaries calculated using other systems may not meet these levels.
Career development moves: The host-based system can also be a cost-effective approach to remunerating more junior employees, those on career development programmes and employees on self-initiated assignments, where the experience of the assignment itself acts as sufficient motivation for the move.
Local returnees: For local returnees (employees originally from the host country who have spent time overseas either studying or working) a local salary should be suitable, although sometimes an additional uplift may be required in order to motivate the employee to accept the assignment.
Summary of the host-based approach
Using the market-rate of the host country, often with additional allowances and benefits, the host-based approach can offer a cost-effective and relatively simple system for assignment compensation.
Consistent treatment of assignees from different home countries
Harder to repatriate – no link to the home
Equity with host-country peers
Might not match home living standards – no RBP protection
Simple to administer
Creates ‘Good’ and ‘Bad’ postings
Can be cheaper if used judiciously
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ECA’s Build-up Calculator enables you to calculate home-based salary calculations quickly and accurately using ECA’s latest data, while our Net-to-Net Calculator quickly compares whether an individual's spending power would be maintained if they were paid a local salary on assignment. Individual calculations are also available on demand through our Consultancy & Advisory service. For more information or if you need advice on expatriate pay models, please get in touch!