As Global Mobility professionals will know, there are various methods of calculating expatriate pay. However, even the most robust of assignment policies may find that certain moves simply don’t work with their standard remuneration approach. This blog post looks at the common pitfalls when moving people out of low paying countries into high paying ones and considers potential solutions to the issues that it can cause.
If relative pay scales were the same around the world life would be very simple, but in reality they vary from location to location. For example, the median basic gross salary (data provided by Willis Towers Watson) paid to a middle manager in Switzerland is EUR 130 218, whereas the same role in Egypt would pay a gross of just EUR 17 212. Of course, respective tax schemes and relative buying power can change the picture provided when comparing at a gross level, but significant disparity still exists regardless. So, how can we bridge this gap to ensure a competitive package is provided that facilitates mobility? Let’s consider some remuneration options, in the context of this move from Egypt to Switzerland.
Our Expatriate Salary Management Survey found that 69% of companies use the home-based approach. In this approach, assignee remuneration is anchored to the home country and the home spendable income is adjusted for cost of living differences in the host country. Using our example, despite a significant uplift to the Egyptian home spendable by a cost of living index of over 200 (to recognise the higher cost of living in Switzerland), this method would still only leave our Egyptian assignee with a gross salary of EUR 29 676, which falls over EUR 100 000 short of what a local peer in Switzerland would be earning.
So should we then look at a host-based approach? This method will often involve using a job grading system and the assignee is paid the same salary a local national would receive for the same job role. Providing the local market rate would certainly be appealing for the assignee in question, but if cost containment is a pressure then this is probably not the best option for you. Most companies intend to protect their employee’s purchasing power, so they’re no better nor worse off when on assignment. However, providing a significantly higher host-based salary will also increase the assignee’s saving capacity. Similarly, managing repatriation back to Egypt would be more challenging as there is no link to the home remuneration structure.
When moving staff out of low paying countries, you may wish to look at both the home and host-based approaches, outlined above, and once you have run the respective calculations you could simply offer the higher of the two net salaries, which ECA considers as the dual approach.
An alternative to the traditional home or host-based decision would be to consider a hybrid solution. The aim of this approach is to maintain the link to the home country but ensure that the spendable income on assignment is both sufficient and in line with host-country peers. For this approach, spendable income tables are used to identify the split of the respective net salaries between living costs and housing/savings. The spendable amount provided will be based on the Swiss salary (as assignment expenditure will be in Switzerland) and the housing/savings component will be based on the Egyptian salary (to cover ongoing home commitments). These two components are then combined to form the assignment net salary, which is then grossed up for the tax liabilities in the host country to reach the gross salary offered.
© Employment Conditions Abroad 2019
As you can see above, the hybrid option is somewhat a “middle” ground, reflective of both the Egyptian and Swiss salaries. Any ongoing mortgage or saving commitments in Egypt will be maintained (not increased) and the purchasing power and living standards in Switzerland will be in line with that of a local peer.
In terms of which approach to go for, this really comes down to what you’re looking to achieve in terms of managing the conflict between the three markets; do you want to achieve equity with home peers, host peers or the expatriate workforce? This will depend not only on the reason for the move but could also be dictated by legislation, such as minimum salary requirements for the purposes of obtaining a visa.
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