How are expatriate salaries calculated? There is no single method that all companies use, as they all have different business needs and are subject to different market forces.
Although companies have evolved many different remuneration policies to meet their individual mobility needs, most expatriate salary systems can broadly be defined as host-based, home-based or some combination of the two. The recent release of ECA’s National Salary Comparison is a good opportunity to look at the host-based approach as part of our Mobility Basics series.
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, two thirds 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. 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.
Source: Expatriate Salary Management Survey 2015
Why use the host-based approach?
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.
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.
The host-based system is simpler to administer than other approaches
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 than 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. 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 better not to compare gross or even net salaries, but 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 Mexicans when offered a host-based salary.
Source: National Salary Comparison
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.
As salary levels are often similar within regions, host-based salaries may be particularly suitable for this type of assignment.
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.
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.
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.
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 get 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
In future posts we will look at the home-based approach and other systems for calculating expatriate pay.
ECA’s National Salary Comparison shows at a glance whether an individual's spending power would be maintained if they moved to work in a different country and were paid a local salary. For more information or if you need help understanding the different approaches to assignee pay, please get in touch.