By Olivier Meier, Mercer
After using home-based approaches (balance sheet) for international assignees for decades, is it time to switch to the host-based approach and simply localize mobile employees? Budget restrictions and attempts to simplify assignee management are prompting a growing number of companies to ponder this question. Unfortunately, as with all things mobility, the answer is not a simple one. The traditional problems associated with host approaches have not fully been resolved, and attempts to fix the host approach with a “local plus” model (adding benefits to the host approach) are not always cost effective. Yet, the local approach deserves a closer look, either as a solution for specific moves or simply to benchmark and put other compensation approaches in perspective.
When is it used?
A host approach is about integrating the employee into the local (host-country) market structure by paying local market rates. One-time relocation/moving costs are covered by the company but on-going allowances and premiums are not provided – in other words, this approach can cut expenses by reducing or eliminating unnecessary expatriate-related pay elements. The host approach creates equity between local nationals and expatriates doing the same or similar jobs, and simplifies administration.
The local approach can be used for moves between similar countries. It is also a common approach for permanent moves (i.e. when the company does not offer a guarantee of repatriation and the assignee does not maintain a link with the home country) and locally hired foreigners. In case of a permanent relocation, companies do not want to have on-going expatriation relocated costs and try whenever possible to provide a local package. Similarly, companies usually try to localize assignees who have been on international assignments for 5 years more and transfer them to a local package.
However, local pay and benefits in the host location might not be competitive internationally, which could create a significant barrier to mobility. Even if the salary structure in the host location is competitive, tampering with the base salary can also lead to more costs for mobile employees over the long-term. The salaries of mobile employees on host-based approaches tend to inflate over time, as they are not likely to accept pay cuts when moving. Working closely with talent management and understanding the long-term intentions is therefore important when using host-based approaches.
Setting a host-based approach
In theory, the employee base salary should be fully aligned with salaries in the host country. In reality, a number of factors have to be taken into account.
Understanding market segments
When talking about local salary what does “local” mean? Should it be the real local market for local nationals? In some locations, the market is segmented and there are different pay structures for locals, local employees with international experience (e.g. “returnees” who have grown up and studied abroad and are returning to home country), and foreigners hired locally. The specific skillsets and international experience of the returnees and locally hired foreigners sometimes means that they can expect a higher salary than pure locals without international experience. In some locations, such as the UAE, local nationals may have a higher salary than foreigners and may also receive additional allowances. Again, the local salary for locals is not always the same as the local salary for foreigners.
Beyond the low versus high paying countries debate
When making salary comparisons between countries, we often talk about “low paying” and “high paying” countries. It can be a useful simplification for the purpose of a discussion but this simplified view does not stand up to a deeper analysis into salary structures.
The concept of high and low paying countries would be valid if all countries were highly egalitarian and their salary curves similar to those of the Scandinavian countries. We know that the reality is very different: The main characteristic of emerging countries is that their salary curves are very steep – in other words, low level employees earn very little but top level managers have very high salaries (sometimes higher than in Europe or the US.) This is the result of persistent social inequality and years of double-digit salary growths. The evolution of the salary curves has multiple consequences for compensation management:
As illustrated in the chart above, entry-level and mid-level positions are less compensated in high-growth emerging markets compared to mature markets, but for top-management positions, salaries in emerging markets tend to exceed those in mature markets. Entry-level positions have low base salaries in emerging markets, so to use a strict host-based compensation approach for international assignments would be difficult. Employees would face a real loss of income and standard of living, making it untenable to fill such positions. For mid-level positions with moderate base salaries, using a host-based approach becomes feasible with some adjustments. However, for top management positions, international moves to an emerging market could significantly increase an employee’s pay versus the home country and increase overall costs for the employer.
This disparity can make moves to emerging markets enticing for senior professionals and highly skilled experts, but it creates cost issues for employers. The global war for talent also means that low-cost mobile employees do not remain low cost for long when their international experience increases and their expectations rise. It can also make repatriation quite difficult.
More generally, the complex compensation landscape makes reasoning based on country level difficult: assumptions about using a host compensation approach in a given country will seldom be applicable for all job levels, all industries, and all types of employees.
The weight of salary history
Understanding what the target salary should be in the host location is important but few employees accept a pay cut and the starting point of the discussion will often be the current salary of the employee in the home country.
In these cases, the objective will be to determine the equivalent salary in the host location taking into account purchasing power considerations, tax, and the local salary ranges. This will help assess if there a gap and will inform the decision about the need for additional compensation.
Comparing the relevance of gross salary, gross salary plus employer costs, net salary and adjusted net salary in compensation package discussions
|Gross base pay plus employer costs
||Employer costs matter for the company but are not always visible to the assignees. They should be mentioned in package discussions as they affect the feasibility and overall cost of using a host approach in a given country.
|Gross base pay
||The gross base salary is not always fully relevant because it includes tax and social security amounts. It tells little about the actual purchasing power of the assignee. It is however often the first figure that assignees have in mind.
|Net base pay
||The net base salary gives an indication of the remaining amount after tax and social security deductions. However, it does not factor in costs in the host locations.
||The adjusted net figures take into account the cost of living differentials (baskets of goods and services for daily expenses) but also housing costs. The objective is not to pay a cost-of-living and a housing allowance like in a home-based package. It is to understand if getting a host local salary will result in a different purchasing power as in the home location.
*See Compensation localizer for examples of calculations.
Addressing compensation gaps
In many cases, the host market salary will not be aligned with the current salary of the assignee. If the salary gap is too significant (outside of the company’s salary band for a given job), the salary gap will need to be addressed.
Understanding pay progression
When setting a host salary, assessing the target host salary upon departure is not sufficient. How will the host salary evolve over time? If the current salary of the assignee is too low or too high, is it possible to act on the salary increases to accelerate or slow down slightly pay progression over the next few years?
Meeting minimum requirements
A package might be viewed acceptable for someone moving from low pay environment but still fall short of the legal requirements to get a visa or comply with employment laws & collective agreements in the host location. Compliance with host country rules influence the implementation of host approaches.
Use of allowances to bridge gaps
Allowances and benefits can to some extent bridge the gaps (e.g. housing allowances) especially when the host approach is used for an assignment of a limited duration – in case of permanent relocation, the allowance could into an undesirable ongoing cost. In some countries, additional allowances and benefits cannot be included in the amount used to determine the minimum salary requirements for visa and employment law. Adding allowances to the host package is effectively turning the host approach into a kind of local plus package and deporting from a strict host-based logic.
The short and the long-term view
A host approach can be a way to achieve pay equity with local peers but sometimes short-term equity could lead to long-term distortions. If the employees on a host package remains mobile during their career, the fluctuations of their base pay (usually upwards) will threaten consistency and equity over the long term. It can lead to a category of highly paid employees due to the accumulation of move-related pay increases.
Currency or salary fluctuations can also have an impact on assignee pay and savings over time for time-limited assignments if the employees remain mobile or wish to return to their home country later in their career. In the case of move on a host-based the salary is converted once in the host currency. Subsequent currency fluctuations can increase the pay gap between the original country and the country assignment. While in theory, no link is maintained with the home country, assignees who eventually return home after a number of years could see significant saving gains or losses just because of currency fluctuations.
Ultimately, the host approach remains an important part of the mobility toolbox. The rise of the concept of pay equity might also renew discussions about host approaches. In any case, the debate about compensation approaches is far from over. The increasing complexity of the mobile landscape and the advent of distributed global workforces is more likely to stress the need to rely on different compensation tools than to consecrate the triumph of one single approach.