By Yvonne Traber, Mercer
Creating an international pool of mobile top talent is high on the wish lists of many organizations. Working out how to pay those people fairly and consistently, is a considerable challenge. International Pay Structures (IPS) are certainly one option: they are becoming increasingly popular, and in some cases are being extended to apply to certain cadres of executive jobs too.
Why use international compensation structures?
Broadly, an IPS places a value on a job in the global or regional talent market, and enables organizations to define compensation packages that best meet the needs of both the employee and the employer without necessarily being constrained by the borders of the country the employee is based in. As such, it is a sensible option for those organizations that draw their established or emerging talent from a variety of countries, including locations where they may not have a business entity; in such cases, it can be difficult for companies to decide where they should ‘anchor’ individuals in terms of pay. Creating an international pay line can also be helpful when calculating remuneration for employees assigned to project work in new markets (often hardship locations) where typical pay levels may not be commensurate with their experience and/or the demands of their role.
Other advantages to the IPS approach include:
- Assuring global or regional consistency for certain jobs;
- Achieving transparent and streamlined compensation structures, which would be otherwise problematic for those organizations operating across multiple legislative regions;
- Retaining and attracting key talent;
- Ensuring that pay is related purely to the job at hand, not an employee’s home base definition;
- Establishing a viable, market-competitive compensation structure;
- Protecting employees’ purchasing power, particularly in locations where currency fluctuations are common.
Who are international pay structures typically aimed at?
Global nomads – that is, those workers who have spent the bulk of their career on international assignment, and thus are considered to no longer have ties to a ‘home’ market – are arguably the biggest target group for an IPS approach, but by no means the only one. International pay lines could also be appropriate for any employee in a key strategic role, for those recruited with a view to their future mobility and for senior executives in competitive roles. This is particularly the case in industries such as oil and gas, construction, consumer goods, and hotel industries, where directors and managers move frequently between regions and establishing new compensation approaches each time would not be viable.
How is international pay determined?
Calculating a fair and – crucially – competitive international pay line that works for your business is essential. There are of course other options you can consider, including local packages, as well as home or local plus market-based compensation, and it is important to analyze all avenues thoroughly to ensure that the IPS really is the best solution on balance. As part of that process:
- Scrutinize compensation trends in the places where you have the most executives, or where you want to attract them to, and create an average pay line that will work in those locations. Furthermore, bear in mind that in some countries, including Dubai and China, local pay structure has been impacted significantly by expat workers, many of whom have been localized but who continue to retain the ‘plus’ elements of a Local Plus package.
- Choose the right currency for the IPS. Although all fluctuate to a certain degree, currencies such as the US dollar, euro and British pound are usually safe options and will ensure that the IPS is sustainable. (The recent Brexit decision may affect sterling for the short to medium term, however.)
How cost-effective is an IPS?
International pay lines have been dismissed in the past as an altogether too expensive option, but that isn’t necessarily the case, as an example drawing on data collated in the 2015 Mercer Total Remuneration Survey and Global HRMonitor shows. A company recruiting a managing director (IPE 60) – married, but with no children – for its operations in Germany, would pay that person €134k in base pay (€165k total cash), while the Local Plus offer would be slightly higher at €158k and €189k respectively. Unsurprisingly, a full-blown traditional US expat package would bust the budget at just over €240k in base pay and €289k total cash. The international pay line, however, would be much more affordable and indeed slot in just above the local pay option at €134,000 for base and €172,000 in total cash.
As ever, however, it is vital that whatever you offer is competitive for your market and the countries you are targeting. Be sure to look at both net and gross pay perspectives when building your pay line so that you can be confident about the compensation offered to assignees and handle any questions they may have.
1. Top 20 executives
A client organization needed to come up with an innovative pay system for its 20 top executives that embraced their different nationalities and guaranteed consistent and competitive compensation. The client was keen to the overcome pay differences per market, the impact of the various taxation rates per country, and maintain purchasing power levels.
The client analyzed pay rates across a number of countries, including Asian locations, focusing on the key metrics of:
- Gross v. net pay line
- International v. regional pay line
- Base salaries v. total cash salaries.
The various options were whittled down to a shortlist of four: net and gross international pay lines, and net and gross Western European pay lines. As the majority of employees were from Western Europe, the client eventually chose the latter option and rolled it out early in 2016. Going forward, encouraging diversity is also high on their agenda, so they will need to monitor their new policy carefully to ensure it continues to be appropriate for new hires from other areas.
2. Global nomads
Another client wanted to create a pay solution for 100 eligible global nomads; the bulk of this group was from mature economies, and the number of employees from emerging markets is expected to increase significantly in the future. The aim was to find a sensible, simplified compensation offering for talent drawn from a variety of locations and without strong home ties. As in the above example, the client analyzed gross and net pay lines, international pay lines and base salaries v. total cash salaries (minimum, mid and maximum points), this time across seven key markets: Canada, Denmark, France, Germany, Hong Kong, Singapore, and the United Kingdom.
The result? While there were, naturally, some differences – most notably between Germany and Canada – the client was able to draw an average ‘band’ that it felt would well serve any employee coming from one of these countries and assigned to the roles in question. Again, this solution may not work for all organizations, and of course much will depend on the market and sector in which your business operates, but again the example illustrates that is possible to find a way forward that suits both staff and employers.
Conclusions and Summary
- Ever more companies are thinking in implementing an international or regional compensation structure for executive/key positions so that they can more effectively pay for the job, regardless of employees’ nationalities and/or origins.
- The IPS approach can help companies attract and retain both experienced executives and high-potential future leaders, but it does have some limitations. When calculating the right IPS for your business, it is important to look across a range of countries but including too many locations or extremely volatile economies in your analysis may result in a pay structure that is not, ultimately, viable long-term. Similarly, trying to match the offering of too many industry peers may mean that your pay line is not competitive enough for your market.
- Some businesses are considering setting up global employment companies (GECs), corporate entities that are used specifically as a base for global nomads, either all of them of just the most senior. GECs enable those employees to share a range of benefits such as international pensions and medical coverage.
Find out more solutions to help you implement your Mobility Strategy: https://mobilityexchange.mercer.com/mobility-strategy-talent-management