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Host-based compensation approaches revisited

Posted 250 days ago ago by William

By Olivier Meier, Mercer and Anne Rossier-Renaud, Mercer

After using home-based (balance sheet) approaches for international assignees for decades, multinationals are increasingly contemplating switching to a host-based approach for some of their international moves, including temporary ones. Budget restrictions and attempts to simplify assignee management are among the reasons why a growing number of companies are pondering whether to use alternative approaches.

So far, however, the host-based approach is primarily used for one-way transfers – according to our research, nine out of 10 companies apply either a pure host-based or host-based-plus approach for such transfers. The approach is also used for locally hired foreigners or sometimes for self-initiated or intraregional moves, and less often for temporary international long-term assignments.

The traditional problems associated with host-based approaches have not been fully resolved. These include the fact that inequitable compensation levels make some locations far more attractive than others, benefits disruption, restricted access to certain local amenities for foreigners, and repatriation. Attempts to fix the host-based approach with a local-plus or host-based-plus model (adding benefits to the host/local 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. Mercer research shows a growing interest in host-based or hybrid approaches for temporary assignments, with almost 10% of companies indicating that the host-based approach is the prevalent compensation practice for their long-term assignments.

When is the host-based approach best 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 ongoing 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 ongoing expatriation relocation costs and try whenever possible to provide a local package. Similarly, companies usually try to localize assignees who have been on international assignments for five years or 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 their 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 had similar salary curves, for example if they were highly egalitarian and their salary curves were similar to those of the Scandinavian countries, but we know that the reality is very different. The main characteristic of emerging countries is that their salary curves are usually 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.

Contents of chart are described in detail in the following paragraph.

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.

Such disparity can make moves to emerging markets not appealing enough for entry-level employees who would face an actual loss of income and decrease in standard of living. On the other hand, such moves may be enticing for senior professionals and highly skilled experts, but then create 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 current inflation trend, also differing by country in terms of impact, adds to the complexity of the equation.

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 whether there is a gap and will inform the decision about the need for additional compensation.

Below we compare the relevance of gross salary, gross salary plus employer costs, net salary and adjusted net salary in compensation package discussions:

Salary aspect Relevance
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.
Adjusted net* 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 as in a home-based package. It is to understand whether a host local salary will result in a different purchasing power from the home location.

*See Compensation localizer for examples of calculations.

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), it will need to be addressed.

Use of allowances to bridge salary gaps

Allowances and benefits (e.g. housing allowances) can help bridge the gaps to some extent, especially when the host-based approach is used for an assignment of limited duration. In case of permanent relocation, the allowance could result in an undesirable ongoing cost if not phased-out. In certain 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-based package effectively turns it into a type of local-plus package, shifting away from the strict host-based logic.

Assessing the total cost of using a host-based approach

More and more often, compensation budget decisions need to rely on the “total” cost projection.

HR teams need to understand and communicate to their business stakeholders not only the “host-based” compensation and benefits but also the incremental costs incurred by the fact that the job is being offered to a foreigner living abroad rather than a local employee, and that they might have trailing social security liabilities in the “home” country. These could include:

  • Potential additional allowances and benefits provided to bridge compensation gaps or facilitate the foreigner’s integration, and their fiscal impact in the host location
  • Relocation costs upon expatriation and repatriation for a temporary transfer, and their fiscal impact in the host location
  • Remaining tax and social security/pension liabilities in the home or another country and their fiscal impact in the host location
  • Employer social security and other costs.

When setting a host-based salary, assessing the target amount upon departure is not sufficient. How will the 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 pay progression slightly over the next few years? A cost projection may provide some visibility into the impact of salary and total cost progression.

The short-term 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 remain 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 moves on a host-based approach, 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 strategies than to consecrate the triumph of one single approach.

Solutions for in-house salary cost projections

Explore these tools to help you make informed decisions around host-based compensation for your global workforce:

Mercer runs a global survey collecting benchmarking data on multinationals' host-based and host-based plus approaches to compensation and benefits for long-term international assignments of temporary duration. Participate today and gain preferential access to the latest market data.

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