Mobility Basics: How are international assignee salaries reviewed?

Soaring energy and food prices have pushed inflation in many countries to the highest levels seen in decades. With genuine anxiety about living costs, societal responses have included strikes and street protests, while authorities have raised interest rates, implemented quantative easing, or replaced finance ministers, among other measures. 

There is a lot of media attention on pay rises, both what employees seek and what employers can afford. But why are salaries reviewed at all?

Fundamentally, salaries need to remain competitive to attract and retain talent and ensure the workforce capability is in place for the organisation to perform. Reviews of local salaries need to respond to such pressures as wage inflation and price increases and to keep pace with the labour market at the regional, industry or national level. For international assignees, there might be the added complexity of price movements in two countries to consider, and the need to be competitive in the home country, host country and international markets.

Reviews will also be warranted for global nomads and other employees who have crossed an international border, such as permanent transferees, or who do so on a temporary basis, such as commuters.

Maintaining equity

When deciding how to review salaries, it is useful to pause and reflect on the logic and premise of the original salary calculation method. The remuneration approach(es) an organisation adopts are determined by the type of equity it wants to achieve in order to promote mobility and retain talent. Does it wish to keep assignees anchored to their home country structure and lifestyle, or create equity between assignees and local peers in the host country, or with a different section of the workforce? 

A pre-defined design and method of calculation is then followed to set a salary for the assignment before it starts. How that salary is reviewed in subsequent years will determine whether the desired equity is maintained.

Salary reviews in practice

ECA’s recent Expatriate Salary Management Survey found that salary reviews are most commonly scheduled annually, but companies differ in the way they undertake them. 

If a host-based approach is used, the majority of employers update salaries in line with local salary trends which often correlates with local salary movements. However, 23% instead refer to trends in assignee rather than local salaries, most likely because they have used the market rate for expatriate workers in the host country as the basis for the salary, rather than the rate for local nationals.

If a home-based approach has been used the total assignment salary will consist of multiple elements that should be reviewed to maintain equity with home country peers. Over half of companies review some or all elements of the salary each year, with cost of living adjustments and base salary most commonly reviewed each time. Over 40%, however, simply update the assignment salary in line with basic home or host salary increases, which can undermine the original purpose of the home-based approach as a means of achieving equity with home-country peers.

The following example shows how the salary could have evolved for a Dutch assignee in Buenos Aires over two years. Using the home-based approach on a gross reference salary of EUR 80 000 initially results in a net assignment salary of EUR 74 116, equivalent at that time to a host gross salary of ARS 9 759 832.

If this host salary was then updated in line with host country salary increases each year, by the time of the second salary review it would have risen to ARS 16 841 712, equivalent to EUR 122 396. However, the gross reference salary in the home country would only have risen to EUR 85 200 in the same period and this would be the salary referenced for new home country peers heading on assignment to Buenos Aires. The link to the home country pay scale has been broken, which could inhibit the repatriation of this assignee to the Netherlands.

Whatever method is chosen to update salaries, the assignee’s reference salary in the home country should be adjusted too, as elements such as employee pension contributions will be linked to this.

There may be reason to step in and review salaries more frequently than annually; significant price changes, or if monies the assignee is remitting between the home and host countries are being affected by currency movements, for example. Larger companies who have more employees and/or more assignees are more likely to have multiple reviews per year as standard than smaller ones, as they are more likely to have invested in an assignment management system that makes the recalculation process easier. In addition, 42% of companies using the home-based approach and 31% of companies operating a host-based approach have provision in their policies to run unscheduled salary reviews in response to large movements in exchange rates or inflation.

Communication

Given the above, it is common that the salary the assignee is being paid at the start of the assignment does not remain at that level for the duration. An assignee may well expect the monies they receive to increase during the period they are abroad, if only because an upward trajectory in pay has been their experience to date when working in the home country, but what happens in reality could be different as a consequence of your salary review policy. COLA, for example, can go up or down according to relative price increases and exchange rate fluctuations. A key point is that a below-inflation pay award at home and/or significant inflation in the home location, may have an impact on COLA that was not anticipated by the assignee.

It should be communicated clearly to the assignee before they go on assignment exactly when, how and for what their salary will be reviewed, as well as the possible outcomes. ECA is ready to assist you with assignee communication, whether it is through employee portals in our webtools, briefing workshops for HR and mobility colleagues, or commentary regarding individual cases.

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