Mobility Basics: International salary spine

What is an international salary spine?

The aim of an international salary spine is to provide a solution when traditional remuneration models may not be applicable. It is often used for attracting and retaining employees of high value who are expected to be continuously mobile. It can also be used for ‘career expatriates’ at a variety of job levels – that is, employees who do not have a home country role but rather undertake a series of international assignments. Industries which often use an international salary spine include oil and gas, construction, leisure (specifically for hotels or where employees are aboard vessels), and non-profit organisations. In recent years, as we have seen an increase in international remote workers, some companies have begun exploring using the international salary spine for such employees.

Limitations of usual pay approaches for career expats

In the home-based approach, assignee remuneration is anchored to a notional home country salary, in order to maintain the assignee’s link to the home country salary structure and to facilitate repatriation. In the case of career expats there is usually no intention to return the expatriate to their originating country of employment, which renders the home country salary structure irrelevant. The home-based approach can also lead to large salary differences within the host country where people from different home countries are working at the same level of seniority. Companies may prefer to create equity amongst their high-level career expats regardless of home. When the priorities are to ensure remuneration that is competitive for a high-value and internationally diverse population and to encourage continuous mobility, the home-based approach may not be the most suitable option.

Unlike the home-based approach, the host-based approach is suitable for creating equity among peers in the same host country. However, it can severely limit onward mobility. For assignees sent to host countries where they enjoy relatively high purchasing power (due to relatively high local pay rates, relatively low tax rates, relatively low living costs, or a combination of all three), it would be hard to incentivise a move onwards to a country where they would be worse off.

A potential solution

An international salary spine is an alternative to these approaches. It involves paying all assignees at the same tier on the basis of an international standard, set at a higher level than the local salaries in most individual countries. This method is comparable to the select country approach, in which one country’s local salary structure is referenced for all assignees – usually the country where the company is headquartered, or the prevailing home country of the assignee population. The main difference is that an international salary spine is typically calculated by taking average salaries across a range of operating countries, or regionally. An international job grading system is required to ensure that all positions can be mapped to the salary scale, ensuring consistency and equity in base salary regardless of assignees’ country of origin. Having an international job grading system also facilitates repatriation, where required. If there is no link between the home country job grading system and the international one, transitioning from the international salary spine to the home country pay structure will be problematic.

A hypothetical tax deduction is typically applied to the international base salaries, to ensure all assignment locations are tax neutral and to maintain equity between nationalities. This hypotax deduction can be calculated using an average tax rate. Alternatively, the base salaries themselves can be determined on a net basis.

Some companies do not make any adjustments to reflect cost of living differences – their viewpoint being that the international average salary is normally set at a higher level than salaries in most individual countries, which ensures that the resulting pay package provides adequate compensation levels. A potential disadvantage of this is that there will be little incentive for assignees to accept moves to countries with relatively high living costs. Companies who do take cost of living into account do this in different ways. Some calculate a spendable and cost of living index on a hypothetical home country (i.e. similar to a select country) and calculate a cost of living-adjusted host spendable, similar to the home-based approach. Other companies calculate an international spendable and deduct this from net base pay. In its place, assignees receive a host country cost of living basket. This is a budget to cover expenditure on assignment, reflecting an international consumption pattern and host location prices.

Location allowances can be provided to recognise prevailing host location living conditions, as a percentage of the international base salary. Instead of referencing the employee’s home country, the location rating is based on a select or composite base to ensure equity between nationalities. 

Some companies would also pay a mobility premium/assignment allowance calculated as a percentage of the international base salary. Other discretionary allowances paid can include a remote site allowance and a responsibility allowance.

When implementing an international salary spine, there are some challenges to consider. Setting the international salaries relatively high might help to attract and retain employees but is very costly for the company. On the other hand, while an international salary spine package will likely result in increases for the majority of assignees, it may not offer a competitive starting point for assignees originating from countries such as Switzerland, where salaries are relatively high compared to the average international salary. 

Considerations around exchange rates and inflation can also be challenging. For instance, reviewing salaries for “home” inflation may not be possible. If the international salary is calculated as an average of a number of operating countries, home inflation would in fact be an average of different countries.

Companies applying this method will often pay all their assignees in one currency because there’s no tie to an actual home country and currency. Paying in the host currency may be problematic when the host country has volatile exchange rates or currency export restrictions. An option is to pay assignees in a third currency (one that is neither the home or host country currency) but as assignees will be remitting part of their pay towards home country commitments and spending part of their pay in the host country, they will be exposed to two different exchange rates. Therefore, any company using this approach should have a good currency protection system in place.

Why use an international salary spine?

Fairness, consistency and stability

All assignees at the same job level receive the same pay regardless of nationality.

Promotes mobility

An international salary spine should prevent locations with higher local purchasing power being preferred. This does however depend on how the international spine is executed. If tax and cost of living differences are not accounted for, then companies may still find difficulty recruiting for placements in high tax or high cost of living locations. Similarly, if location allowances are not provided, assignees may avoid locations perceived as challenging to adapt to.

When should you use an international salary spine?

Career expats

The main reason companies use an international salary spine is to smooth the way for their top talent to be highly mobile, without pay differences between countries being a barrier to this. The relatively high salaries on the salary spine also help retention of these valuable employees.

To achieve equity between high-value assignees

Using an international salary spine ensures the whole cadre of highly mobile, high value assignees are treated on the same in terms of their remuneration. This can be particularly useful when assignees come from many countries with very different pay structures. 

When traditional remuneration models are not suitable

An international salary spine is often used in specific industries, such as those with assignees working offshore. It is also a possible solution for employees recruited externally from the international job market, from home countries where the company lacks knowledge of local pay rates.

Summary of an international salary spine

An international salary spine can be an ideal solution for some assignments, particularly ones where high value, career expats are expected to be constantly mobile. However, it is likely to be an expensive approach to remuneration, and is not appropriate for all assignment types and assignee demographics.

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