Mobility Basics: The select country approach

There are many ways to calculate expatriate salaries and companies use different methods to suit their specific mobility needs and objectives. Even so, most assignment salary systems can broadly be defined as host-based, home-based or some combination of the two. Having looked at the dual and hybrid approaches in previous posts, we will now look at a less common variant of the home-based approach called the select country approach (used by 3% of respondents to ECA’s last Expatriate Salary Management Survey).

What is the select country approach?

The aim of the select country approach to calculating pay is to apply the same standards to the whole expatriate workforce, regardless of their nationality or home country. Whereas the home-based approach starts with a notional home salary from the assignee’s actual home country, companies using the select country approach choose one ‘home’ country to reference for all assignees.

Hypothetical tax and social security contributions for the select country are then deducted from the notional home salary and a cost of living adjustment made to the spendable portion of net income. Additional assignment allowances are then often added to make up the net assignment salary.

The select country can be determined in different ways. It is usually where the company is headquartered, but it may also be the prevailing home country of the assignee population, or one with preferable pay scales or living standards. The stability of the select country’s currency can also be a factor.

The notional home salary used in the calculation is typically determined by reference to the salary structure used for local nationals in the select country. However, mobility teams may also need to maintain assignees’ notional home salaries from their actual home countries in the background to facilitate the calculation of pension contributions and repatriation.

Why use the select country approach?

Fairness and consistency

All employees are treated the same way on assignment, no matter which country they are coming from.

Promotes mobility

Or does it? The assignee’s standard of living will match that of peers from the select country. Whether the assignee will see their living standards maintained or improved upon depends on their home country and the select country used (employees will see little incentive to relocate if they think their living standards may drop).

In the example below, two employees at equivalent job levels are to be assigned to India from China and Switzerland. The table compares assignment packages calculated using a standard home-based approach for each assignee with one using the Netherlands as the select country that would be applied to both (salaries have been converted to euros and the tax assumptions for a married individual with two children applied).

The net assignment salaries shown represent the amount of money required to preserve an employee’s home-country spending power while on assignment.  Using the select country approach instead of a home-based approach would see the Chinese assignee’s spending power in India improve by nearly EUR 5 000 per year. The Swiss assignee, however, would see a reduction in their spending power of nearly 50% and be unlikely to be willing to move.

This example demonstrates why the select country must be chosen carefully to promote mobility in all possible cases. A company with potential assignees from countries with high local salaries are therefore unlikely to find this approach particularly cost-effective. Another possible consequence of using this approach is that assignees from countries with low salaries may be reluctant to repatriate.

When should you use the select country approach?

To achieve equity with other assignees

The main reason why companies use the select country approach is that it ensures the whole international assignee population is treated the same in terms of their remuneration. This can be particularly useful when assignees come from many countries with very different pay structures. The flip side is that expatriate pay levels will be different to those of local peers in the host country.

From low-salary to high-salary countries

When moving assignees from low- to high-salary countries, the host spendable calculated using a standard home-based approach may not be sufficient to support the assignee’s expenditure in the assignment location. This can also be true for moves from higher-salary countries with high levels of taxation, meaning that the build-up is starting from a low base. Even applying a very high cost of living index might not get the host spendable anywhere near local peers’ spendable levels.

Using a carefully chosen select country on which to base assignment pay ensures that the assignee’s purchasing power is protected or improved upon when they go on assignment.

Career expats

This approach can be suitable for 'global nomads', employees who move from one country to the next without having a designated home country.

Summary of the select country approach

The select country approach can be an ideal solution for some assignments, particularly where the assignee is moving from a low-salary country to a high-salary one or moving on from one assignment to the next. However, it is unlikely to be the most cost-effective option and is not appropriate for all assignment types and assignee demographics.

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