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Will a local salary suffice?

How do you know if salary offers based on a local package will provide sufficient incentive for your expatriates? 

Global mobility professionals are increasingly faced with the challenge of having to manage a wider variety of international relocation types in order to support business demands for agile staffing. Added to this, pressures to reduce, or at least contain, costs mean that more and more companies are exploring multiple and alternative ways to compensate their different cadres of mobile staff.
  
This being so, salaries based on local packages are coming more into play. It appears to make sense, for example, to use a local salary as a base for an offer for a permanent transfer or a local hire, as well as for standard assignments in some cases – in ECA’s last Managing Variety in International Mobility survey, over 50% of participants reviewing their pay method stated that they were intending to introduce a host country based approach for some of their transfers.
  
Understanding what level of buying power a local-based salary will give is vital to ensuring that the package offered will be fair and provide sufficient incentive for the employee to take the position. ECA has several tools that can help you with this task.

National Salary Comparison 

ECA’s National Salary Comparison (NSC) looks at salaries for locally employed staff in 57 countries and compares them in terms of gross, net and relative buying power. Generally speaking, companies will find it easier to assign their employees to countries where their relative buying power is going to be higher.

The chart below illustrates how misleading a simple comparison of gross salaries can be and why buying power rather than gross salary is the key to determining the suitability of a host-based salary. In this example, the higher gross salary on offer in Finland compared to that for a similar position in South Africa might at first appear to provide ample reward for undertaking such a move. In reality, the Finnish salary provides a lower buying power because of high taxes and living costs. This can make Finland an unappealing destination for South Africans when offered a host-based salary. 

Source: National Salary Comparison

Through graphical comparisons such as that shown above, the NSC shows at a glance whether spending power is likely to be maintained when moving employees between countries on local terms, providing a big-picture pointer to the remuneration issues companies may encounter when using such a policy. For a more targeted approach, a Net-to-Net calculation enables you to assess the suitability of a local salary on an individual basis (see below).

The NSC is available to download free of charge from the Insights area of this website. In addition, subscribers to ECA's services have access to an interactive version of the NSC in MyECA that makes it easy to compare countries in terms of gross, net and relative buying power, relative to a base country of your choosing.

Net-to-Net calculations

A comparison of the employee’s actual home and proposed local salaries can be undertaken with the help of ECA’s Net-to-Net calculator. You simply input the home and local gross salaries and the calculator deducts the appropriate tax to provide a comparison of net salaries.

This level of comparison may already include as much information as you need, but if you wish to compare the relative buying power, there is also an option to factor in a cost of living differential. In addition, you may wish to take into consideration a housing differential to account for the difference in housing costs between the home and host locations.

The resulting comparison report will demonstrate the true value of the proposed salary, making it easier for mobility professionals to deal with challenges to the local salary offer.

The example below illustrates the steps involved in a Net-to-Net comparison for a move from Denmark to France.

If we assume that our employee receives a gross salary in Denmark of EUR 90 306 and compare that to the amount paid for the equivalent position in France (EUR 71 543) we can see that, in gross terms, the employee is earning EUR 18 763 more in their home country of Denmark.

However, in net terms, due to higher taxes in Denmark this difference is reduced to EUR 4 634.

When we factor in a cost of living (COL) differential, we see that France is cheaper than Denmark and the home net salary is reduced accordingly.

The end result, after factoring in the tax and cost of living differences between the two countries, is that the employee would in fact receive an additional EUR 1 386 to spend, if paid the local French salary for this position, shown as "Local net surplus". 

Had the calculation turned out differently and the Danish salary provided more buying power than the French one, the difference would be displayed as a "Required local net adjustment" that you would need to pay in addition to the local salary if you wished to preserve the employee's buying power. In fact, two-thirds of companies who use the host-based approach do not only pay a local salary but add in some additional benefits or allowances (e.g. relocation assistance, schooling, housing). This is referred to as a local-plus approach.

Individual Net-to-Net calculations are available through our Consultancy and Advisory service and the Net-to-Net calculator can be added to ECA subscriptions for access within MyECA.

Net-to-Net calculations can also be incorporated into ECAEnterprise, ECA's Assignment Management System, for companies who have a Net-to-Net policy framework in place, or who regularly use Net-to-Net comparisons as a step to establishing the most appropriate remuneration approach.

Reasons to use a Net-to-Net calculation

MyExpatriate Market Pay Survey 

As well as assessing the feasibility of a local salary, it is also important to consider how your assignee salaries will compare to those of other expatriates in the host location. ECA's unique MyExpatriate Market Pay reports enable you to easily assess and justify your approaches and help you to motivate and retain mobile staff with the right package.

The reports provide detailed benchmarking information about expatriate pay and benefits packages in specific countries and can be used to understand the market position of your salaries, whatever method you use to calculate them. Comparisons with local staff are also included.

Personalised results are provided free and exclusively to participants. Contact us for more information or to register interest in taking part in this year's survey.

If you are interested in buying a Net-to-Net calculation, adding the Net-to-Net calculator to your subscription, or need advice on expatriate pay models, salary benchmarking or anything else mentioned in this article, please get in touch!

 

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