How do you know if salary offers based on a local package will provide sufficient incentive for your expatriates? ECA’s Net-to-Net calculator can show you how they measure up in just a few clicks. ECA’s Software Solutions Consultant, Ema Boccagni, explains how.
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 means 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 recent 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’s Net-to-Net calculator provides a simple way to do this, and to see the adjustments required to redress any shortfall.
How the Net-to-Net calculator works
Developed in response to client requests, the Net-to-Net calculator is an easy-to-use tool that automates the manual processes many companies currently have to do to assess the suitability of a local salary. It provides the tools that IHR professionals need in order to negotiate and explain a local salary offer to their employees in clear terms.
The beauty of the Net-to-Net calculator is its simplicity. You don’t have to input hundreds of numbers: only the home and local gross salaries are required. The calculator then 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 net-to-net means different things to different people, and furthermore, a level of pragmatism in the application of a local-based approach is expected.
ECA’s Net-to-Net calculator, therefore, also gives you the option to factor Cost of Living and Housing differentials into the comparison. Even though a local salary is being offered, the employee will in all likelihood be a non-national in the host location, and you may wish to take into consideration the employee’s lack of familiarity with local living costs and the housing market, as well as their standard of living in the home country when calculating a salary package.
The results of the comparison, and associated factors where selected, are presented in a Comparison report, clearly showing how the two salaries compare.
Key uses for the Net-to-Net Calculator
Demonstrating the value of a salary - When a salary offer is refused or challenged, it can be difficult for IHR professionals to demonstrate the true value of the proposed salary without providing a calculation that clearly illustrates the variables at play in a home to local salary comparison. The clear, side-by-side layout of the report produced by the Net-to-Net calculator, with the figures presented in both currencies, makes it simple to see.
Calculating additional allowances in order to maintain home country buying power - While the local salary offered to employees may seem perfectly acceptable since it is appropriate for peers in the host location, you may want to assess the impact that a different tax regime, lack of familiarity with the local living costs and a different housing market, will have on the employee’s spending power.
If the Net-to-Net comparison shows comparable income, then the company has something to share with the employee to demonstrate that they are not worse off. If the comparison shows a reduction in the employee’s spending power, the Net-to-Net comparison will suggest the minimum top-up the employee would need in order to redress this.
Seeing beyond the comparison of net salaries - The Net-to-Net calculator provides a useful check where preconceptions may exist. If, for example, the host location has a favourable tax regime, it is easy to assume that a local salary offer will be suitable – and a comparison of the home and local net would confirm this. Adding a housing differential could, however, put into doubt the viability of a local salary offer if the local housing market is particularly expensive.
Testing a new policy design - Another scenario where Net-to-Net comparisons can prove extremely useful is when companies want to gauge the impact of changing their remuneration policy from a home-based system to a host-based system. Running Net-to-Net calculations will test the viability of the proposed reward approach. In the case of restructuring or significant organisational change, where a company is considering switching a group of employees to local T&Cs, the Net-to-Net calculator can help establish if the proposed package would work.
Net-to-Net calculator in action – case scenario
The starting point is an employee from Antwerp, Belgium, on a home salary of EUR 65 000, whose company is sending her to Reading, UK. She is to be accompanied by her spouse and two children. The local salary on offer, based on their local salary scale at this employee’s job grade, is GBP 50 000. To assess the viability of this salary offer, the company runs a Net-to-Net calculation.
After home and local gross salaries are inserted, these are netted down and the two resulting net salaries are compared – for this reason, the home salary values are converted from EUR to GBP. The local net salary of GBP 38 562 is higher than the home net salary of GBP 32 110. If the comparison stopped here, the calculator would display a local net surplus of GBP 6 452. However, the company wishes to also take into consideration how different living and housing costs may affect their employee in Reading. Simply by switching on the Housing and Cost of Living (COL) differentials in a dedicated tab, this additional level of comparison is easily achievable in the Net-to-Net calculator. The ‘Net-to-Net Comparison Report’ below illustrates the outputs produced by this Net-to-Net calculation.
Once the Housing and COL differentials are applied in our example, the higher living and housing costs in Reading compared to Antwerp mean that the employee needs GBP 41 063 (Home net - after differentials) to maintain their home country buying power, and no longer just GBP 32 110 (Home net salary). In other words, expanding the comparison to include the Housing and COL differentials has highlighted that simply providing the Local net of GBP 38 562 would no longer be as appealing an option for this employee, and that an adjustment may be required. The ‘Required local net adjustment’ of GBP 2 501 is clearly displayed, together with the ‘Adjusted local net’ and the corresponding ‘Adjusted local gross’.
The Net-to-Net calculation is indicating that a local gross of GBP 56 234 would be required in order for the employee to maintain their home country buying power, rather than the originally suggested GBP 50 000.
How to buy the Net-to-Net calculator, individual calculations or software functionality
The Net-to-Net calculator can be added to ECA subscriptions for access within MyECA, and activated for your authorised users in a matter of hours.
If you only have an intermittent need, Net-to-Net calculations are also available to both existing ECA subscribers and nonsubscribers through our Client Services and Consultancy Bureau services.
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.