The local-plus approach: a viable method for cost-saving?

Broadly speaking, there are two main approaches to calculating expatriate salaries – using the home salary as a starting point and basing the calculation on the host salary for the equivalent role. While there are many variations and combinations of these approaches, the traditional home-based build-up approach continues to be the most popular option. However, host-based alternatives, such as the local-plus approach, which combines a local salary and some expatriate allowances and benefits, are proving popular for companies looking to achieve specific goals. This blog uses the results of ECA’s country-specific benchmarking MyExpatriate Market Pay Survey to understand more about how and where the local-plus approach is used. 

Why a host-based approach?

The local-plus approach is one which is derived from local salaries, with the addition of allowances and benefits which are known as the ‘plus’. This host-based approach is often considered to be a lower-cost alternative to a home-based approach, which could be appealing to those managing assignees. It can also be easier to administer and could offer companies with diverse expatriate populations an opportunity to treat all staff in any given host country in the same way. 

Host-based salaries are also commonly used for permanent transfers. Indeed, according to ECA’s Permanent Transfers survey, 61% of companies sending staff on permanent transfers use a host-based salary approach. This compares to only 25% of companies for long-term assignments.

Although the key benefit for many is the possibility of cost savings, this is not always possible. To be acceptable to a potential assignee, local salaries must be comparable to salaries in their home country or typical expatriate salaries in the host country. Therefore, companies are unlikely to use a host-based approach for assignments moving from a high-paying to a low-paying location. 

Where is the host-based approach used?

Companies are more likely to use a host-based approach where the local and expatriate market salaries are similar. Therefore, only limited possibilities exist for cost savings which relate to the salaries portion of the host-based approach. Furthermore, if there are large pay differences between the home and host locations or even between seniority levels, a host-based salary system may not be appropriate. For example, in some Latin American countries, local pay at senior levels often exceeds that of expatriates so companies could end up spending more if the appropriate system is not used. Within ECA’s MyExpatriate Market Pay reports, there are local salary graphs which can help to show and compare how well-off expatriates would be compared to local staff. These graphs can also provide guidance as to whether a host-based approach would be a viable option. However, just because it may be feasible does not mean it is popular.   

Similar levels of expatriate and local salaries are a necessary but not sufficient requirement for the common use of host-based approaches. As you can see below, using the salary data for senior managers in ECA’s MyExpatriate Market Pay Survey, use of the host-based approach varies considerably, even when the local and expatriate salaries are quite similar, as they are here for all countries in the chart.

Host-based salary systems are most commonly used in Asian countries, according to the survey. Singapore and Hong Kong were the most popular Asian assignment countries where a host-based approach was used. Perhaps unsurprisingly, Asian-headquartered companies are more likely to put their employees on host-based salary systems within Asia. 

Our analysis of the host-based approach (including local, local-plus and expatriate market rate) essentially found that it is most commonly used when companies are bringing employees into their HQ country. So, for example, for Thailand the percentage of European HQ companies using the host-based approach is just 13%, this rises slightly to 33% of Asian HQ companies but for Thailand HQ countries it is 83%.

This is something we see very consistently across a range of countries, as shown in the chart below. The overall percentage of companies using the host-based approach in each of the countries shown is between 13% (for China) and 31% (in Hong Kong) but when we look at practice amongst companies who are Headquartered in the assignment host country the percentages increase in every case with the lowest percentage is 50% (Taiwan) and the highest 83% (Thailand).

This demonstrates a couple of important points. Firstly, that companies are predominantly using the host-based approach when bringing people into their HQ country, and rarely doing so when sending employees from HQ out bound or for assignments between other countries. Secondly, it shows that the salary levels in the host country are not the only factor which influences where companies will use this approach, as we see this correlation between the approach taken and the HQ even in relatively lower salary locations such as Thailand and Taiwan. Where salaries do have a greater impact is in the specific type of host-based approach being used, with local plus being more common in higher salary locations such as Singapore and Hong Kong and the expatriate market rate being more common in the lower salary locations previously mentioned.

The reasons companies are utilising the home-based approach when bringing employees into the HQ are possibly to do with the types of roles being offered and the more permanent nature of assignments into HQ where career development opportunities may be stronger, as well as the tendency to hire foreigners who are already working in the host location and offer them host country terms.

In contrast, this trend is not replicated for assignments in Europe from European-headquartered companies, despite the local and expatriate market salaries being similar in many countries in the region. This could be because European companies tend to have more developed global mobility programmes, allowing for easier administration of the more complex but more flexible home-based approach. Alternatively, they may manage a wider range of international assignments both within and outside the region and simply prefer to use the same approach across all countries. 

A more cost-effective approach?

As mentioned, the cost-effectiveness stemming from the salary portion of a host-based package can be limited. Instead, the cost-saving aspect is more likely to derive from the ‘plus’ elements of a local-plus approach. This is demonstrated in the graph below which compares the provision of common benefits and allowances from companies using home and host-based approaches in Singapore.

In addition to the reduced provision, the value of these assignment benefits and allowances is generally lower when using a host-based approach.

Take, for instance, accommodation provision, something which can add significantly to the cost of an international assignment. Analysis of the Total Package Listings section of the MyExpatriate Market Pay Report for Singapore shows that the accommodation allowance provided to an expatriate is on average 10% lower for employees on a host-based approach compared to a home-based one. 

Summary

Local-plus can, if done correctly, certainly be effective in reducing assignment costs compared to a traditional home-based approach, and can offer other advantages such as simpler administration. However, it is not an appropriate option for many assignment locations, and even when it is - it may not be cheaper than the alternatives. Each company’s situation is different, but you can get all you need to inform your decisions with ECA’s MyExpatriate Market Pay reports, available for over 130 countries. 

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