Delivering pay to local national employees is a straightforward matter. Employees receive their pay packages in local currency and in their local bank account, as delivered by the company’s local payroll. When companies are dealing with mobile workers, however, how and where to deliver pay are not such simple questions. The currency of payment and the payroll used depend on a range of factors, particularly the salary calculation methodology used.
Currency of delivery and salary calculation methodology
As the Mobility Basics series has shown, companies employ many different salary systems to calculate long-term assignment remuneration, and our latest Expatriate Salary Management Survey shows a strong connection between the system applied and delivery.
© Employment Conditions Abroad 2019
It is no surprise that, for companies who take a host-based approach when calculating packages, the standard practice is to deliver pay in the host country currency. Host-based packages are typically calculated based on the host country market rate for local nationals (or expatriates), especially when the principle behind the choice of salary system is that there should be some degree of equity between the assignee and their host country peers. In which case, it would seem logical that the delivery of pay is kept consistent with host country peers too. The downside of delivering the full package in host country currency, however, is that assignees will typically need to convert a portion of their package into their home country currency to meet ongoing savings and housing commitments. If assignment allowances or location allowances have been awarded, the assignee is likely to want to add these to their home country savings too. If exchange rates shift, assignees could win or lose when converting this portion of their pay.
There is a lack of consensus between companies when it comes to delivering home-based packages. Almost 50% of these packages are quoted entirely in the home currency. The advantage of this approach is that the currency used to quote and deliver pay will be the one that the assignee will be most familiar and comfortable with. They will be able to make an easy comparison to their previous home country pay, and this may reduce queries and promote a perception of transparency and simplicity. The currency of delivery will match that of the assignee’s home country commitments and the assignee can remain on the home country payroll. On the other hand, assignees will of course need to convert a portion of their pay over to the host currency to cover their living costs on assignment – and as discussed above, any conversion of pay into another currency exposes assignees to the potential of exchange rate fluctuation.
A majority of companies using the hybrid approach split delivery between the home and host currencies, as do a large minority of companies using the home-based approach. The home-based components of the packages are delivered in the home currency, and vice versa. An advantage of delivering each pay element in the appropriate currency is that this eliminates the need to convert any elements into a different currency, and thereby protects these elements from any potential exchange rate volatility. It is typical for companies to treat the housing and savings elements as part of the home portion, and the spendable and COLA elements as part of the host portion. Other elements are more divisive – our survey showed that companies providing home-based packages are split on whether mobility and location allowances should be delivered in home currency or host currency. It is rare for companies paying local-plus packages to split pay between home and host currencies (only 15% do so). Since host-based pay by definition isn’t built up from home and host components like a home-based package, the split is generally determined according to each assignee’s preference.
Paying the full package in a third country currency is rare for all remuneration approaches except for the select country approach. This salary methodology inherently involves a third currency, since the notional home salary is based on a reference country.
As we would expect, the payroll location and the currency in which the package is quoted are closely linked. Host country payroll is most commonly responsible for delivering local-plus packages, with two out of three companies taking this approach. The second most common approach is a split payroll, used by 14% of companies.
Meanwhile, around 40% of companies paying home-based packages exclusively use the home payroll and 20% use the host. Just over a quarter split payment between the home and host payrolls, with the remainder taking an alternative approach.
Limiting factors affecting delivery
For 22% of companies, pay is not always delivered in accordance with the currency or currencies in which the package was quoted. Four in five of these companies cited legal requirements in certain jurisdictions to deliver employee pay in the host country currency, or exchange control regulations, as factors in this. Other common reasons for companies varying the currency of delivery to the currency of quotation are employee preference and adverse economic conditions, such as currency volatility.
Delivery practice for alternative assignment types
The trends that we have seen for the delivery of long-term assignment packages broadly apply to short-term and commuter assignments, as demonstrated by our recent surveys.
Given the brevity of the assignment type, employees on short-term assignments maintain strong links to the home country entity. It is little wonder that 70% of companies deliver their pay through the home payroll rather than through host or split payroll (13% and 12% of companies respectively) and 86% pay the base salary in the home currency. Short-term assignees are not expected to contribute any of their home salary towards their living costs on a short-term assignment. Typically, daily expenses on assignment are covered by an essentials allowance – the component of pay most commonly delivered in host currency – and a third of companies do this, likely with the intent of protecting these allowances from currency fluctuations. More than half of companies provide essentials allowances in the home currency, however, and this may be due to limited payroll capability. Around two-thirds of companies pay location and/or mobility allowances in the home currency and less than a third in the host currency. Split pay and third currency pay delivery is rare for short-term assignments, perhaps due to such complexity not being warranted for assignments only lasting for a matter of months.
Market practice for commuter assignments likewise appears to be linked to the assignment duration, as there are differences between temporary and permanent commuter arrangements. The vast majority of companies (four in five) pay basic salary to temporary commuters in home country currency and through the home payroll. For permanent commuters, the link with the home country is not quite as strong, and accordingly companies are somewhat less likely to deliver basic pay in home currency and through the home payroll (with around 60% reporting doing so). For both permanent and temporary commuters, companies are likely to deliver additional components of pay – mobility allowances, location allowances and assignment completion bonuses – through the host country payroll and host country currency.
When it comes to the method of delivery, there is a clear relationship between the salary system or assignment type in use, and whether delivery of pay is focused on an assignee’s home or assignment country. Some salary systems and assignment types promote close links to the home country, while others are geared towards creating stronger ties with the host country. When delivery is split between two countries, it follows a logical division between the elements of pay which are naturally related to the assignee’s home country and those which are assignment related. Essentially, the delivery should be established to best reflect both the assignee’s needs and company objectives.
However, for some organisations it may not be possible to have a universally consistent policy. It is important to be aware of internal limitations, such as a lack of payroll capabilities in the host location, particularly if your organisation is not yet an established presence there – as well as external factors, such as local regulations restricting currency of pay.
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ECA’s MyExpatriate Market Pay reports provide an in-depth and personalised guide with which to compare your current expatriate salary and benefits policies against 10,000 jobs across a wide range of industry groups in 130 countries around the world. The survey is open until 31 August and participants receive free country-specific benchmarking reports for each country that they submit data for.
Our National Salary Comparison white paper is a unique guide to how differences in local pay levels, tax and cost of living between countries affect the mobility management options available to employers. It is available to download free from our website. Subscribers to ECA data also have access to an interactive tool based on this report, comparing local salaries in 57 countries.