As global mobility professionals will know, there are various methods of calculating expatriate pay. However, even the most robust of assignment policies may find that certain moves simply don’t work with their standard remuneration approach. An issue we regularly advise clients on, here we take a look at the common pitfalls when moving people out of low paying countries into high paying ones and consider potential solutions to the issues that it can cause.
If relative pay scales were the same around the world life would be very simple, but in reality they vary from location to location. For example, the median basic gross salary (data provided by Willis Towers Watson and converted into euros to facilitate comparison) paid to a middle manager in Switzerland is EUR 141 192, whereas the same role in Egypt would pay a gross of just EUR 25 584. Of course, respective tax schemes and relative buying power can change the picture when comparing at a gross level, but significant disparity still exists regardless. So, how can we bridge this gap to ensure a competitive package is provided that facilitates mobility? Let’s consider some remuneration options in the context of this move from Egypt to Switzerland.
Our Expatriate Salary Management Survey found that 69% of companies use the home-based approach. Under this approach, assignee remuneration is anchored to the home country and the home spendable income is adjusted for cost of living differences in the host country. Using our example, despite a significant uplift to the Egyptian home spendable by a cost of living index of over 200 (to recognise the higher cost of living in Switzerland), this method would still only leave our Egyptian assignee with a gross salary of EUR 40 718 in Switzerland, which falls over EUR 100 000 short of what a local peer in Switzerland would be earning.
So should we then look at a host-based approach? This method will often involve using a job grading system to identify the salary of a local or in some cases of an expat performing the same role as the assignee in the host location. Providing the local market rate would certainly be appealing for the assignee in this scenario, but if cost containment is a pressure, then this is probably not the best option for you. Whilst the assignee’s saving capacity would increase, they would be benefiting from a higher purchasing power than their peers on assignment from another home country which would create disparity. Furthermore, as there would no longer be a link to the home remuneration structure, repatriation back to Egypt could be challenging.
When moving staff out of low paying countries, you may wish to look at both the home- and host-based approaches, outlined above, and once you have run the respective calculations you could simply offer the higher of the two net salaries, which is known as the dual approach.
An alternative to the traditional home or host-based decision would be to consider a hybrid solution. The aim of this approach is to maintain the link to the home country but ensure that the spendable income on assignment is both sufficient and in line with host country peers. For this approach, spendable income tables are used to identify the split of the respective net salaries between living costs as opposed to housing and savings commitments. The spendable amount provided will be based on the Swiss salary (as assignment expenditure will be in Switzerland) and the housing and savings components will be based on the Egyptian salary (to cover ongoing home remittances). These components are then combined (plus any assignment allowances) to form the assignment net salary, which is then grossed up for the tax liabilities in the host country to reach the gross salary offered.
© Employment Conditions Abroad 2022
As you can see above, the hybrid option is somewhat a “middle” ground, representative of both the Egyptian and Swiss salaries. Any ongoing housing or saving commitments in Egypt will be maintained (not increased) and the purchasing power and living standards in Switzerland will be in line with that of a local peer.
In terms of which approach to go for, this really comes down to what you’re looking to achieve in terms of managing the conflict between the three labour markets; do you want to achieve equity with home peers, host peers or the expatriate workforce? This will depend not only on the reason for the move but could also be dictated by legislation, such as minimum salary requirements for the purposes of obtaining a visa.
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