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Mobility Basics – The hybrid approach

Our previous Mobility Basics blog looked at the dual approach to calculating expatriate pay, which compares the salaries calculated using both the home- and host-based approaches and pays the higher to promote mobility. This post looks at an alternative way to harness the best of both methods; known as the hybrid approach, it is used by 8% of companies who took part in ECA’s last Expatriate Salary Management Survey.

What is the hybrid approach?

The aim of the hybrid approach is to maintain the assignee’s link to their home country, while ensuring they have sufficient spendable income on assignment equal to that of their host-country peers. 

It is a modification of the home-based approach. Once again, the starting point is generally the notional or hypothetical home country gross salary, from which hypothetical home tax and social security contributions are deducted. Companies then use spendable income tables to calculate how to split the home net into housing, savings and spendable components.

In the home-based approach, the home spendable is usually protected for differences in living costs by applying a cost of living index to produce the host spendable. 

In the hybrid approach, the host spendable is instead calculated to be the spendable of local peers. There are three stages to calculating host spendables:

  1. Companies refer to their pay scales to define the gross salary that would be paid to a local individual in the host location for doing the job 

  2. Net pay is calculated for this salary by deducting hypothetical host tax and social security contributions. 

  3. To calculate the portion of the local net salary that is spendable income, companies can refer to spendable income tables available for local nationals of comparable job level, or simply calculate a percentage of local net pay.

As with the home-based approach, the housing and savings elements are added back on to the host spendable along with additional allowances to make up the net assignment salary.

The result is that employees of similar seniority assigned to work in the same location will receive equal host spendable payments but the housing and savings portions of their income will differ according to the home countries from which they’ve been assigned.

 
Hybrid approach

Variations

Basket approach

A variation of the hybrid approach is the ‘basket approach’, which uses a spendable based on the salaries of several countries rather than just that of the host.

To calculate the basket spendable, home spendables for the same job level are calculated for different nationalities (typically reflecting the company’s expatriate population), and a cost of living index applied to each. The resulting host spendables are converted into the host currency and averaged to give the final host spendable. 

This method not only ensures that expatriates working in the same host country receive the same spendable but that the spendable reflects the living standards of assignees from all the countries in the basket.

The example below shows how a spendable based on a basket of five countries could be calculated for a move from Romania to Central London, based on average salaries paid for a job grade of 54 ECA points.

Romania to Central London
 
Gross
Net
Home spendable
Index
Exchange rate
Host
Spendable (GBP)
France
50 652
34 142
22 351
118.4
EUR 1 = GBP 0.8533
22 581
Germany
65 636
36 768
22 706
121.9
EUR 1 = GBP 0.8533
23 618
Netherlands
56 424
37 121
22 583
122.7
EUR 1 = GBP 0.8533
 23 644
UK
40 000
30 480
17 470
100
GBP 1 = GBP 1
17 470
USA
82 110
62 162
29 389
129.8
USD 1 = GBP 0.7577
28 904
Average spendable
 
 
 
 
 
23 243
 

Safety net

Another variation is to use the hybrid approach as a ‘safety net’ when the home-based approach does not produce a sufficiently high assignment salary, which can be particularly useful when assigning employees from countries with a relatively low local salary structure. 

Companies compare the local peer spendable with the cost-of-living-adjusted host spendable as calculated using the home-based approach. If the local peer spendable is lower than that produced using the home-based system, then a salary based on the hybrid approach would be unattractive and the home-based system should be applied as usual. If, however, the local peer spendable is the higher of the two, then the hybrid system is applied. 

This approach ensures that the assignee’s living standards would be not be lower than that of their peers in the host location, but could be higher if the home-based approach results in a more generous host spendable amount. 

Why use the hybrid approach?

Cost saving

For moves from a low-salary to high-salary country where the home-based approach does not provide sufficient compensation, this system may be a more cost-effective way of raising the salary to an appropriate level than the host-based approach.

Easier re-integration

The host-based approach can make repatriation unattractive if the employee would be returning to a lower-salary home country. As the housing and savings element and assignment allowances are calculated as they would be using the home-based approach, the hybrid approach maintains the link to the compensation structure in the home country. In financial terms, this may facilitate the transition back to the home country.

Fairness

Applying a local spendable ensures that all peers receive the same host spendable, and therefore standard of living, regardless of country of origin. If a basket approach is used then the standard of living will also reflect that of all nationalities in the basket, whichever host country they are working in.

Promotes mobility

The assignee’s living standard should be sufficient, regardless of which location they are assigned to. This helps to prevent “good” and “bad” postings emerging in companies that operate in a broad range of countries.

When should you use the hybrid approach?

From low-salary to high-salary countries

When moving assignees from low- to high-salary countries, the host spendable calculated using the home-based approach may not be sufficient to support the assignee’s expenditure in the assignment location. This can also be true for moves from higher-salary countries with high levels of taxation, meaning that the build-up is starting from a low base. Even applying a very high cost of living index might not get the host spendable anywhere near local peers’ spendable levels.

Paying a host-based salary is one solution, however the host-based system may make repatriation challenging as discussed above. Using the hybrid approach combines the best parts of each system – it brings the assignee’s purchasing power level with that of a local peer, while still linking discretionary income to the home country.

Fixed-term assignments

As with the home-based approach, the link with the home country salary structure makes the hybrid approach more suitable for assignments where the employee will return home than for permanent transfers or global nomads who move from one country to the next without having a designated home country.

To achieve equity with other assignees

Unlike the home-based approach, assignees from different countries receive the same spendable amount in the host country, although their levels of total pay will differ.

Summary of the hybrid approach

By combining aspects of the home-and host-based approaches, the hybrid approach can be an ideal solution for some assignments, particularly ones where the assignee is coming from a low-salary country and relocating to a high-salary one. It is, however, complex and not appropriate for all moves; whether or not it is the right choice for your organisation depends on the mobility you need to achieve and the demographics of your assignee population.

Advantages Disadvantages
Maintains some link to home country compensation structure - easier re-integration Link to home country compensation may not be sufficient to encourage repatriation
Equity of living standards with host-country peers Not appropriate for moves from high-salary to low-salary countries
Can promote mobility from low-salary to high-salary countries Dependency on third-party data (spendable tables, hypothetical tax etc.)
Can be cost-effective in some cases Complex to administer and difficult to explain to assignees

 

  FIND OUT MORE

ECA’s Build-up Calculator enables you to calculate home-based salary calculations quickly and accurately using ECA’s latest data, while our Net-to-Net Calculator quickly compares whether an individual's spending power would be maintained if they were paid a local salary on assignment. Individual calculations are also available on demand through our Consultancy & Advisory service. For more information or if you need advice on expatriate pay models, please get in touch!

  Please contact us to speak to a member of our team directly.

 

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