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Mobility Basics – The home-based approach

Having looked at the host-based approach to calculating salaries for globally mobile staff in a previous post, we now turn our attention to the principles behind the more-commonly applied home-based approach. Also known as the Build-up or Balance Sheet, over two-thirds of companies responding to our Expatriate Salary Management Survey use this approach as their primary method for calculating assignee pay.  

What is the home-based approach?

The aim of the home-based approach is to maintain assignees’ home country purchasing power, so they are no better or worse off while on assignment in the host country than if they had stayed at home.

Build up approach

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 need to determine what proportion of the resulting home net salary to protect for differences in the cost of living between the assignee’s home and host location. Most companies base this proportion on spendable income tables which are derived from government statistics and take into consideration the assignee’s home country, salary and family size. 

Based on the spendable tables, the home net salary is split into three elements:

  • Housing: average household expenditure on housing costs, including mortgage payments, property taxes and charges, repairs and maintenance, expenses for moving house, insurance and rent.
  • Savings: the amount a household is typically able to save each year from the given salary.
  • Spendable: the total annual day-to-day expenditure on items such as food, clothing, motoring, furnishings, holidays etc. 

The spendable element is usually protected for differences in living costs by applying a cost of living index. ECA publishes three types of index that take different consumption patterns and price levels into account to give companies the flexibility to use different assumptions within their calculations. The type of index chosen depends on the company’s philosophy; increasingly companies are using indices which reflect shopping with equal cost-effectiveness in both the home and host locations, whereas previously it was almost universal to assume employees shop less cost-effectively on assignment than at home.

Percentage of companies paying additional allowances in a home based systemWhen the home spendable has been adjusted by the cost of living index, the new amount is called the host spendable, which can also be expressed as the home spendable plus COLA (Cost of Living Adjustment). This is the starting point from which the assignment package in the host country is built up. 

The housing and savings elements are added back on to the host spendable along with additional assignment-related allowances. A basic mobility (or “expatriate”) allowance of (most commonly) 10% of the home gross salary is added by 62% of companies at this point. In addition, 78% of companies apply a hardship or location allowance system, typically adding an allowance of up to 30% of the home gross salary here. These elements together make up the net assignment salary, to which the value of benefits-in-kind are added. The estimated host taxes and social security contributions due on the total package are added to arrive at the assignment gross salary.

 

Why use the home-based approach?

Easier re-integration

The home-based approach maintains the link to the compensation structure in the home country, making it easier for assignees to be re-integrated from a monetary perspective when they return home.

Fairness

Applying the cost of living and tax differential ensures that assignees earn no more or less at the net level than they would have at home. Additionally, all employees from the same home country are treated the same way on assignment.

Promotes mobility 

The assignee does not suffer financially, 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 home-based approach?

Between any two countries

The methodology of maintaining the home country purchasing power means that the home-based approach can essentially be used between any two countries. However, for moves from countries with very low pay levels to high-salary countries, the resulting salary level may be too low to provide a suitable standard of living or even to meet immigration requirements; a top-up may be needed.

This is a growing issue, as more and more companies are now expatriating out of developing countries with low salaries. That said, companies might find that expatriation at high seniority levels from the same countries results in assignment salaries much higher than those of employees in the host, due to the shortage of talent at the highest levels in some developing countries.

To meet different assignment objectives

The level of allowances provided within the calculation can be varied (e.g. choice of cost of living index, provision or not of mobility allowance), meaning the home-based approach can easily be adapted to suit different purposes, for example career development assignments may require lower levels of incentivisation than assignments to fill a skills gap.

Fixed-term assignments

As the home-based approach maintains the link with the home country salary structure, it is 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 home-country peers

Application of the home-based approach ensures that all assignees from the same home country are treated the same. However, it can lead to disparity with expatriate peers in the host country, as it produces different pay levels depending on the assignee’s home country. The assignment pay may not fit in with the local salary structure either, meaning further disparities when comparing to local staff. 

Summary of the home-based approach

By providing a means of calculating fair pay for an assignment between almost any two countries, it is no surprise that the home-based approach continues to the be the most widely used method of remunerating expatriates.  As with any pay system, whether or not it is the right choice for your organisation depends on the patterns of mobility required and the demographics of your assignee population. 

Advantages
Disadvantages
Maintains link to home country compensation structure - easier re-integration
No tie to the local national salary structure
Treats everybody from one country the same way
Generates different pay levels among peers in the host location
Home country purchasing power protected
Complex administration
Assignee earns no less at net level than he or she would have at home
Dependency on third-party data (cost of living, hypothetical tax etc.)
Promotes mobility - assignee does not suffer financially regardless of assignment location
Complexity grows with the number of countries

ECA’s Build-up Calculator enables you to calculate home-based salary calculations quickly and accurately using ECA’s latest data. Individual calculations are also available on-demand through our Consultancy & Advisory service.  For more information or if you need help understanding the different approaches to assignee pay, please get in touch

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