eddy's Blog

The remuneration of expatriates often tends to be a rushed last minute decision due to urgent operational requirements. The resulting implications often only arise after the expatriate arrives in the host country, and when the assignment comes to an end. For example, the post assignment position back in the home country pays less than the expatriate earned on assignment.

Inconsistent treatment of expatriates quickly leads to unhappy expatriates. Once an organization has more than 1 or 2 expatriates in the field it becomes vital to have a defendable expatriate pay philosophy in place. This philosophy should clearly convey the organization's remuneration principles regarding expatriate assignments. An expatriate assignment pay philosophy is intended to provide guidance in the consistent and equitable treatment of all expatriates and forms the basis of the organization's expatriate pay policy.

Most large global organizations have over time established a clear policy for remunerating expatriates. This is often a legacy policy, where past practice has become policy. However expatriate pay is a complex area of remuneration with complex issues such as volatile exchange rates, weak and strong currencies, constantly changing differences in cost of living between countries, different tax regimes, as well as the reality that there are attractive and not so attractive countries to work and live in. This is an area where a clear philosophy and an aligned practical policy are required to ensure attraction, fairness, equity, motivation and retention.

Firstly let's deal with what makes an employee an expatriate. In my view an expatriate is a person working in a foreign country, where they are not permanently resident, on an assignment of typically not more than 3-5 years but is a citizen from another country. There are as many different expatriate pay practices as there are organizations employing expatriates. However we can identify at least four broad approaches to expatriate pay that has emerged as the dominant philosophies underlying expatriate pay.

Salary Build-Up (SBU)

The Salary Build-Up approach uses the current market related home salary as the base for calculating the expatriate package. Home in this case is the country where the employee permanently resides or is a citizen. The purpose of the build-up approach is to maintain internal equity between countries and to equalize the impact of differences between country tax rates. This ensures that expatriates neither lose nor gain as a result of tax treatment in the host country.

The Salary Build-Up approach typically involves deducting hypothetical tax in the home country, and builds on top of the home salary with an international premium (to compensate for hardship experienced), cost living index and the exchange rate to calculate a total net (i.e. after tax) assignment package.

The net assignment package is then "grossed up" in the host country for local tax and other statutory and non-statutory deductions to ensure the net pay assignment package is paid to the expatriate.

Salary Purchasing Power Parity (SPPP)

The Salary Purchasing Power Parity approach uses the principle of putting all expatriates within the organization on an equal footing regardless of nationality and geographical location. The purpose of the SPPP approach is to ensure parity in the level of the purchasing power of the salary of expatriates doing the same job at the same level in different parts of the world, taking hardship, cost of living, and exchange rate differences into account.

This approach is typically used by global organizations that have a large number of expatriates, who move from one international assignment to another and compete globally for skills. Organizations using the SPPP approach typically establish a single global pay scale which is often by default that of the global headquarters country. The expatriates salary is calculated by adding calculated additional amounts for the hardship, cost of living, and exchange rate differential between the global headquarters (home) and the host country.

The assignment package is then taxed in the host country and other statutory and non-statutory deductions made to arrive at the net pay assignment package paid to the expatriate.

Cost of Living Allowance (COLA)

The Cost of Living Allowance approach uses the principle of retaining the expatriates home salary and paying an additional separate allowance, primarily for cost of living, but also for hardship based on the differences between the home location and the host location. The purpose of the COLA is to ensure parity in the level of the purchasing power of expatriates doing the same job at the same level in different parts of the world, taking hardship, cost of living, and exchange rate differences into account by paying a cost of allowance to compensate for the differences. At the end of the assignment the COLA falls away.

This approach is typically used by global international organizations that have a large number of expatriates, who move from one international assignment to another and compete globally for skills. Organizations using the COLA approach typically have country level pay scales. The expatriates COLA is calculated by adding calculated additional amounts for the hardship, cost of living, and exchange rate differential between the home country and the host country.

The assignment package is then taxed in the host country and other statutory and non-statutory deductions made to arrive at the net pay assignment package paid to the expatriate.

Local Market (LM)

The Local Market approach uses the principle of applying the local (i.e. host country) expatriate market pay rates. In many organizations the policy is to use the better of the Build-Up or the Local Market approaches, to ensure that the assignment package is equitable and competitive in the host market.

Due to the need for market data, the Local Market approach is typically only used where a strong local and / or expatriate market exists in the host country, and reliable salary surveys exist that accurately report the level of market salary for different positions. For example, take an organization sending an expatriate from an economically poor, relatively low salary market country, to a city such as New York. It is likely that having used the home base salary as the basis of the calculation, that the resulting total assignment package will be significantly lower than the New York Salary Market. This would occur even after adding an international premium (to compensate for hardship experienced), and a cost living amount (to compensate for the higher cost of living in New York) as well as applying the exchange rate. The reason is that the market level of home base salary in an economically poor country is so much lower than the equivalent market salary in New York.

The Local Market approach is typically used in high economic growth and high cost of living countries where demand for skills is high and there are a large number of expatriates comprising many nationalities such as the United Arab Emirates, Hong Kong or Singapore.

In conclusion it is important to ask questions about your current expatriate pay philosophy. Does your current expatriate pay philosophy drive the desired behavior? Is the current policy and practice aligned to organizational objectives? Does the current policy work for or against the organization achieving its global objectives?

I recommend a regular review of organizational expatriate pay philosophy in light of what the organization seeks to achieve and where it operates geographically, whilst ensuring integration with the other pay related strategies of the organization.

The biggest secret I have found to moving is to stay calm, my stomach always used to churn every time we would say: "Let's look at moving to London, Perth, Colorado...." I would have this rush in the pit of my stomach and wonder how we were going to cope with the challenge.

Now, I take it one step at a time. What do we do first, what do we need to know before we make the decision, how does the family feel about a new culture, different schools, a new home and most importantly new friends.

So, where do we start? Usually with the most important questions, why are we moving and do we really want to change from our comfort zone, once you have been able to answer these questions and you have more positives about leaving than staying (and the answer to this could be as simple as being offered a job in a new country), then you need to start researching the place you are moving to.

Questions start surfacing such as will we fit in and be happy in a new country, what is the education like, medical facilities, culture, politics, housing, work conditions, transport and entertainment? How many expats like ourselves will be living there, will our life be normal or will we have to adjust too extremely, and are we happy to do this?

This is where I start searching the internet. Wikipedia is a great site to get an overall overview on any country in the world and it will cover all the basic factual information for you, including geographical location, population, historical background, religion, culture, education, economic situation and political info.

On getting a basic understanding of a country, I would then start looking at government sites and gathering information about the ease of moving to this country. What is required from a governmental legal perspective, including visa's, whether a spouse can work on entry, how long a spouse needs to wait before starting to work, what legal rights do you have in the country, can you take your pets with and how does this work, what furniture can you take with (some countries do not allow wooden furniture into a country if it has not been treated) these government sites will cover any and all questions of this nature for you.

Finally and probably more importantly are the forums and blogs you can find, where expats can inform you of what to expect and you can ask any question and expect an honest answer. These sites can come across with mixed emotions from people who are enjoying the move and loving the country to those who hate every minute of their stay. The relevant question to ask here is why....why are they enjoying or hating it and then make your own decision?

The above would be the questions that the spouse that stays at home and cares for the children, however the bread winner wants a different question answered. They want to know what they should be earning in the new country and this is where an international cost of living salary calculator like xpatulator can be relevant to you. Xpatulator gives you the answers you are looking for dependant on the questions you answer in the Cost of Living Calculator. It will determine what your salary in the new country should be to maintain your standard of living.

Why, you may ask? Because $100 000 may sound like a fabulous salary, however if your cost of living in the country you are moving too is extremely high, it may not cover your costs on a monthly basis. With the calculator, you can determine whether or not you will be able to afford to live in the new country. The calculator will work out the salary you should be earning if you have to cover all costs, or if your company will cover some of those costs for you. They also cover the Negative Cost of Living and Negative Hardship. What are these you ask with horror? Negative Cost of Living refers to a location that has a lower cost of living than the country you are living in and selecting to use this will result in a proportional decrease in the salary required e.g. if you had to move from London to Zimbabwe you will find the cost of living will be lower (negative difference). Negative Hardship refers to less hardship in the new location e.g. if you had to move from Zimbabwe to London you will find that your quality of living will be easier (negative difference).

So before you disregard the importance of what you need to earn when moving to a new country, take all aspects into account. At the end of the day what you will earn, will determine the school, home, medical facilities and entertainment you will be able to afford. So the secret to moving from one country to another, may be your emotional stability and happiness in the new location, however this is often determined by how much money is sitting in your bank account.