Expat Salary: Expatriation Compensation Approaches
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
July 9, 2022
Expat Salary: Expatriation Compensation Approaches
Whether an overseas assignment will succeed or fail mostly depends on the quality of
the expatriation compensation employees receive while working abroad. A lucrative
compensation package will guarantee that your foreign employees feel entirely supported
financially during their assignment. They also attract the best possible candidates for the job
from within your organization or when recruiting externally. When designing a competitive
expatriate compensation package, there are several approaches that you should be well-
informed about. As each has its distinct benefits and limitations, we will share with you
our conseil fiscal about what you need to know about them in this article.
Approaches to Expatriate Compensation
A competitive expatriation compensation plan is one that an expatriate considers to be
fair while still being cost-effective for the firm. It is essential to plan these expat salary packages
in such a way that they can achieve both the organization’s mobility and personnel objectives.
Developing one, however, is difficult given that a three-year abroad assignment can cost more
than $3 million. There are several typical approaches to international compensation. Figuring
out which method works best for an organization can be one of the most challenging things to
do.
The Home-Based Approach
The home-based approach aims to match the employee’s usual living standards in their
native country, considering taxes, housing, commodities, and services. This approach divides
the employee’s basic pay into four broad categories. They are: taxes, commodities and services,
housing, and discretionary income. The home-based approach is the most popular approach to
international compensation worldwide. Almost 76% of long-term postings worldwide and 85%
of US multinational organizations follow this pay structure to compensate their expatriate
workers.
The Host-Based Approach
The host-based approach means that the organization assigns an employee to the payroll
of their host country. The organization also follows that country’s procedures, rules, and
regulations to determine the compensation and other incentives. When employing a host-
based approach, your employees will likely not earn additional allowances for their
assignments. So, this approach is the most cost-effective option for businesses that wish to save
expenses. However, even after returning to their home countries, the employees may remain
too absorbed in the compensation systems of their host countries. This strategy often faces
challenges.
The Balance Sheet Approach
The balance sheet approach protects the employees from cost disparities abroad. This
approach is considered an extension of the home-based approach and is the most popular
alternative for expat salary. As per this approach, you will need to employ the home-based
approach to calculate an employee’s compensation. Then you convert the resulting amount
into the currency of the host nation. You can use a worksheet to compare the home and host
country expenditures, in this way, the Cost of Living Adjustment (COLA) can be determined. For
instance, if renting expenses are significantly lower in the host country, you can decrease the
employee’s remuneration to a certain degree.
The Global Market Approach
The global market approach considers an international assignment to be continuous. Even
if the project is for varying lengths of time and the employee is assigned to various countries,
this approach uses only one compensation scale. Simply put, regardless of their country of
origin, the organization treats all employees according to the same scale. The global market
approach seeks to be more inclusive, and the principal benefits don’t depend on the
employee’s country of assignment. Even though companies want to make their compensation
packages more international, this approach is still only used by about 4 to 5 percent of
companies.
Host-based compensation approaches revisited
After using home-based approaches (balance sheet) for international assignees for
decades, is it time to switch to the host-based approach and simply localize mobile employees?
Budget restrictions and attempts to simplify assignee management are prompting a growing
number of companies to ponder this question. Unfortunately, as with all things mobility, the
answer is not a simple one. The traditional problems associated with host approaches have not
fully been resolved, and attempts to fix the host approach with a “local plus” model (adding
benefits to the host approach) are not always cost effective. Yet, the local approach deserves a
closer look, either as a solution for specific moves or simply to benchmark and put other
compensation approaches in perspective.
When is it used?
A host approach is about integrating the employee into the local (host-country) market
structure by paying local market rates. One-time relocation/moving costs are covered by the
company but on-going allowances and premiums are not provided – in other words, this
approach can cut expenses by reducing or eliminating unnecessary expatriate-related pay
elements. The host approach creates equity between local nationals and expatriates doing the
same or similar jobs, and simplifies administration.
The local approach can be used for moves between similar countries. It is also a common
approach for permanent moves (i.e. when the company does not offer a guarantee of
repatriation and the assignee does not maintain a link with the home country) and locally hired
foreigners. In case of a permanent relocation, companies do not want to have on-going
expatriation relocated costs and try whenever possible to provide a local package. Similarly,
companies usually try to localize assignees who have been on international assignments for 5
years more and transfer them to a local package.
However, local pay and benefits in the host location might not be competitive
internationally, which could create a significant barrier to mobility. Even if the salary structure
in the host location is competitive, tampering with the base salary can also lead to more costs
for mobile employees over the long-term. The salaries of mobile employees on host-based
approaches tend to inflate over time, as they are not likely to accept pay cuts when moving.
Working closely with talent management and understanding the long-term intentions is
therefore important when using host-based approaches.
Setting a host-based approach
In theory, the employee base salary should be fully aligned with salaries in the host
country. In reality, a number of factors have to be taken into account.
Understanding market segments
When talking about local salary what does “local” mean? Should it be the real local
market for local nationals? In some locations, the market is segmented and there are different
pay structures for locals, local employees with international experience (e.g. “returnees” who
have grown up and studied abroad and are returning to home country), and foreigners hired
locally. The specific skillsets and international experience of the returnees and locally hired
foreigners sometimes means that they can expect a higher salary than pure locals without
international experience. In some locations, such as the UAE, local nationals may have a higher
salary than foreigners and may also receive additional allowances. Again, the local salary for
locals is not always the same as the local salary for foreigners.
Beyond the low versus high paying countries debate
When making salary comparisons between countries, we often talk about “low paying”
and “high paying” countries. It can be a useful simplification for the purpose of a discussion but
this simplified view does not stand up to a deeper analysis into salary structures.
The concept of high and low paying countries would be valid if all countries were highly
egalitarian and their salary curves similar to those of the Scandinavian countries. We know that
the reality is very different: The main characteristic of emerging countries is that their salary
curves are very steep – in other words, low level employees earn very little but top level
managers have very high salaries (sometimes higher than in Europe or the US.) This is the result
of persistent social inequality and years of double-digit salary growths. The evolution of the
salary curves has multiple consequences for compensation management:
As illustrated in the chart above, entry-level and mid-level positions are less compensated
in high-growth emerging markets compared to mature markets, but for top-management
positions, salaries in emerging markets tend to exceed those in mature markets. Entry-level
positions have low base salaries in emerging markets, so to use a strict host-based
compensation approach for international assignments would be difficult. Employees would face
a real loss of income and standard of living, making it untenable to fill such positions. For mid-
level positions with moderate base salaries, using a host-based approach becomes feasible with
some adjustments. However, for top management positions, international moves to an
emerging market could significantly increase an employee’s pay versus the home country and
increase overall costs for the employer.
This disparity can make moves to emerging markets enticing for senior professionals and
highly skilled experts, but it creates cost issues for employers. The global war for talent also
means that low-cost mobile employees do not remain low cost for long when their
international experience increases and their expectations rise. It can also make repatriation
quite difficult.
More generally, the complex compensation landscape makes reasoning based on country
level difficult: assumptions about using a host compensation approach in a given country will
seldom be applicable for all job levels, all industries, and all types of employees.
The weight of salary history
Understanding what the target salary should be in the host location is important but few
employees accept a pay cut and the starting point of the discussion will often be the current
salary of the employee in the home country.
In these cases, the objective will be to determine the equivalent salary in the host location
taking into account purchasing power considerations, tax, and the local salary ranges. This will
help assess if there a gap and will inform the decision about the need for additional
compensation.
Salary
aspect
Relevance
Gross base
pay plus
employer costs
Employer costs matter for the company but are not always visible to
the assignees. They should be mentioned in package discussions as they
affect the feasibility and overall cost of using a host approach in a given
country.
Gross base
pay
The gross base salary is not always fully relevant because it includes
tax and social security amounts. It tells little about the actual purchasing
power of the assignee. It is however often the first figure that assignees
have in mind.
Net base
pay
The net base salary gives an indication of the remaining amount
after tax and social security deductions. However, it does not factor in
costs in the host locations.
Adjusted
net*
The adjusted net figures take into account the cost of living
differentials (baskets of goods and services for daily expenses) but also
housing costs. The objective is not to pay a cost-of-living and a housing
allowance like in a home-based package. It is to understand if getting a
host local salary will result in a different purchasing power as in the home
location.
Comparing the relevance of gross salary, gross salary plus employer costs, net salary
and adjusted net salary in compensation package discussions
Addressing compensation gaps
In many cases, the host market salary will not be aligned with the current salary of the
assignee. If the salary gap is too significant (outside of the company’s salary band for a given
job), the salary gap will need to be addressed.
Understanding pay progression
When setting a host salary, assessing the target host salary upon departure is not
sufficient. How will the host salary evolve over time? If the current salary of the assignee is too
low or too high, is it possible to act on the salary increases to accelerate or slow down slightly
pay progression over the next few years?
Meeting minimum requirements
A package might be viewed acceptable for someone moving from low pay environment
but still fall short of the legal requirements to get a visa or comply with employment laws &
collective agreements in the host location. Compliance with host country rules influence the
implementation of host approaches.
Use of allowances to bridge gaps
Allowances and benefits can to some extent bridge the gaps (e.g. housing allowances)
especially when the host approach is used for an assignment of a limited duration – in case of
permanent relocation, the allowance could into an undesirable ongoing cost. In some countries,
additional allowances and benefits cannot be included in the amount used to determine the
minimum salary requirements for visa and employment law. Adding allowances to the host
package is effectively turning the host approach into a kind of local plus package and deporting
from a strict host-based logic.
The short and the long-term view
A host approach can be a way to achieve pay equity with local peers but sometimes short-
term equity could lead to long-term distortions. If the employees on a host package remains
mobile during their career, the fluctuations of their base pay (usually upwards) will threaten
consistency and equity over the long term. It can lead to a category of highly paid employees
due to the accumulation of move-related pay increases.
Currency or salary fluctuations can also have an impact on assignee pay and savings over
time for time-limited assignments if the employees remain mobile or wish to return to their
home country later in their career. In the case of move on a host-based the salary is converted
once in the host currency. Subsequent currency fluctuations can increase the pay gap between
the original country and the country assignment. While in theory, no link is maintained with the
home country, assignees who eventually return home after a number of years could see
significant saving gains or losses just because of currency fluctuations.
Ultimately, the host approach remains an important part of the mobility toolbox. The rise
of the concept of pay equity might also renew discussions about host approaches. In any case,
the debate about compensation approaches is far from over. The increasing complexity of the
mobile landscape and the advent of distributed global workforces is more likely to stress the
need to rely on different compensation tools than to consecrate the triumph of one single
approach.
