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 software de rrhh unhappy expatriates. Once an organisation 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 organisation’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 organisation’s expatriate pay policy.
Most large global organisations 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 organisations 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 equalise 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 organisation 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.