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Correct expat salary structure could cut costs

Published on Friday, 23 Aug 2013
Lee Quane

Globalisation has created many benefits for companies, especially by allowing them to tap into a worldwide talent pool. The global mobility of expatriate workers, however, also presents a variety of challenges in terms of compensation packages.

One particular challenge employers face when setting expatriate salary levels is whether to align them with the pay scales of the home jurisdiction or the jurisdiction where the expatriate is living and working.

Lee Quane, Asia regional director at HR data and solutions firm ECA International, says the home-based salary structure means that an expatriate remains on their home country payroll and receives a base salary and incentive pay. Assignment allowances, meanwhile, are delivered through either the home or host country payroll.

On the other hand, the host-based salary structure means that an expatriate transfers to the host country payroll and receives base and incentive pay equivalent to the host country’s remuneration practices and benchmarks.

“There are pros and cons for both strategies,” Quane says. For example, if an expatriate from the US or Europe working in Hong Kong is on a short-term assignment, it may be beneficial for both the employer and employee to maintain the home-based payment system.

However, for expatriate employees on open-ended contracts, Quane feels there can be advantages in adopting the host-payment method. One of these is that finance departments do not have to make salary adjustments for tax and cost-of-living indexes linked to home-country costs. Moreover, locally employed staff and expatriate employees from different countries can be remunerated on the same salary scale, reducing the likelihood of friction due to salary differentials.

Quane adds that devising attractive but cost-effective expatriate pay packages is becoming increasingly complex as the number and profile of expatriating Asian locations grows.

ECA’s MyExpatriate Market Pay Survey shows that companies using the home-based salary system tend to provide the highest level of financial assistance for host-country accommodation, paying around 18 per cent above the host-based overall average. The survey also shows that expatriates in Hong Kong receive the fourth-highest compensation packages in Asia, behind Japan, India and South Korea. The average overall package for expatriate middle managers in Asia stands at US$231,000 per year.

A study by The International Journal of Human Resource Management revealed that even when local employees hold similar jobs and possess similar qualifications to their expatriate colleagues, they are frequently paid less as an overall package. The study also raises the issue of salary differential, which could lead to perceived unfairness and have a negative effect on workplace harmony.

While the cash element of a salary package is important, according to ECA’s survey, benefits can make up a significant proportion of a typical expatriate package. Significantly, a high base salary is not necessarily an indicator of a high package overall and vice-versa. For example, the high costs of housing and schooling in Hong Kong means that the overall package for an employee in a middle manager position could more than triple once accommodation and education benefits are added.

“The two payment options are not necessarily about cost savings – it is more about equalising payment systems,” Quane says.

He adds that host remuneration is particularly noticeable in the banking and finance sector. In the aftermath of the global financial crisis, when many international banks stripped back their Hong Kong operations or laid off staff, a large number of expatriates decided to stay in Hong Kong. They joined hedge fund and financial firms, usually on local terms.

Marc Burrage, regional director of Hays in Hong Kong, also notes that the host-based salary system can offer a potentially cost-effective alternative to the traditional home-based system. However, he also says that while the host-based approach can work to reduce costs in certain cases, it is not always a practical approach for assignments.

“Understanding the advantages and disadvantages of using host-based packages is the key to successfully implementing this alternative method of expatriate remuneration,” he says. For example, the host or local approach can be a cost-effective alternative to the traditional home-based structure because of the leaner and less-costly benefits package.

Of the various types of host-based salary systems used by multinational companies, Burrage says the “local-plus” approach is the one that tends to attract the most interest because of its flexibility. This is based on a salary derived from local pay levels, supplemented by additional expatriate benefits and allowances.

Given Hong Kong’s high rental costs, he adds, companies using the host-based system provide a markedly lower level of financial assistance. He adds while the host salary system is expanding in Hong Kong, it has yet to take hold on the mainland, where salaries still lag. “With rapid economic growth causing substantial wage rises and improved living standards, I think we are likely to see the situation change,” he says.

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