Expat pay management

Competitive salaries are crucial for ensuring the attraction and retention of top talent. When it comes to overseas assignments, HR needs to keep an overview of local salary trends and ensure that its own remuneration (and relocation) packages are benchmarked fairly

Expatriate packages usually consist of a cash salary, benefits and tax. All three components need to be added together to get an accurate idea of the overall cost to companies, says Lee Quane, Regional Director – Asia, ECA International.

According to ECA’s MyExpatriate Market Pay report, the average package for expatriate middle managers in Singapore is approximately US$257,000 per year. This puts Singapore as the sixth most expensive location in the region for expatriate packages, just below Hong Kong which ranks fifth. However, the cost of packages increased at a faster pace in Singapore than Hong Kong last year – largely due to the level of benefits required here.

“While the most common approach to devising expatriate salary packages is to take a notional home salary and add to it in Singapore, we see a trend towards basing expatriate packages on local market terms, rather than home pay levels, and then providing some additional benefits such as assistance with children’s schooling costs,” says Quane.

There are a number of reasons for this, he notes. Firstly, there is the advantage of the package being administratively less complex. It is also a way of increasing parity between local and expatriate employees in the host country.

Another driver of this trend is the employment of expatriate staff on a permanent “one way” basis, rather than for a fixed length assignment.

“It’s also worth pointing out that although this system is sometimes perceived to be cheaper, this is often not the case,” Quane explains.

Elsewhere in the Asia-Pacific region, Japan, where both living costs and tax levels are high, remains home to the highest expatriate packages. On average, a package for an expatriate middle manager there is worth US$379,000. Australia is in second place, followed by India.

Mainland China which has the region’s fourth highest expatriate packages has overtaken Hong Kong – largely due to the value of the benefits element of expatriate packages having increased in China over the past year.

“Companies need to factor in the tax cost of the assignment,” says Quane. For example, this element of the package is much higher in China than both Hong Kong and Singapore.

“In fact, when comparing expat pay within the region, it is in Singapore that tax makes up the smallest part of the expat pay package,” he adds.

Some of the lowest expatriate salary packages in the region are provided in Malaysia.

Benchmarking expat remuneration packages

Companies need to ensure that they are consistent, comparing “like with like”, says Quane. “They should also be aware that the same job title in different companies and countries may reflect very different responsibilities.”

A country manager of a small satellite office of a mid-sized organisation, for example, is unlikely to be comparable to the country manager of a large multinational with a significant presence in the country.

“Using a job evaluation system is the best way to ensure a degree of comparability, and is crucial to ensure the accuracy of any benchmark, even more so if you are managing assignees from a wide range of countries and industries,” Quane explains.

“It’s important too to look at each element of the package,” he adds. “It’s not just about the salary but also about the benefits which can be an extremely valuable part of an overall package to an assignee. In some high cost locations, they can even be worth more than the salary.”

Flight Centre Travel Group doesn’t offer expatriate remuneration packages. “In the Singapore market when we first set up the company, we offered a few extra bonuses, such as housing, but now we offer a local lifted salary for all employees,” says Natalie Gilroy, Peopleworks Leader Singapore, Flight Centre Travel Group Singapore.

The reason behind this is that the international travel company aims to attract a good ratio of locals and expatriates and doesn’t want to encourage a “them and us” culture.

“We want everyone to be equal and salaries to be benchmarked fairly across the company,” says Gilroy. “This helps to foster an open organisation, it builds a better community and ensures that everyone faces the same kinds of struggles – we are all in it together.”

Competitive salaries are crucial for ensuring the attraction and retention of top talent at the world’s largest courier company, Deutsche Post DHL. “When it comes to overseas assignments, local HR continues to provide inputs on local remuneration trends and ensure that its own remuneration (and relocation) packages are benchmarked fairly,” says A. Mateen, Senior Vice President – HR, DHL Express Asia-Pacific.

Policies and guidelines governing expatriate management at the company are managed globally and executed locally.

“Benchmark data across all countries are collated and managed centrally, ensuring that expatriate remuneration packages remain competitive for the different markets in which we operate,” Mateen explains.

Expat benefits versus costs

Benefits typically provided within an expatriate package include: accommodation, international schools, utilities, cars, and medical insurance.

“Club membership has become rarer in recent years but is more likely to be included in more difficult or isolated locations,” says Quane.

These can have a very big impact on the overall cost to the company. “In Singapore and Hong Kong, for example, the most expensive part of the package is typically the benefits element,” he explains.

Expatriate benefits including cost of living allowances, hardship allowances, home leave and healthcare, can indeed increase assignment costs significantly.

“Typically, the provision for these benefits is made in a company’s relocation policy and depends upon individual circumstances, as well as the assignment location,” says Kenneth Kwek, Managing Director – Asia, Cartus.

“According to Cartus’ latest Global Mobility Policy & Practices survey, country and region-specific policies are now being used by 54% of survey respondents, indicating a need to structure benefits away from a ‘one-size-fits-all global policy’ to more targeted provision by region or by country,” he adds.

While expatriate benefits do increase the costs to the organisation, this group of staff are hired to supplement and develop local talent, says Mateen. “During the term of the expatriate assignment, it is the expectation that there will be a transfer of knowledge and skills, a building of local capabilities, and identification of local successors for the role being covered by the expatriate.”

Expat versus local salary

A consequence of fast economic growth and generally higher inflation in developing countries is that local salaries are increasing more rapidly than expatriate salaries.

This is particularly evident in South America and in many developing Asian economies, such as China, says Quane. “The steep rises in Chinese local salaries mean they are now fast approaching expatriate levels, making a host-based salary system (rather than the home-based approach) more viable for companies with assignees there.”

Meanwhile, in many developed countries, particularly those in Europe, local salaries have risen only moderately due to low inflation and restricted economic growth, and the same is also true of expatriate salaries.

According to Cartus’ latest Global Mobility Policy & Practices survey, patterns of relocation are changing. Over 170 survey respondents reported that between 2012 and 2014, the number of permanent transfers and localised moves increased in their organisations.

“Indeed 60% of respondents indicated that permanent transfers (a one-way relocation from one country to another for an indefinite period of time) had risen and 39% reported that localised moves (integration of an employee into the compensation and benefits system of the host country) had also increased,” says Kwek. “This is indicative of companies’ search for lower cost approaches to relocation that still support flexible, mobile workforces.”

Over time, if an expatriate remains in the same location for, say, five years, he or she will be localised with reduced benefits spread over a period of about three to five years, says Mateen. “The expectation is that the expatriate will adapt to the local environment and living conditions after an initial settling in period.”

For companies such as Flight Centre, where staff are not offered an expatriate package or a higher salary, there may be other challenges. For instance, once those employees start looking at international schools, that can mean half of the salary package of a millennial who has young children.

“It can be a struggle to retain these employees once their children hit the age of five years old,” says Gilroy. “How can we make these packages fair so that can also support to educate families children so that the employee doesn’t leave the company? This is a challenge that as a company we are trying to get answers to.”

Tips to benchmark and manage expatriate pay

1 Identify and understand the objectives behind an expat pay policy.

For example, do you use a home-based salary approach so that a link is maintained between your expatriate and their home country, or do you want your employee’s salary to be on a par with expatriate peers in the host country – so that there is a smaller chance of them being poached by a competitor?

Do you prefer to ensure your expatriate’s salary is in line with local employee peers? Is the assignment to provide a young executive with international experience? Or is the assignee required to fill a skills gap at short notice?

“Companies use international assignments for a number of reasons,” says Lee Quane, Regional Director – Asia, ECA International. “Having clarity on this will underpin what you benchmark against in order to achieve the assignment’s objectives.”

2 Keep an eye on what’s happening in the local market.

Doing so enables companies to see how local pay compares with their assignees’ and assess whether the current remuneration approach continues to meet and reinforce business objectives.

“As mentioned above, this is a burgeoning issue for companies sending employees into and out of emerging markets, where rapid economic growth combined with often high inflation is causing substantial wage rises,” says Quane. “In a growing number of developing economies local pay has overtaken the expatriate market average.”

3 Be aware that relative salary levels between countries can vary significantly by seniority.

While at the junior level, local salaries are highest in the traditional high-salary locations such as Switzerland or the US, this is not so for more senior job levels.

For example, in a number of South American economies, including Chile and Brazil, local salaries at senior levels can be higher than expatriate salaries and higher than those with similar roles in Europe or North America.

The limited number of qualified people for the top jobs in these locations means that those who do have the skills are in a strong position to command very high salaries.

“Clearly, this has to be considered when devising packages to motivate talent into or out of these locations,” says Quane. “As with any pay management system, you need to have a policy, or policies, that are consistent, equitable, transparent and clearly communicated to your staff.”

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Sandeep Aggarwal, Chief Financial Officer of Aon-Hewitt Asia-Pacific, shares his thoughts on the Workday finance and HR analytics platform. He says the cloud-based system is intuitive and easy-to-use, but still provides powerful insights across the functions.

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