Wednesday, February 10, 2016

Home-Based Pay

The home-based pay approach aims to ensure that the value of the salary of expatriates is the same as in their home country. The home-base salary may be a notional one for long-term assignments (ie the salary which it is assumed would be paid to expatriates were they employed in a job of equivalent level at the parent company). For shorter-term assignments it may be the actual salary of the individual. The notional or actual home-base salary is used as the foundation upon which the total remuneration package is built. This is sometimes called the ‘build-up’ or ‘balance sheet’ approach.


The salary ‘build-up’ starts with the actual or notional home-base salary. To it is added a cost of living adjustment, which is applied to ‘spendable income’ – the portion of salary that would be used at home for everyday living. It usually excludes income tax, social security, pensions and insurance and can exclude discretionary expenditure on major purchases or holidays on the grounds that these do not constitute day-to-day living expenses.


The expatriate’s salary would then consist of the actual or notional home-base salary plus the cost of living adjustment. In addition, it may be necessary to adjust salaries to take account of the host country’s tax regime in order to achieve tax equalization. Moves of less than a year that might give rise to double taxation require particular attention.


Host-based Pay


The host-based pay approach provides expatriates with salaries and benefits such as company cars and holidays that are in line with those given to nationals of the host country in similar jobs. This method ensures equity between expatriates and host country nationals. It is adopted by companies using the so-called ‘market rate’ system, which ensures that the salaries of expatriates match the market levels of pay in the host country.


Companies using the host-based approach commonly pay additional allowances such as school fees, accommodation and medical insurance. They may also fund long-term benefits like social security, life assurance and pensions from home.


The host-based method is certainly equitable from the viewpoint of local nationals, and it can be less expensive than home-based pay. But it may be much less attractive as an inducement for employees to work abroad, especially in unpleasant locations, and it can be difficult to collect market rate data locally to provide a basis for setting pay levels.

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