Should You Pay Your Overseas Employee a US Salary?

What Should You Pay Your International Employees
Popular Approaches to International Pay
How do Companies Determine International Employee Remuneration?
Ethical Considerations for International Remuneration Approaches
Net, Gross and RBP of Salary Averages Around the World
The Effect of Global Salary on Local Economy

As ongoing advocates for remote work and global mobility, we see a slew of opportunities and benefits from engaging with international employment in not only our own company but our client’s business as well. Hiring internationally gives you access to greater talent, often at a lower cost, and distributes your team, giving you access to multiple markets and time zones. It also has the added benefit of diversifying your team organically.

Remote work offers employees flexibility and autonomy and opens up the workforce to those who may be excluded from traditional “co-located” work opportunities due to health, family commitments, or location.

However, with the rise of these employment opportunities comes a set of new challenges. Negotiating compensation packages is a tricky process for most companies. Throw in international employees and the process grows exponentially more complicated. Instead of managing a single country’s market rate, tax requirements, and living costs, you’re juggling multiple.

In this article we unpack the different compensation methods used in the global mobility industry, make true comparisons between markets, and uncover the benefits of each approach for both the company and employee.

The Dilemma — What Should You Pay Your International Employees?

Deciding what to pay your international employees is not as straightforward as it may initially seem. When dealing with a variety of markets, there are many ethical, economic and cultural considerations to make before settling on final numbers.

Generally, companies deciding what to pay international employees will fall into two camps – those who pay a local salary and those who pay a global salary.

Popular Approaches to International Pay

We talked with Anna Michielsen, a General Manager with ECA International, a world-renowned global mobility resource to unpack the different approaches she suggests for her clients.

While ECA and many companies who offer international assignments or have expatriate workforces utilize these approaches when deploying employees overseas, they can be tweaked to fit more permanent international employment.

The Global Approach to International Pay

When employees are deployed overseas, a global, or home approach utilizes the same salary package as they would receive if they had never left.

“The goal of any calculation was that the employee shouldn’t be any better or any worse off than if he had stayed in his home country,” says Svetlana Bettiol, our head of implementation at Shield GEO who in a previous role calculated salaries for international deployments.  

A home-based approach achieves equity with the employee’s colleagues in their country of origin.

The Local Approach to International Pay

A host or local compensation approach is where a company will match its salary offer to the localized market. For example, if a company is based in the UK and is deploying an employee to Singapore, they will match the salary offer to the Singapore market – using the median salary for that role in Singapore as a guide rather than the median salary for that role in the UK.

The host-based approach achieves equity with the employee’s peers in the country where they work. According to the ECA’s National Salary Comparison, “The major advantage of a host-based salary system is that employees of different nationalities working together receive similar levels of pay to each other and to local nationals. Given the trend toward mobility between an increasingly complex combination of home and host countries, this system can also appear appealingly straightforward to implement.”

Alternative Approaches to International Pay

While local and global approaches are the most common, each case is unique and often requires a more specific plan.

The above chart showcases the different methods ECA offer as options to their clients. These options include ‘local plus’, a local approach plus benefits, and the ‘expatriate market rate’ which uses a global expatriate rate as the basis for salary rather than home or host, and ‘hybrid’ – an individualized merging of the two main approaches.

How do Companies Determine International Employee Remuneration?

According to an ECA report entitled National Salary Comparisons, companies decide on remuneration packages based on their preference or belief of where equity should lie. “Which, broadly speaking, can be achieved in three main areas: with the employee’s colleagues in their country of origin, with peers in the country where they work, and finally equity with other expatriates,” the report said.

But Anna says there are a lot of factors to consider.

“Some of it depends on who’s being moved, what are their particular skills and what seniority they are.”

For example, if a highly-skilled professional is being sent to a country lacking in this particular skill set, they may be compensated using a specialized approach, higher than local or global rates.

“Organisations will also need to take into consideration what kind of markets and countries they’re working with — are there lots of markets and countries or just a few? Do they have lots of different countries that people are going to and from or is everybody going from Australia to the Philippines?”

All of these factors will affect a company’s decision as to which approach fits their scenario best.

What are the Ethical Considerations for International Remuneration Approaches?

Ethical concerns may make a company consider a global approach. On the one hand, utilising a global payment approach seems fair. Doing the same work should garner the same payment.

But, when comparing international economies, tax requirements, and living costs — it’s not as simple as that.

“Money isn’t valuable in absolute terms,” says Tim Burgess co-founder of Shield GEO. “Its value comes in what you can do with it — and that value varies by country.”

Anna agrees, “I can convert two currencies, but if you think about this a bit more there’s a little bit more to it than that,” she says.

“It’s not about net salaries, it’s about gross salaries, and ultimately it’s about what you can buy with that salary.”

Paying a standard San Francisco wage for a regional sales manager to someone based in San Francisco and Manilla will yield vastly different measures of wealth due to differences in living conditions and tax requirements in the various cities.

When calculating salary packages for employees on international assignments, ECA doesn’t compare net or even gross salaries between markets. They prefer to take into consideration the cost of living and therefore utilize relative buying power (RBP) as a more accurate comparison method.

“If you just compare the gross salaries then you won’t have taken properly into consideration different tax regimes and buying power around the world,” Anna explains.

Net, Gross and RBP of Salary Averages Around the World

To showcase these differences, we’ve gathered average salary and cost of living data to showcase the difference between net, gross, and RBP. As you can see from the charts, taking into consideration taxes affects both the actual figures as well as the organization of data among countries. The average lawyer in the UK is paid more than the average lawyer in Australia and the US when looking at gross amounts, but when the tax is taken into consideration, the order inverts.

When we look at RBP, while differences in salaries are still significant, they are not as extreme as when looking at gross amounts. The average wage for a lawyer in the UK now sits fairly evenly with that of one in Australia.

A simple translation of a home salary into local currency would fail to understand the complexities of different tax policies, cost of living, and relative buying power in different countries.

How Can the Local Market Determine International Pay?

It may seem easier to pay an international worker the same salary as the role would typically garner in your home market without putting much thought into researching your employee’s local market. But as we’ve seen in the data above, a simple conversion doesn’t consider the context.

Here, we see how a standard San Francisco based salary for a regional sales manager is divided among living costs. Over 30% is put directly towards housing and utilities, 21.26% is put towards tax, and 6.19% towards social security. Food, transport, health, and clothing make up 23.79% with the remaining 12.84% deemed disposable income.

In comparison, this chart breaks down the costs of living for a Manila regional sales manager earning a Manila Salary. Most of the living costs are lower than San Francisco, except for food which takes up 30% of the income in Manilla. Housing and utilities make up just over 18%, 15.36% goes towards tax, and 1.24% towards social security. With these differences, a regional sales manager in Manila will have a higher disposable income at 25.22% (compared to San Francisco’s 12.84%) despite differences in their salary amounts.

To reiterate the differences between the two markets, we’ve applied the standard San Francisco wage to the living costs in Manila – simulating a global payment approach. Here we see some drastic changes to the percentages of the salary used for living costs. Housing is now down to 1.8%, food at 5.66%, and transport to 1.02%. Tax has increased to 30.3%, and disposable income now accounts for a huge 58.76%.

Clearly, these are not like-for-like comparisons even if the salary amount is technically the same.

Compensation, Benefits, and Allowances are Additional Considerations

For global mobility and often international employment, a compensation package could include more than just a salary.

On top of the benefits and allowances required by law, an employer may wish to provide additional benefits that are in line with their company values or in an attempt to equalize conditions across multiple countries.

These benefits may include a cost of living adjustment, housing or schooling allowances, additional health insurance or retirement funds, or spousal assistance to cover any loss of work for following a spouse.

“If you’re offering someone a salary but then going to pay their kids school fees that’s a very different comparison to just salary vs salary,” Anna says.

Not only does the value of a salary change between markets but adding benefits or allowances to the final salary will skew the comparison too. 

How Does Global Salary Effect the Local Economy?

Understanding the different markets and calculating an appropriate comparison isn’t the only factor involved when utilizing a local compensation approach.

This graph shows the discrepancy between a US-based salary and those across a number of professions in India and the Philippines.

Paying a US salary for an IT technician in India would mean she would earn 4.6 times more than the local salary for that job. Moreover, she would earn 2.4 times more than a local lawyer and 2.9 times more than a local doctor.

We see a similar pattern when comparing the US IT salary to salaries in the Philippines. An IT Technician being paid a US salary in the Philippines would earn 5.6 times more than her peers on a Philippines salary. She would also earn 2.3 times more than a local lawyer and 2.5 times more than a local doctor.

Not only is this approach out of the ordinary to what your employee would be used to, and expect, it also has the potential to disrupt the local economy and could see incoming generations divert away from vital roles like doctors and nurses towards higher-paying positions serving international companies.

Which Salary Approach is the Best Choice for your Company?

“In the end, [if you choose a global approach] you are paying people more than you need to and you have to think about whether that is the best use of your company’s money,” says Tim.

Using a globalized approach may not be scalable either. It could even reduce your ability to attract and retain employees in some countries.

“You’ll find your US salary is competitive in India, but maybe it isn’t competitive in Germany,” Tim says.

“Especially if you are factoring in that in the USA the employer doesn’t pay much employer social security compared to other locations.”

It’s important to note that while, one of the biggest reasons companies choose to employ internationally is to reduce costs, utilizing a localized compensation approach is not about taking advantage of people. A localized salary is one that will cover all of the living costs for your employee including housing, utilities, food, health needs, clothing, and transport. It is not the lowest payment an employee is willing to accept.

In fact, utilizing a local approach will allow you to take care of your employees appropriately while also remaining profitable.

“Would you be better off paying international employees a top 5% local salary for that role, offering great local benefits and spending the money you save on building features for your customers? Or internal infrastructure? Or philanthropy?”

 Need more information about employing in a new country? Learn more about:

 

• Hiring an Employee Overseas

• Outsourcing International Employment

• Expanding in a New Country

• Sending Employees on Assignment

 

Looking to hire an employee overseas? Get in touch.

The information in this article is subject to changes in local legislation.