(…)

This memo is intended to help determine the suitability of the host-based pay approach within your own organization by summarizing some of the key success factors and describing the assessment process.

Briefly, the term “host-based” means that employees transferred from one country to another receive local peer salaries, and pay their own income taxes on these salaries. There may or may not be plus elements such as assistance with host housing and education. The host-based approach can be appealing because of potentially lower costs and less administration than home-based balance sheet approaches. Local pay for transferees also works well for corporate cultures which wish to emphasize pay equity amongst peer employees, as well as for companies which are competing for business based on costs of prevailing local wages.

AIRINC’s Mobility Outlook Survey confirms that the majority of respondents that have host-based policies tend to use them to supplement their primary home-based balance sheet approaches. This is because the host-based approach can work well in many cases, but is not equally effective for every potential transfer. The key to success is having a decision process in place to make it clear when a host-based approach is likely to be successful, or when an alternative pay approach may be preferable. To help you make the right decisions for your own organization, we have summarized below some potential success factors along with some watch-outs which may signal further scrutiny is required.

 

Success Factors

• When transfer patterns tend to be between countries which have economic affinity (similar salaries, taxes, and living costs), mobility is enhanced because transfers are reasonably attractive to potential assignees yet do not result in large cash windfalls or reductions in net income and purchase power.
• Since host-based pay may retain few ties to home, it can be a good solution when future mobility is unlikely or when future work and career plans are indefinite or likely to continue at host.
• If there is a long-term need to build talent capability in host locations, fully localizing assignees tied to host-based pay can be an easier process than transitioning those tied to home via balance sheets.
• Since assignees are responsible for paying their own income taxes on their salaries, host-based arrangements present the least financial risk to junior to mid-level  employees whose compensation is not structured to include high levels of variable pay or equity reward.
• If assignments tend to be between countries with social security arrangements and labor agreements that smooth the path for benefits eligibility and portability (such as the European Union), this can significantly reduce the administration required to ensure continuity in health insurance, retirement, and other long-term benefits.

Watch-Outs:

• Robust global salary equivalencies are a prerequisite; not having these in place can lead to inequities and increased costs.
• A high proportion of highly compensated U.S. nationals may be a warning sign due to global taxation rules; there needs to be careful evaluation to determine whether dual tax costs will be a block to mobility for this group.
• Tying pay to host may not be the best option for strategic assignments that require significant future mobility; for example, assignments with an explicit talent-development objective or those that are part of a leadership career path may be better handled via home-based or globalist pay arrangements.
• When host destinations are economically volatile it may be difficult to convince employees to shift to local pay because of significant risks of currency and purchase power losses.

Assessment

This high-level analysis of your company’s program should give you a good sense of whether the host-pay approach may be suitable for at least some of your potential cross-border transfers. The next step in the assessment process is to pinpoint when the host-based pay approach is likely to be attractive to the potential transferee as well as costeffective for the company. Given the global diversity of wages, tax rates, and living costs, it may not be clear how to go about determining the suitability of host-based pay arrangements within your own company.

 

Businesses are demanding manageable assignment costs, and in many cases host-based pay approaches can provide a cost-effective alternative to home-based. However, host-based approaches are not always the answer, as in some cases they can discourage mobility or be costly to the company. A well-thought out policy supported by easy-to-use tools can help you make the right decisions about when and how to use host-based pay to achieve program savings without sacrificing mobility goals.