Home versus host country approach and how to deal with inflation –
What options do companies have to pay their expatriates appropriately during the foreign assignment and what influence does inflation have? The issue of inflation has always been present in different combinations of countries, but a very large number of countries have only been affected since 2022. The regular publications of the International Monetary Fund (IMF) show a disproportionate change when looking at the year 2022. Double-digit inflation can be found in many countries. This development presents global mobility managers who set up and organize assignments with a new task. “The expatriates feel this particularly clearly abroad and so the call for constant adjustments and reviews of salary determinations in companies is becoming much louder,” says Kai Mütze, Managing Director of IAC Unternehmensberatung GmbH.
Find the right compensation approach
In practice, two main remuneration approaches are used:
• Home-based approachThis approach is based on the principle that expatriates should not be worse off or better off during their posting abroad than they were in their home country before their posting. With the focus on long-term assignments that take place in the overriding interest of the company, it can be clearly stated that the home-based remuneration approach is predominantly used.
• Host-based approachThe host-based approach, on the other hand, provides for the integration of the expatriate into the salary system of the host country. This makes it clear that the previous remuneration of the employee can differ greatly from the performance during the international assignment and is set up completely differently than before.
“Unfortunately, it can also be seen that some companies are using different approaches in parallel. This makes it much more difficult to ensure equal treatment and leads to further discussions and an increased workload for the Global Mobility Managers,” says Kai Mütze.
The Balance Sheet Approach
The Balance Sheet Approach is used to put expatriates on an equal footing with the original salary determination in their home country during an international assignment. The Balance Sheet Approach can therefore be represented by both a net and a gross commitment. Both commitments follow the same pattern: the gross salary agreed in Germany before the posting serves as the basis. Hypothetical taxes and social security contributions are deducted from this, which are calculated on the basis of, or at least based on, the laws and regulations of the home country.” The calculation therefore pursues the goal that the expatriate should be treated the same as in his home country. As a result, the expenses for housing and the cost of living must be part of the consideration. The aim of the calculation is then to balance additional and also reduced costs at the country of assignment compared to the home country by means of compensation or, in the case of major negative effects, by reducing allowances. This approach has been widely accepted since the 1990s and has always been very positively received by the expatriates, as communication on this is very clear,” says Mütze.
The home-based approach therefore relates the calculations to the home country. Its complexity becomes clear on closer inspection. Influencing factors that have to be checked regularly are the price development in the sending country and at the expatriate’s place of work as well as the existing exchange rate. In the past, the low inflation rates in Germany were hardly noticeable or not noticeable to the expatriates and were therefore well accepted. Adjustments to the cost-of-living allowance (COLA) have typically been necessitated by changes in the exchange rate between the home and host country currencies and/or price changes at the host country location.
The situation has changed
The picture has changed with regard to the inflation rates in Germany and in the most important countries for expatriate assignments. For example, the inflation rates in 2022 for China – but also for other countries – are significantly below those for Germany. Expatriates who work in locations with lower but nevertheless positive inflation rates generally perceive the price increases in full on site, while the comparison of purchasing power in their home country is regularly no longer transparent to them due to their absence. “The consequence of this: there is a clear expectation on the part of the expatriate that his balance sheet approach will be adjusted,” explains Kai Mütze. In the case of assignment combinations between home countries with high inflation rates and countries of assignment with lower inflation rates, the home-based approach, assuming a largely unchanged exchange rate, causes the cost of living allowance to drop and thus a loss of income due to falling purchasing power in the country of assignment. “In this case, the human resources department must not make the mistake of thinking that simply increasing the COLA would heal the loss of purchasing power. This would completely change the use of the Balance Sheet Approach – and only unilaterally. Although she settled the case, she unilaterally undermined the remuneration strategy in her company. That must not be the solution if the home-based approach is used,” says Mütze.
In view of the current inflation situation worldwide, the question can be asked whether the host-based approach is a suitable alternative.If this approach were chosen, the expatriates would be integrated into the remuneration determination process in the host country. In this case, the salary level and the corresponding adjustments are based on the respective regulations of the country of assignment. “This approach is also difficult to implement in some combinations, for example if the pay in the country of assignment is lower than in the home country. But even with more attractive remuneration in the country of assignment, it poses immense challenges for the HR departments in the context of the subsequent reintegration,” continues Kai Mütze. “The expectation of the expatriate is then often to maintain the level achieved abroad.”
“In our opinion, the use of the home-based approach will continue to be the better option in the future. It is transparent and is generally well received by expatriates. Especially under the principle of equal treatment, this is the appropriate form of remuneration determination. However, it is very important that HR departments make this approach clear to the expatriate. A good preparation of the calculation basis, the individual parameters such as COLA and exchange rate as well as the corresponding explanation create transparency and lead to acceptance,” says Kai Mütze. IAC Unternehmensberatung GmbH is a professional full-service provider in the field of international personnel assignments. Finding remuneration and drafting contracts are part of day-to-day business. More than 400 customers trust IAC GmbH. Do you have questions? We are happy to serve you. Contact us!