Mercer Expatriate Compensation Introduction

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Mercer Expatriate Compensation Introduction

Introduction
Surveys show that the "home country," or "balance sheet" approach, remains the most used approach to
calculating expatriate compensation. One reason is that its basic principle, equalisation of the home country net
salary, works well. However, to work, such an approach implies that the home country compensation structure be
sufficiently high (such as in the United States, where the approach first originated).
The most common method used to calculate expatriate packages remains the Home or Parent Company
Balance Sheet approach. According to Mercer's 2003 International Assignments Survey, two-thirds of companies
use a home balance sheet approach.
Mercer is home to a wide range of information products, including Cost-of-Living, Tax, Quality-of-Living and
Compensation reports, and has a strong expertise in international assignment practices. This enables us to
develop fair and competitive expatriate compensation packages for our clients' expatriates.
The Mercer Balance Sheet Calculation process, both the Web automated tool and the calculation methodology,
allows you to calculate, in a systematic, transparent and easy way, your expatriate compensation package. The
calculation takes into consideration tax constraints in the home and host country, as well as cost of living, housing
and quality of living differentials.
The calculation process uses Mercer's standard format, but can be easily adapted to the policies of our clients who
use a balance sheet type of approach.
Mercer's web tool, the Expatriate Compensation Calculator included in Mercer Global HR Monitor, allows you to
run through all the steps of the calculation process, including: Gross to Net calculation of the home country
reference salary, calculation of cost of living and housing allowances, determination of mobility and hardship
allowances as well as other user's defined allowances. Moreover, the Expatriate Compensation Calculator not only
produces a compensation package; it details each step of the process, enabling clients to make changes or
adjustments as they desire.

Methodology
1. The Gross home country reference salary
The starting point of a balance sheet calculation is the Gross home country or reference salary. It represents
the annual base salary of the employee according to the home country companys compensation philosophy. If
the foreign assignment includes a promotion, the Gross home country pay or reference salary should reflect the
new position level. Bonuses and other variable compensation should not be included.
Hypothetical social security and personal income tax deductions In a balance sheet approach, also
sometimes called a net to net approach, the intent is to guarantee the equivalent Net pay to the employee
abroad as he or she enjoys at home. To enable equalisation of the net income, we first have to deduct the
employees hypothetical social security and tax amounts. As we are not aware of the private elements constituting
the taxable income of the employee, income tax and social security deductions are based on basic assumptions,
taking into consideration the Gross home country pay and the family status of the employee. The income tax and
social security charges applied are derived from Mercers Personal Tax reports.
If the employee is coming from a country that provides family allowances, these should be added.

2. The Net home country pay

We reach the Net home country pay by subtracting the hypothetical social security and personal income taxes
and adding the family allowances to the Gross home country pay.
In order to be able to calculate adequate cost of living and housing allowances, it is essential that the comparison
between home and host costs be based on relevant numbers.
Therefore, the Net home country pay is broken down into three components:
1.

Housing (hypothetical home country housing costs): used to calculate the housing allowance for
companies that provide a housing allowance calculated as a differential between host and home housing
costs. Please note that, as our COL basket does not include housing costs, the amount presumably spent
for housing in the home country should not be adjusted by the COL index.

2.

Savings and other expenses items that are not included in our COL basket such as big furniture,
education costs, medical costs etc.

3.

Spendable income represents the part of Net income spent on the goods and services, as included in
Mercer COL basket and is used to calculate the Cost of Living Allowance (COLA)

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Mercer has developed Home Housing Norms and Spendable Income tables by income level and family size that
allow one to determine the right percentage of the Net income for each of these three components (spendable
income, housing, savings and other expenses). Other spending assumptions such as using a fixed % of the net
income or using the Mercer Total Spendable Income can also be used.
(For more information on spendable income assumptions, please refer to the Introduction to the Spendable
Income, Home Housing Norm and Savings calculator and/or tables.)
A. The Spendable Income applied in the calculation
This spendable income amount is the amount upon which the Cost-of-Living index is applied. In most cases, it
should correspond to the spendable income amount as derived from the Net home country pay breakdown
process (see step 2, above).
However, when transferring employees from countries with low Net pay, the spendable income part may need to
be increased in order to allow for comparable purchasing power with expatriates from countries with higher Net
pay. Mercer helps companies define appropriate spendable income levels that ensure a fair and equitable
standard of living for expatriates whatever country they are coming from.
In Global HR Monitors Expatriate Compensation Calculator, provided they have access to the International
Spendable Income option, users may select to use one of the two Mercer predefined Internaional Spendable
Income levels Mercer Tier 1 or Mercer Tier 2 or choose to build up their own benchmark spendable income
levels.
(For more information on International Spendable Income levels, see the Introduction to Mercers International
Spendable Income).
B. The Cost-of-Living Index
This is the index used to measure cost of living differences between the home and the host location.
Any of the three indices Mercer produces (Mean to Mean, Efficient or Convenience) can be used. Indices can also
be adjusted to reflect latest exchange rates and inflation. Moreover, users can remove any of the 10 COL index
categories, such as Transportation or Utilities for example, to recalculate the index.
(For more information about the choice and use of Mercers indices, please refer to Mercers Cost-of-Living
Introduction).
C. Exchange rates
Exchange rates are used in the calculation to convert salary amounts from the home to the host currency.
Normally, rates used should correspond to the exchange rate applied to calculate the cost of living index. If you
want to use the most recent exchange rates, you can recalculate Mercers latest survey index with your selected
exchange rate. However, when doing so, you should also take into consideration the possible price fluctuation
between Mercer's last COL survey date and your selected exchange rate date.
(For more information, please refer to Mercer's Cost-of-Living Introduction, How to adjust the index for exchange
rate and inflation).
D. Cost-of-Living Index applied in the calculation
In most cases, the index used in the calculation will be the same as under B (see above).
However, when the index is negative, (meaning that the host country has a lower COL than the home country), it
is possible to apply a more limited COL adjustment (for example, not below a certain amount, or with an offset of
10%).
E. Cost-of-Living Allowance (COLA)
Host location Compensation Build up
The adjusted spendable income in the host location is the result of the multiplication of the home spendable
income by the COL index. (As the COL index is expressed as a multiple of hundred, you need to divide the result
by 100 to get the correct number).
The COLA is the difference between the adjusted spendable income in the host location and the home country
spendable income. This is the amount required to ensure that the employee benefits from the same purchasing
power in the host location as in his/her home country.

3. Net home country pay

This is the same amount as under step 2 (above). In a balance sheet approach, this is the amount that should be
guaranteed as equivalent in the host location.
Supplement amount for spendable income

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If the spendable income used in the calculation is not the same as the one stated under step 2 (above), the
difference between the two amounts should be added here.

4. Cost of Living Allowance (COLA)

This represents the amount the employee should receive on top of his home Net pay to benefit from the same
purchasing power as in his/her home country. It corresponds to the amount calculated under E. Cost of Living
Allowance, as described above.

5.The Housing allowance

a) The host location expatriate accommodation costs figures we provide are derived from our COL reports. We
have three expatriate accommodation costs tables that allow you to assess the host housing cost.
1.

The Expatriate Accommodation Costs table by area that provides you with monthly rental costs for 1 to 4
bedrooms apartments and houses in good to best areas

2.

The Expatriate Accommodation Cost table by home income level and number of bedrooms

3. The Expatriate Accommodation Cost table by home income level and family size
By default in Global HRMonitor Expatriate Compensation Calculator, Mercer uses the 3rd table to assess host
accommodation costs.
(For more information about expatriate accommodation costs tables, please refer to Mercers Cost-of-Living
Introduction).
b) The home housing figure, (in case it is your companys policy to deduct home housing costs), is the number
stated under step 2, Breakdown of the Net home country pay at the housing line. It corresponds to average
national home housing costs and is a variable amount according to employees income level and family size.
(Please see step 2. above).
c) The Housing allowance is the difference between the host city expatriate accommodation costs and the
hypothetical home country housing costs. If the company is providing free housing to employees, the home
country costs should be set to 0 and the housing allowance will correspond to the total expatriate
accommodation costs amount.
In certain countries it can be tax effective to have the housing paid directly by the employer or some employers
might wish to pay the rental costs directly. When this is the case, the housing allowance amount should not be
included in the Net host country pay and the allowance should be manually set to 0.

6. Equalised Net host country pay

This first total corresponds to the equivalent of the employees Net home country pay, at the host location,
applying a strict balance sheet approach. At this stage of the calculation, if the housing allowance takes into
account the deduction for home housing norms, this first equalised Net pay does not provide any financial
advantage to the employee.

7. Expatriation Premiums
Under this part of the Balance Sheet Calculation, we can add the allowances related to the assignment that would
be typically provided by companies, such as:
1.

The Quality-of-Living allowance, or hardship allowance - to compensate for the difference in quality of
living between the home and the host locations. It is usually determined as a percentage of the Gross base
salary varying between 0 and 30 percent, but could also be calculated as a percentage of the home
country Net pay or expressed as a fixed amount.

In Global HRMonitor, the hardship or quality of living allowance % to apply comes out by default according
to Mercer Quality of Living index between the home and the host location.
1. The Mobility premium or incentive, independent from the host location, to compensate for the
inconvenience of being uprooted. It is usually determined as a percentage of the home Gross base pay
varying between 5 and 15 percent but can also be calculated as a percentage of the home country Net pay
or expressed as a fixed amount.
In Mercers Global HR Monitor Expatriate Compensation Calculator, another subtotal line is included in the
calculation result page that shows the total under step 6 plus the expatriation Premiums (step 7).
(For more details about our recommendations on Quality of Living allowances, please refer to Mercer Quality of
Living report Introduction.)

8. Other Cash Benefits

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Under this part of the Balance Sheet Calculation, other cash benefits can be added, as per company policy, such
as education allowance or car allowance.

9. Equalised Net host country pay including Expatriation Premiums and Other Cash Benefits
This is the total of steps 6 (equalised Net host country pay), 7 (Expatriation Premiums), and 8 (Other Cash
Benefits).
This amount (under step 9) can then be grossed up by the employees hypothetical social security contribution
(whether he remains in his home Social Security system or contributes to the host country system) and personal
income tax amounts he/she will have to pay.
The hypothetical Social Security and personal income tax figures are added to the host country Net amount and
add up to the final host country Gross pay.
In Global HR Monitor, Step 9 is the last result of the Expatriate Compensation calculator. If the user wishes to
gross up the net host country pay, he might use the Tax calculator on Global HR Monitor, provided he has an
entitled access to it.

10. Net host country pay to be grossed up

This is usually the same amount as under step 9, unless some of the cash benefits are provided as Gross amounts
to the employee.

11. Gross host country pay

This is the employees total pay including hypothetical host country personal income taxes and social security
contribution.

12. Comparison to local market

At the end of the Expatriate Compensation process, Mercer provides with a comparison of the host country base
salary, corresponding to the same job level.
Comparative pay data are extracted from Mercer Compensation survey, All Industries, at Median level, but other
client or market pay data can be substituted, if desired.
For further assistance with Mercer Expatriate Compensation process, please feel free to contact:
Ms. Anne Rossier (anne.rossier-renaud@mercer.com) or your nearest Mercer office..
2002 - 2012 Mercer LLC, All Rights Reserved.
Version: 3.11.27.1

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