Friday, May 16, 2014
Quality of life may be the single most important deciding factor for workers considering an overseas assignment. As someone considering a posting to one of your company’s foreign offices, or as a human resources manager seeking to retain the best people in your global workforce, being able to calculate a compensation package that affords an equivalent quality of life helps both employer and employee feel they are getting a fair deal.
The SPPP calculator compares compensation packages between the home office, or where the employee is now, and a new assignment in a different country, by measuring relative purchasing power. A compensation package that affords the same purchasing power as the current location is calculated for the host destination. The salary is adjusted to account for differences in exchange rate, the availability of goods and services and other relative differences.
Establishing Your Home Purchasing Power
Purchasing power is calculated by regularly checking the local cost of a wide range of common goods and services and establishing standard cost per unit measurements that can be compared between locations. Xpatulator uses approximately 200 items such as monthly rent, the cost of milk and the price of gas. Items are then grouped into 13 different baskets, such as education, clothing, transportation, groceries, etc.
The baskets are weighted as a percentage of total living expenses based on surveys of how expat workers actually allocate their spendable income. For example, household costs like rent, utilities, home insurance and property taxes are weighted as 30% of the total cost of living.
Which Baskets Are Included In Compensation Package Calculations
Depending on the location, certain costs, such as housing, education and transportation may be arranged for, and paid directly by the company. If, for example, housing costs are to be borne by the worker, then this basket is included in the calculation. If housing is to be provided by the employer, that basket is removed.
Adjusting for Employer Borne Costs and Taxes
When inputting the home salary to the calculator, include only the amount that the employee would normally spend on baskets that will not be covered by the employer at the host location. For example, an employee earning $100,000 USD may typically spend $24,000 annually on rent/mortgage and utilities. If housing and utilities are being provided by the employer at the host location then $76,000 ($100,000 - $24,000) would be used to calculate the salary required to provide equivalent purchasing power.
To adjust for differences in taxes it is recommended that the net salary be used in the SPPP calculator. The applicable tax treatment of the employee at the host destination then needs to be factored in to provide a sufficient after tax salary.
Adjusting For Hardship
Social and political circumstances may impact an employee’s quality of life in ways that are difficult to measure easily. Xpatulator provides a hardship rating for over 700 locations worldwide based on things like political stability, social freedom, availability of quality education and difficulties associated with learning a new language. A hardship adjustment is calculated based on the relative difference between the hardship rating of the home location and the overseas assignment.
Using the SPPP Calculator for Multiple Locations
If you are comparing offers from several different locations use the SPPP calculator to calculate the adjustment between the home location and each host location separately. If you are an HR manager trying to insure that your company is compensating a group of comparable employees fairly, this method also gives you the most consistent way to compare different locations.
Thursday, May 15, 2014
One of the most common, but also one of the most complicated to administer approaches to compensating an employee while they are on an overseas assignment is to use the buildup or balance sheet approach. This approach normalizes the employee’s overseas compensation with what they would earn in a similar position at the home office.
The Xpatulator.com IAM calculator allows HR departments to calculate an equitable package of compensation and benefits during the employee’s overseas assignment. At the end of the assignment the employee is able to maintain the same relative purchasing power and standard of living when they return to the home base salary and benefits structure. The IAM calculator is recommended for extended overseas assignments of from 6 months to 5 years.
Here are the major components used to calculate an overseas assignment compensation package.
Home Net Salary
The employee’s home net salary is calculated using their gross cash payments minus any variable payments such as performance bonuses. Hypothetical tax is then subtracted to calculate the net salary. From this amount the employee is expected to spend 40% on essential living expenses and 60% on discretionary spending such as savings, vacations, maintaining a residence at their home location etc.
The home component of the employee’s compensation typically includes their discretionary spending amount plus hardship and expatriate premiums. This amount is paid in the home currency. (60% Net Salary + Location Hardship Premium + Expatriate Premium)
Hardship premiums help to offset relative quality of life issues that employees and their families are likely to encounter while on their overseas assignment. Xpatulator.com maintains hardship ratings on over 700 locations worldwide and calculates a hardship premium based on the relative difference of the hardship rating between the host and home locations.
The expatriate premium is an incentive offered to employees to encourage them to take overseas assignments. The international standard is 15% but this number can be adjusted based on company policy or negotiation.
The host component includes the amount needed for essential living expenses adjusted for any differences in the cost of living. It is typically paid in the host location currency. (40% Net Salary X Cost of Living Difference X Exchange Rate)
The difference in the cost of living is calculated using the Xpatulator.com Cost of Living Index (COLI). The COLI uses price information on approximately 200 common goods and services in each location. Data is verified and updated quarterly by trained analysts. Price information is grouped into 13 baskets of related expenses such as groceries, communication, education etc. The COLI baskets are weighted based on surveys of actual expat spending habits and the applicable COLI uses only those items that the employee will be responsible for paying out of their salary.
Benchmark Housing Allowance
The host location will typically be responsible for providing housing or reimbursement for housing. The IAM calculator includes a benchmark housing allowance based on the host location and the employee’s level and family size.
If company transportation was provided at the home location, that benefit will typically be extended in the host location. If transportation was the responsibility of the employee at the home location and they will receive company transportation or a transportation allowance at the host location, then that amount should be excluded in the calculation of the employee’s net salary. The IAM calculator provides a benchmark transportation allowance for each host location.
Medical, Education and Benefits
Providing appropriate medical services and maintaining equivalent quality education for the employee’s children are normally the responsibility of the host location. Where appropriate, private and/or boarding school may be included.
Company benefits such as retirement plans and performance bonuses will continue to be paid as part of the home component of the employee’s compensation package.
Wednesday, May 14, 2014
The global economy offers unique opportunities for companies doing business internationally. With opportunities come challenges and managing a global workforce requires reliable information on the cost of doing business and not every source of business information is created equal. Xpatulator has created a Cost of Living Index (COLI) calculator that is tailored to the needs of global companies and managers responsible for overseas workers.
Xpatulator uses up-to-date data collected and verified by our own expert analysts to provide the most accurate cost of living information available. Our proprietary database is updated quarterly with the latest price information for over 700 locations around the World. We collect prices on approximately 200 common goods and services.
Weighted to Reflect Actual Expat Worker Lifestyle
Some living expenses will impact your employees to a greater degree than others, so our cost of living data is grouped into 13 related baskets of goods and services, such as household, transportation and education. Each basket is weighted based on extensive surveys of expat worker’s spending habits to reflect the actual cost of living differences that your overseas workers will experience.
Based on Your Home Office
The COLI calculator uses your home office or whichever location you choose as your benchmark and sets the cost of living for that location as 100. You can then easily compare the cost of living at all your overseas offices with your home office.
Adjusted For Your Company’s Individual Benefits Package
If you are providing direct benefits like housing, private education or transportation at some or all of your overseas locations you can easily remove those baskets of benefits to see the impact they have on a specific cost of living index. You can calculate a reliable COLI on a location by location basis or even on an employee by employee basis.
When a certain basket is removed from the COLI calculation, that item’s weighting is removed and the COLI is calculated for the expenses that your employees will be paying directly from salary. This gives you the advantage of being able to assess the relative impact of paying for certain benefits directly.
Recruiting and Retention Advantages
Choosing to offer benefits where they have the greatest impact in reducing your employee’s cost of living can give you an advantage in attracting and retaining top talent. Having a tool like the Xpatulator COLI calculator also lets you highlight the value of benefits to your employees compared to direct salary adjustments or cost of living allowances.
Controlling Your Costs
In some cases there may be benefits to your bottom line by paying certain costs directly. Medical, housing and transportation are common benefits that some companies elect to pay themselves rather than have employees paying for with after tax dollars.
You can also equalize compensation for different employees that may not need or want some of the benefits that you have available. Quality private education is a benefit that families with school age children will place a high value on while individuals and couples will not. By talking with your employees about how specific benefits will affect their cost of living you can provide the most valuable compensation package while keeping an eye on your bottom line.
Tuesday, May 13, 2014
|COLA Calculator Example|
Most companies that maintain a global workforce or regularly send employees overseas on special assignments offer a Cost Of Living Allowance (COLA). The purpose of a COLA is to partially offset the high cost of living overseas and maintain an employee’s purchasing power.
Disadvantages of Simple Cost of Living Calculators
Many COLA calculators simply apply a percentage adjustment between your current salary and the salary you would need to earn at the destination you are moving to, based on the overall cost of living. Simple calculators do not account your individual circumstances, family situation, or the value of any benefits that your employer may offer you.
The Xpatulator COLA calculator allows you to run reports using many different scenarios. Depending on the benefits that are included in the offer, you can check to see what the affect will be on your actual purchasing power. The relative value of benefits such as housing and health care may far outweigh any disadvantages of your salary offer, such as accepting a compensation package tied to local pay rates.
Customized For Your Situation and Lifestyle
The COLA calculator uses the cost of approximately 200 goods and services grouped into 13 different baskets, such as education, groceries and transportation. The baskets are then weighted based on surveys of how expat workers actually spend their money. You can choose which baskets to include in your calculation and which baskets to exclude.
Choosing Your Baskets
You may wish to eliminate certain baskets from your calculation based on your lifestyle, family situation or the benefits that your employer is providing. You might eliminate tobacco and alcohol as a lifestyle choice, education because you do not have any school aged children or plan to homeschool and household because the company will be providing housing for you. By removing these baskets the weight will be shifted to the remaining baskets. The amount of COLA that you require to maintain your purchasing power will be based on the expenses that you will actually be responsible for.
Accounting for Hardship
There are often costs of taking an overseas assignment that are more difficult to measure. Things like social freedom, personal safety and difficulties associated with not knowing the local language are broadly grouped as hardship. Xpatulator maintains a global hardship rating for over 700 destinations based on quality of life issues that foreign workers are likely to encounter. A relative difference in the hardship rating is used to add or subtract from your COLA calculation.
For example, transferring from a home location in Atlanta, Georgia, which has a hardship rating of 10%, to Sao Paulo, Brazil, which has a hardship rating of 20%, would entail a 10% relative difference in hardship. 10% of your inputted salary would be added to your calculated COLA to account for the additional hardship of relocating from Atlanta to Sao Paulo.
Adjusting Your Input Income
To accurately calculate your COLA needs, you should base your calculations on your net income, after taxes. Using the taxes you will be subject to at your host destination, determine how much COLA you will require to maintain the same after tax purchasing power at your host destination. You may need to contact tax advisers at home and abroad to confirm what your tax, withholding and tax return filing responsibilities will be.
If you are receiving benefits such as housing, private education and transportation from your company, adjust your income accordingly. Deduct the money that you would normally spend on those items from the portion of your income you use to calculate your required COLA.