When companies make a salary offer to a new employee, it’s usually aligned with local standards. For example, in the U.S., employers will consider the market rate for the position in their city, Social Security and Medicare contributions, tax rates, and other factors on a distinctly domestic basis.
But when hiring employees from other countries, the salary calculation has to account for several key differences. Otherwise, your organization risks over- or underpaying workers, both of which have some significant consequences.
Here’s how to calculate salaries globally so you can avoid costing your company money and protect its global reputation.
Which approach to setting salaries is right for you?
As more companies embrace remote work and realize the benefits of hiring teams from around the world, the question of how to pay everyone fairly has become more pressing. The typical approach of basing salaries on industry averages and competitor rates, and offering performance- or cost-of-living-based increases, may work in some circumstances, but paying international employees requires a significantly more nuanced approach.
Most companies use one of three approaches to calculate pay for global workers:
1. Local or national compensation rates
This approach pays workers based on the average rates for a comparable position where they live. It establishes a salary baseline at a specific percentile of the local market based on the cost of living and industry standards, then adds or subtracts accordingly. Most companies use the median salary in the market as the baseline.
Ensuring equity among teams and departments when you take this approach may require making additional adjustments and setting different benchmarks. Companies that base salaries on local compensation trends also need to determine how they will handle country-specific compensation requirements, like the mandatory annual 8% holiday bonus in the Netherlands.
2. Standard of living compensation
Some companies establish salaries according to the standard of living in the country where they reside. A company using this approach typically establishes a benchmark, usually a percentage of the average salary for their industry where they are headquartered, then multiplies it by their cost of living. The latter factor is based on whether their country has a high, intermediate, average, or low cost of living.
This approach is an objective way of calculating salaries. While on the surface, it may appear to create significant discrepancies in pay among team members, adding the cost of living into the equation does promote fairness across the board. On the downside, this approach doesn’t account for country-specific requirements, and individuals may need to have their pay recalculated if they relocate. This could result in a pay cut for some people if you convert their salary between countries, which they may view as a penalty for making personal choices.
3. Location-agnostic compensation
A location-agnostic approach to compensation means the company pays the same salary to every employee in that role, regardless of where they live. In other words, someone living in Spain would receive the same pay as someone living in New Zealand, despite cultural and cost-of-living differences.
Companies that use this approach typically benchmark pay to a mid-cost city to avoid paying over-inflated salaries in areas with a lower cost of living. For example, in the U.S it’s more likely that pay will be based on a city like Dallas or Chicago rather than a notoriously expensive area like San Francisco, or New York.
What to consider when choosing how to calculate global salaries
To select the best approach for calculating pay for global workers, you must consider some critical factors that influence payroll, human resources, and employer-employee relationships. The last thing you want is to run afoul of international employment law, so as you evaluate your options, consider these critical factors.
Legal pay requirements
Most nations have strict requirements regarding the lowest amount an employee can be paid, and you are responsible for adhering to them.
Some countries also require employers to provide additional compensation in the form of holiday or bonus pay. Mexico and Portugal, for example, require employers to pay a 13th month of salary every year. When you hire an international worker, you need to account for these unique requirements.
The best way to ensure compliance with varying legal requirements is to work with a local employment expert or use a global employment platform that will address these issues.
Taxes and payroll deductions
Every country has its own set of required payroll deductions for taxes, social programs, insurance, and more. In some cases, employers are also expected to contribute to social programs on behalf of their employees. Your required contributions and how the country calculates their deductions (e.g., a flat rate or percentage of the salary) can influence how much you pay.
Cost of living
Employers need to determine whether they will account for an international employee’s cost of living in their salary offer, and how they’ll do so. In other words, does the fact that someone lives in a city with a high cost of living, like London, mean they should be paid more than a colleague who lives in a more affordable city? If you decide to incorporate the local cost of living into a salary, you need a clearly defined benchmark and formula to avoid over- or underpaying people.
In every country, different industries have their own standards for pay, with some paying significantly more than others. When calculating compensation for remote employees anywhere, it’s important to keep the industry standards in mind to ensure you stay competitive and continue to attract top talent.
How to calculate salaries
If you are new to calculating salaries, the two basic components to consider when deciding how to determine salary are base pay and incentives.
The strategies we discussed above determine base pay. It’s the baseline salary level for employees, either across the board or for specific positions in specific countries. It depends on what your business can afford, market trends, and local expectations and requirements.
Incentives are opportunities for additional pay based on performance. For example, some companies pay a base salary plus commissions, while others offer bonuses for hitting specified targets. These variable compensation plans aren’t common in some countries, so you may need to adjust in some circumstances.
You may also need to include certain premiums or allowances in the salary calculation. Some countries require employers to cover expenses like computers or internet access, for example. Because standards of living are so different around the world, you may opt to include housing, education, or other allowances in the pay to attract talented individuals to your organization.
Don’t overlook currency conversions
Currency fluctuations can significantly affect global employee earnings. If the currency you’re paying your employee in devalues, they effectively lose earnings. On the flip side, if their currency gains value, you’re paying more.
Keeping track of exchange rates and mitigating the risks of changes to currency value is a big job. Companies can try to reduce risk by offering additional benefits to make up for lost pay, maintaining a reserve of currency in different countries to cover payroll, and monitoring historical exchange rates. But using an employer of record (EOR) is the easiest way to deal with this issue and ensure that every employee is paid what they earn. An EOR is experienced in managing international payroll as well as issues related to currency conversion.
Need more help? Turn to Oyster
Navigating the challenges of global salary regulations and paying international employees is a big job, but you don’t have to go it alone. Use Oyster Total Rewards to get insight into global salaries, select from pre-created benefits packages and access consultation services for your global compensation strategy. Request a demo today and see how we make it easy to calculate salaries globally.
Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
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