Ups and downs to similar pay at multinationals

Equal rates for similar jobs in different jurisdictions can have unintended consequences
By Paul Pittman
|Canadian HR Reporter|Last Updated: 09/25/2012

Deciding whether to provide similar levels of pay for work of equal value is a natural consideration for Canadian companies with operations abroad — internal equity is a key platform for human resource strategy. However, a number of challenges must be surmounted, which raise the question: Is this a noble cause or a foolhardy gesture?

In looking at what “similar pay” actually means, it’s important to look at why there are differences in pay for the same job in different countries.

Talent supply: Labour is not free to move at will across international borders and, while this is changing, at different times countries will have shortages of certain types of skills that cause competitive pay to increase at different rates.

Cost of living: As a general rule, in free market economies, salaries rise in relation to the prosperity of the economy and underlying inflation. This will differ by country and, over time, has resulted in significant variances among countries in compensation levels for the same work. In the last 20 years, however, with more goods and services available on a global basis, differences in costs for the same goods have begun to diminish.

Payroll taxes: Payroll taxes include income tax, social security and other government-initiated deductions from pay. While not directly impacting gross pay, they cause indirect, upward pressure on pay when net pay is reduced.

Social policy: Social policy plays an important part in influencing pay. For example, Canada has seen significant increases in the compensation of mining executives as they are free to leave and work in higher-paying jurisdictions. Other reasons might be the level of (and who pays for) the social safety net. The United States government, unlike Canada’s, for example, plays a limited part in subsidizing health care or tertiary education costs for working individuals, thus putting more pressure on pay levels.

Location: The attractiveness of a location may have a discounting effect on local salaries. For example, Canada has lagged international competitive pay levels despite higher taxation and many considered this to be because Canada — with its open spaces, safe cities, high standards of human rights, education and health care — is a first-rate location for families.

While the sentiment may be noble, paying the same rates for similar jobs in different jurisdictions can have unintended consequences. For example, “equalizing” the pay between Mexican and Canadian supervisors would almost certainly mean paying the Mexicans more. Mexican salaries at this level are lower because the competitive pressures are fewer, Mexican supervisors are unlikely to be able to move to competing jurisdictions and their standard of living is lower.

Increasing their discretionary income would improve their standard of living, but is this reasonable for one group of employees and not others? Why wouldn’t Canadians ask for something similar? Fairness may not just be a question of pay, it may also mean what that pay can buy. In addition, how will the company respond to investors when asked why it pays more than required to attract and retain supervisors in the local competitive market?

Paying employees the same amount for doing the same work — irrespective of local competitive pressure — is, therefore, probably not a sound approach. However, there are occasions where moving towards the same pay for certain types of skill set may be prudent.

For example, an international organization may have a pay philosophy that advocates a global pay scale and equalizing absolute discretionary income for the executive team. Why? Because they are globally mobile and capable of being hired by anyone, anywhere; the amount available for lifestyle items and services (such as cars or vacations) is at a similar level irrespective of location; and executives from low-paying countries don’t feel discriminated against.

That same company might want to equalize pay for senior managers because they are successors to the executive team and mobility is a scarce competency, so this retains managers with a successful international transfer record.

Expanding internationally introduces a number of considerations. Employees at a newly acquired overseas subsidiary may expect to be paid at Canadian levels and HR will need to have a prepared response. Equally, if the new operation is in a higher-paying location than Canada, Canadians might seek parity with their new international colleagues.

When administering pay in an international context, the approach must reflect and align with a company’s business values, culture and practices within the industry, and serve the goals of the business. Fundamentally, the issues remain the same as when managing domestic compensation:

Do we have the right skill sets to achieve the tasks required?

If this means attracting employees from overseas to the home base (or encouraging employees to move overseas), the employer may need to go beyond its traditional compensation philosophy and pay components.

What do we need to pay to attract, retain and motivate?

Research gross and net competitive pay levels in the host location for the skills you need to retain. Determine to what extent you will recognize any differences, how you will do that and whether an incentive is required to motivate mobility.

Are incentives aligned with strategic goals?

Ensure assignment goals are clearly documented and agreed to, and that they are appropriately incentivized. For example, if completion of the assignment is critical to your business, consider a completion bonus.

While equity and pay equity are important principles when considering employee compensation, it becomes more complicated across international operations. At senior levels, there may be competitive justification to equalize some or all of the key components of pay but, as a general rule, this will create more challenges than it resolves.

Paul Pittman is senior partner and founder of The Human Well, a collaborative HR consulting practice with global clients. For more information, visit www.thehumanwell.com.


Determining pay

Pay strategies for expatriates

Consider length of assignment, career plan and pay philosophy when deciding how to pay expats.

Assignment of less than 1 year

Future career plan

Pay philosophy

•Likely in home country

•May be high potential

•Unable or unwilling to relocate

•Temporary assignment will reflect temporary need for short-term, specialized skills in host location

•May repeat this approach in other
locations

•Home country pay scale plus temporary allowance and per diem for expenses or international contract scale

•Permanent or fixed-term contract reflecting progression potential within company and industry norms

Assignment of 1 to 3 years

Future career plan

Pay philosophy

•At end of assignment, return to home location and unlikely to move abroad again

•Home country salary with expenditure components protected for high costs in host location, such as housing, taxes, goods and services

•May also recover amounts representing less costly expenditures in host location, such as equalizing housing or taxes to home country

•Likely to have a series of overseas assignments

•To reinforce mobile nature of career, sever compensation links to home country and provide an internationally competitive salary

•Reimburse additional costs of temporary housing and any double taxation (do not equalize)

•International assignment objectives should be included in regular, short-term incentive goals

•Subject to numbers and locations, may involve a global employment strategy or company


Assignment of indefinite length

Future career plan

Pay philosophy

•Likely to remain in host location

•Host location pay scale and incentives

•Additional, fixed off-shore amount to retain total in line with former home country compensation, if required

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