What Human Resources department wants to elicit jealousy between coworkers, renegotiation of compensation, or employee turnover? Easy answer: none. But this is what happens without an organized approach to shifting an employee from home payroll to host payroll on a permanent basis, also known as localization.
When companies start localizing employees, they often take an ad hoc, negotiated approach. We’ve encountered cases where one assignee gets an added benefit, like a company car, because he or she knew to negotiate it, while another employee does not, even though that particular person may need it more. Such individually negotiated packages can represent a significant risk to any company’s talent pipeline, which is why AIRINC helps our clientele design well-thought out employee localization approaches which eliminate problems before they happen.
Seven Areas of Focus for Localizing Negotiations
- Differences in salary between the home and host.
- Differences in income taxes between the home and host.
- Differences in social and corporate benefits between the home and host.
- Differences in cost of living/ housing between the home and host.
- Host currency and barriers on ability to invest.
- Host Education for dependent children.
- Hardship (risk and quality of life) in the host location.
An Affinity Matrix Approach
One way we resolve these issues is the application of an “affinity matrix,” which is an evaluation of compensation elements between home and host locations that can indicate the degree of difficulty a specific country to country transfer will have. An affinity matrix approach can be as simple as a comparison of net income differences between locations or as complex as evaluating salary, tax, benefits, and cost of living. The factors that a company wants to consider when creating an affinity matrix will be dependent on its needs.
Evaluating Your Options
The seven points above will help your company define the correct localization package and it also highlights the feasibility of that package for a given transfer as some home-host combinations may not be suitable for local transfers, such as going to high hardship locations. The most important benefit here, is that an affinity matrix can help you decide whether to place an employee on a local package or to consider another type of pay approach, or even whether to reconsider moving forward with the transfer.
What Does an Affinity Matrix Look Like?
Below is a sample of a simple net income to net income affinity matrix. It shows the relationship between net incomes at a given peer midpoint salary in each location. To determine the matrix, net incomes were converted to a like currency using a set of given exchange rates, and the host net income was divided by the home net income to establish a net income index. An index above 100 indicates that the host net is higher than the home net; in other words, the assignee will be gaining net income by going to the host location. An index below 100 indicates that the home net exceeds the host net and so the assignee will lose net income by shifting to the host payroll. Locations where moves would be most feasible are highlighted in blue, locations where more investigation is necessary are orange and locations where moves are least feasible are red.
An Affinity Matrix showing a comparison of net income indices across home and host locations
If the index is well above 100, such as for Ethiopia to Ireland, it will be very important to consider where the assignee’s career will lead them. The significant uplift in net income will undoubtedly make the transfer economically attractive to the employee, but may impact future mobility. A balance sheet package based on the assignee’s actual home (or an HQ/globalist-style package if the assignee will be expected to move frequently) may be more appropriate for this assignee. Additionally, from a total compensation perspective, the localization package may be more expensive than a home-based package in this case.
But if the index is well below 100, such as for Ireland to Ethiopia, the company may choose not to offer a host package as it is highly unlikely the employee will accept a position that so drastically reduces his or her net income. Or, if the company does want to offer the package, it may be necessary to pay significant (and possibly permanent) allowances for items like housing and education in order to entice the assignee to take the assignment. This, of course, may raise cost and local peer equity issues.
Trending Topics in Mobility
Localization is a trending topic in global mobility and applying it correctly will help you grow your business, nurture your employees, and preserve your talent pool.
If you’d like more information on affinity matrices or other ways AIRINC helps our clients improve their localization programs, please contact us at firstname.lastname@example.org. Additionally, check out the links below to learn more about our suite of host-based compensation decision tools and how they can help you:
Host Pay Calculator:
AIRINC’s Host Pay Calculator helps companies with one-way relocations to evaluate and protect the transferees’ purchasing power in the host location.
Salary Evaluation Tool:
AIRINC’s Salary Evaluation Tool assesses the economic impact of a permanent relocation on an employee, providing a net-to-net comparison of the offered compensation in the host location to the current compensation.