How do spending patterns affect expat salary calculations?
Various studies show that different generations have different needs. The Baby Boomers (born between 1946 and 1964), who make up the largest number of American consumers, are good team players, love social interaction at work, work long hours, and are willing to spend a considerable amount of time at work to move up the organizational hierarchy. Boomers prefer handwritten notes and phone calls. As they approach retirement age, Boomers tend to cut back on spending to increase their retirement savings. Members of Generation X (born between 1965 and 1979) are more skeptical, thinking that boomers are crazy for working so hard. While they are also determined to do a good job, they also want to go home at night and have a life. Xers prefer email. According to Gallup, 71% of Xers have children under the age of 18 (compared to Boomers, who have less than 25%). Xers spend more on average than Boomers. The younger generation, Millennials (1980+), have little patience or loyalty to the organization. When Millennials aren’t happy, they tend not to solve problems, they just leave. Millennials prefer text or instant messages. According to Gallup, Millennials spend roughly the same amount as Boomers, even though their salaries are, on average, lower than Boomers.
Home and host countries differ in terms of legal taxes, social security and national health obligations. Some home countries require expatriates to pay tax wherever they reside, while other countries have tax systems that are based on residence. Other countries, such as most of the Middle East, do not have personal taxes, however despite this some source countries still require their citizens to pay tax.
Wage practices differ between employers in various parts of the world, and sometimes due to local market practices, practices differ for the same employer in different countries. The costs of accommodation, medical care, education, transportation and other benefits can be paid for, provided or subsidized by the company or, alternatively, left to the expatriate to pay out of their salary.
Home country personal spending obligations (e.g., savings, mortgages, private/personal retirement/investment funds, private healthcare, etc.) along with home country legal obligations, affect not only the amount of host expenses expats have available to them, but also how much they need to spend. in.
Spending patterns affect expat salary calculations due to differences in cost of living, availability of goods and services, as well as the degree to which the expat (and family) adjust to culture and style of local life.
Differences in cost of living are most often reported in the form of cost of living indices. A cost of living index is a general number that takes into account the prices of a number of different goods and services. Anyone who has traveled to another country will notice that the price differences between countries are not the same for all goods and services. In Hong Kong restaurants, dining out and hotels are relatively cheap, but homestays are relatively expensive. An expat who is provided with accommodation in Hong Kong will experience a lower cost of living compared to an expat who must rent her own accommodation. Therefore, the cost of living difference depends on the spending pattern of the expatriate.
For ease of use, cost of living indices are generally grouped into similar/related goods and services, called baskets. Shoes are usually weighed according to expat spending standards. Each basket has a different weight representing the portion of expatriate income that is spent on each basket. The following basket weights are used for the complete set of baskets:
- Alcohol and Tobacco 2.0%
- Clothing 2.5%
- Communications 2.0%
- Education 5.0%
- Furniture and Appliances 5.0%
- Groceries 16.5%
- Health 5.0%
- Household 30.0%
- Various 3.0%
- Personal Care 3.0%
As an example, let’s calculate an expat salary for a person ABC International transfers from the Dubai office, where they earn a salary of $5,000, to the Hong Kong office. In our example, it is assumed that there is a global Compensation and Benefits structure (ie the practice in Dubai and Hong Kong is the same). Our goal is to calculate what salary to pay in Hong Kong to have the same spending/buying power as $5000 in Dubai: In each scenario, the difference in cost of living, taking into account the three spending patterns, resulted in different salary calculations for expats. By choosing sneakers affected by expat spending, a more accurate cost of living difference can be determined. The result is a more accurate expat salary calculation. There are several ways to apply the cost of living difference in calculating an expat’s salary. First, the domestic gross wage can increase or decrease based on the difference in cost of living, without taking tax differences into account. The net salary of the second home can be increased or decreased, in order to cancel the tax differences. Third, a cost-of-living allowance can be calculated by deducting the household’s salary (net or gross) from the host’s salary that has been adjusted for cost-of-living differences. The local gross salary (ie before local taxes and statutory deductions) and the difference in cost of living between the home country and the host country can be used to calculate the host gross salary. Taxes and any other legally required deductions are deducted from the resulting host’s gross salary to calculate the host’s net salary using a top-down approach. Although the gross salary in the host country is equal, in terms of purchasing power, to the gross salary in the home country, the expatriate will experience higher purchasing power in low-tax countries and lower purchasing power in high-tax countries. The net salary from the home country (i.e. after local taxes and statutory deductions) and the difference in cost of living between the home country and the host country can be used to calculate the net salary from the host country. The host’s resulting net salary is then extracted, in an accrual approach, by the amount of taxes and any other mandatory legal deductions, so that the net salary in the host country is equal in purchasing power terms, to the net salary. in the country of origin. Finally, organizations can use the top-down (gross) or accrual (net) approach above by deducting the local salary from the host salary and paying the differences as a cost of living allowance, so that salary plus cost of life in the host country the allowance is equal, in terms of purchasing power in the host country, to the purchasing power of the local salary in the country of origin.
- Scenario 1: Only a cash salary is provided (ie, no benefits). The overall cost of living difference, including all sneakers, is 45.09%. $5,000 X 1.4509 = $7,254.50
- scenario 2: A cash salary is provided, as well as accommodation paid for by the company. The overall cost of living difference, excluding housing, is 6.76%. $5000 X 1.0676 = $5,338.00
- Scenario 3: A cash salary is provided, as well as company-paid healthcare and education. The overall cost of living difference, excluding healthcare and education, is 45.73%. $5000 X 1.4573 = $7286.50
- Recreation and Culture 6.0%
- Restaurants Eating Out and Hotels 2.0%
- Transport 18.0%
References:
http://www.gallup.com/poll/122546/boomers-spending-generations-down-sharply.aspx
http://www.xpatulator.com/