Global Versus Local Pay

Globalization has spread quickly and pay differences are even more important today. Companies that were once purely “local”, with a few “expatriates”, are now operating internationally with multinational workforces. Managers are increasingly responsible for multinational employees in multiple locations, creating increasingly challenging demands for pay consistency within the team and the company.

Just as it has become increasing difficult to identify the “nationality” of a company, establishing the “nationality” of an employee has become even more complex. Third culture kids of yesterday are the global employees of today. The question “Where are you from?” is becoming a difficult question to answer for more employees than ever before. We have shifted from answering this question with reference to “nationality” (i.e. country of birth or citizenship) to referring to where we are “local”. Let us take Ramesh as an example.

Ramesh prefers to say “I am from Dubai and Mumbai” as these are the two places he feels he is a “local” rather than have to explain “My parents were from India. I was born in Dubai and grew up there, we regularly visited family in Mumbai when on vacation, but I attended university in Canada and worked in Houston for 8 years, before returning to Dubai. My wife is Canadian and my kids are American having been born there. We moved to Mumbai 5 years ago”. Is Ramesh global or local? What is his “nationality”.

The required skills for managing pay in the context of globalization are evolving, moving from local subject matter expertise (local market and local practices) to building international solutions for a global landscape (global market and global practices). The challenge within a multinational company today, is to find an appropriate balance between global consistency and local country and/or employee needs/requirements, whilst maintaining costs.

• Compensation: Global or Local?
• Benefits: Global or Local?
• Job structures: Global or Local?
• Incentives: Global or Local?
• Equity: Global or Local?

We now have sophisticated technology to manage multinational teams across borders but how do we manage the differences between global and local pay?

Imagine working in a multinational company and finding out that your colleague at the desk next to you (doing the same job, at the same level, with the same experience and qualifications, and a similar level of performance) earns double your salary and gets benefits you’re not eligible for. They are entitled to 35 days annual leave; you get 20 days. They are provided with accommodation, health insurance and their children’s school fees are fully paid for at the international school; you don’t get any of that.

So why are they earning so much more than you? What if you found out it was simply because you are “local”?

With a “Local” versus “Expatriate” pay approach, this is the reality.

Local pay is traditionally driven by the supply and demand for skills in a localised free market. These local markets have evolved over many decades and are dominated by nationals, the majority of whom have not, and do not wish to, move to other locations. Depending on the dominant supply and demand trends for jobs, each local market is different in terms of what is pays different skill sets in different industries.

Expatriate pay on the other hand is traditionally driven by the cost of living and hardship differences between the home and host location, using home location pay as the base and adding to this in accordance with the calculated home-host differences and a global benefits policy. While the gap differs from one country to the next, generally in a low-income country (usually a third world / developing country), local staff are paid far less salary and receive fewer benefits than their expatriate colleagues (usually from a developed first world country), even when they do similar work and have similar qualifications.

Local staff in developed, first world countries, with structurally high cost of living (high-income countries), earn far more than their compatriots in less developed, third world countries, with structurally lower of cost of living (low-income countries). That means that before applying any expatriate premium / incentive to take up an assignment in a low-income country, a high-income country expatriate is already way more highly paid. The problem is further compounded by the fact that in order to “encourage” someone to take up an expatriate assignment to a place that is less attractive to them, albeit with a lower cost of living, a significant premium is often required, which results in the pay gap being even larger between a high-income country expatriate and their low-income country local colleague.

These large pay gaps can create significant internal equity issues. Local staff can feel less valued than their expatriate colleagues and become resentful and dissatisfied. This is made worse when the expatriate is perceived as having a visibly higher socioeconomic status such as children attending the most exclusive private school, living in a more exclusive up-market house, or driving a luxury car.
Ramesh has and could continue to work anywhere on the planet. Should he be paid as an “expatriate” or as a “local” in Mumbai?

The obvious solution is to minimise the use of expatriates from high-income countries in low-income countries. Rather than sending an engineer from Germany (high-income country) to Dubai, it would, for example, be far more cost effective to send an engineer from India (low-income country) to Dubai. As the talent pool in low-income countries increases, more and more multinational companies are sourcing talent from them resulting in “brain-drains” and perpetuating the crippling lack of skills in these countries. This is a double edged sword for low-income developing countries. On the one hand they need to retain their skilled talent to help further build their economies and grow local skills, but at the same time, their expatriate remittances are a critical contribution to many low-income country economies.

The reality is that expatriates from high and low income countries around the world, will continue to work side by side in multinational companies, along with local staff in each physical location.

Many multinational companies are grappling with these issues and are developing new approaches to equitable and sustainable global pay. While there is no easy answer, any solution will require the development of frameworks that align global pay models with local pay markets in order that the principle of equal pay for work of equal value is achieved. This does not mean that everyone will be paid the same. These new approaches will require years of integration of global and local pay practices. Where differences remain, these will have to be transparent and defendable based on fairness.