Dummies guide to getting a salary increase

1.       Register on a few recruitment/job websites. This is especially effective if you do it on Linkedin and your boss is one of your contacts

2.       Inform HR not to pay next year’s school fees until you advise otherwise as your kids may not be attending the same school next year

3.       Advertise your car for sale on the company intranet, but don’t disclose why

4.       Casually ask your boss how much notice you have to give

5.       Act really happy for no apparent reason……

I hope it works for you.


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Comparable Worth: Equal Pay for Equal Work – Expatriate Salary Purchasing Power Parity

 

Comparable worth is a principle that states that people who perform work of equal value should receive similar levels of compensation regardless of gender, ethnicity, nationality etc, but with the exception of legally allowable differences such as level of performance, seniority, location based allowances etc.

Jobs have an organization value that can be measured and compared across jobs of widely differentiated content. Tools such as job evaluation can be used to explain these differences in terms of levels of work, skills, competencies, length of training and the amount of responsibility etc.

In the USA, despite the Equal Pay Act of 1963, it is legal to discriminate in pay if the job of one is not precisely identical to the work of another. Critics of equal pay for equal work argue that comparable pay for comparable work (comparable worth) would be far more effective in addressing gender pay differences in the USA. Comparable worth implies “comparing” rather than a precise measure of equality. Employers constantly “compare” jobs internally through job evaluation and externally through compensation and benefit surveys.

In the USA this principle applies largely to gender based pay discrimination. However what about expatriate pay? Expatriate compensation typically uses home salary as the basis of an assignee’s pay. For example, examine two equally skilled, experienced and performing expatriates doing work of equal value, side by side, in a third country. The expatriate from a higher paying / higher cost of living country earns more than their colleague from a lower paying / lower cost of living country. Does it mean that the two expatriates should be paid the same amount to achieve the principle of comparable worth?

Comparable worth seeks to ensure comparable pay for comparable work. The reality is that each dollar earned by the expatriate from the lower cost of living country will go further in their home country than it will for their colleague. To ensure that the principle of comparable worth is applied it is necessary to ensure that salary purchasing power parity (SPPP) is achieved.

SPPP calculates how much you need to earn in another location to compensate for cost of living, hardship, and exchange rate differences, in order to have the same relative spending power and as a result have a similar standard of living as you have in your current location.

No company pays the “market rate”, because there is no single universally accepted, appropriate rate for any job. Actual pay is influenced by market related targets, competition, perception, retention fears, circumstance and legacy. Expatriate pay is further influenced by cost of living, hardship and exchange rate differences. Whether we have comparable pay for comparable work or equal pay for equal work or even equal pay for equivalent work the principle is the same. People who perform work of equal value should be rewarded equally without discrimination. In the case of expatriates this implies salary purchasing power parity.

Demo SPPP Report

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Why your salary is what it is

Have you ever wondered why your salary is what it is? At first glance you would probably say it is based on what you signed up for when you joined your company and on the salary increases you received since then. Perhaps this was based on the state of the economy, your company’s profitability or hopefully your performance. But let us dig a little deeper.

Are other potential employers knocking at your door to offer you a better salary? Do you feel well paid for what you know and do? Do you feel you are unlucky and deserve to be paid a lot more, and hope someday you will! Chances are you fall somewhere in between feeling well paid and not. Most people would like to earn more, but accept that they are probably paid close to the salary market for their set of skills, and for the effort you put in. After all, at least you have a job. It could be worse.

In reality your salary is more a result of the supply and demand for your type of skills in your area, rather than a result of your actions. When demand exceeds supply for your skill type, you can demand a high salary, expect higher salary increases and consider better offers from other employers. On the other hand when supply exceeds demand, such as during a recession, or when an industry or skill set is in decline, it becomes tough to negotiate a better salary, in fact you would consider yourself lucky just to have a job.

Factors that pull salaries down through a decrease in demand / increase in supply for specific skills in a geographic area include:

• New technologies that produce products more cheaply, more efficiently, and with less people.
• Lower demand for products resulting in lower production volumes and, as a result, less jobs (i.e. economic recession).
• Skills that have become redundant due to technology changes.

Factors that push salaries up through an increase in demand / decrease in supply of specific skills in a geographic area include:

• Increased demand for products resulting in higher production volumes and, as a result, more jobs (i.e. economic boom).
• Skills that have become required due to technology changes but are not available in sufficient numbers

There are of course other factors pulling and pushing salary levels, there are just too many to cover. The world is not a simple model of supply and demand.

The cost of living is often used to motivate salary increases. High inflation drives higher salaries which in turn drives higher inflation. Central Banks focus a great deal on this aspect. On the other hand, deflation and recession, may lead to pressure to decrease salaries, as we have seen in some countries in recent years.

Trade unions aim to look after their member’s interests by negotiating salary and benefits on their behalf. While trade unions have the best intentions in negotiating “rates” with large employers, this can be counter productive to it’s members at times by not only preventing employers from pushing salaries down but also by preventing (or perhaps more accurately “discouraging”) employers from pushing salaries up.

So what is the moral of the story? If you want to earn a high salary:

• Work in a place where the economy is strong and growing
• Get skills that will be in demand, now and in the future
• Work in a place where inflation is low and stable
• Work in a profession or industry that is free of trade unions and wage regulation
• Choose an employer who practices performance based pay
• Choose an employer who offers you developmental and promotion opportunities

 

Steven is Chief Instigator at http://www.xpatulator.com a website that provides cost of living index information and calculates what you need to earn in a different location to compensate for cost of living, hardship, and exchange rate differences.

A New Approach to Expatriate Pay

The challenges of ensuring expatriates are paid fair salaries across different countries, in the current economic climate, of the credit crisis together with rapid currency and inflation fluctuations are increasingly complex.

The current economic climate has made it necessary to constantly review expatriate salaries. Rapidly fluctuating exchange rates and inflation can increase or decrease the amount of salary paid, and significantly impact purchasing power both positively and negatively in a very short period of time. The approach many organizations have taken is to convert a spendable percentage (typically 60%) of the expatriate’s salary into the host country currency on a monthly basis and to provide non-cash benefits such as accommodation, transport, education of children etc. This can result in employers paying too much or too little salary in these volatile times.

Too Much: The expatriate experiences short-term upside, as a result of a change in the exchange rate. A fall in the value of the host country currency against the home country currency, without an increase in the prices of goods and services in the host country, results in the expatriate having increased purchasing power. It may appear for a while that all is well. The expatriate has an unexpected windfall. A wise expatriate will save this windfall knowing that the situation will not be permanent. Either the exchange rate will adjust back to where it was or prices and inflation will begin to increase until economic equilibrium is achieved. The reality is, that in the short-term the employer will be faced with increased overall salary costs, and will eventually have to deal with disappointed expatriates when the trend inevitably reverses itself and their purchasing power drops again to realistic levels.

Too Little: The expatriate experiences short-term downside as a result of a change in the exchange rate. An increase in the value of the host country currency against the home country currency, without a decrease in the prices of goods and services in the host country, results in the expatriate having reduced purchasing power. This is when the employer faces complaints from expatriates unable to make ends meet. Prices of goods and services have remained the same in the host country but as a result of the change in the exchange rate, the expatriate receives less salary in local currency. In the long term either the exchange rate will adjust back to where it was, or prices and inflation will begin to decrease until economic equilibrium is achieved. The reality is that in the short-term the employer will be faced with decreased overall salary costs and will have to deal quickly with unhappy expatriates.

Clearly the approach on converting a portion of the salary into host country currency on a monthly basis does not work any more.

The expatriate compensation questions that employers must consider:

-What amount of salary will ensure that the expatriate will have the same purchasing power overseas as they have at home?

-What process / tool will be used to ensure the salary retains its purchasing power when inflation and exchange rates change?

New Approach: The ideal approach is for the employer to decide on a process / tool that establishes and maintains the expatriate’s salary purchasing power. The Salary Purchasing Power Parity (SPPP) approach is one such approach and involves the following steps:

-Committed Salary: Decide what amount / portion of the current salary (in home currency) will remain in the home country to meet committed expenses such as mortgage commitments, retirement funding, savings etc.

-Home Gross Spendable Salary: Establish what amount / portion of the current salary (in home currency) is spent in maintaining the expatriates current standard of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the expatriate pay rent, will healthcare be provided etc.

-Home Net Spendable Salary: Establish the net spendable salary by deducting the amount of tax, social contributions and any other statutory deductions applicable in the home country to the Home Gross Spendable Salary.

-Host Net Spendable Salary: Use the established amount of Home Net Spendable Salary in home currency, to calculate the amount of Host Net Spendable Salary required in the host country, in order for the expatriate to have the same amount of purchasing power as they have in their home country. The calculation comprises 4 factors:
1) The difference in the cost of living index for the same basket of goods and services between the home and host country applicable for the spendable salary.
2) The difference in hardship that the expatriate and their family are likely to experience.
3) The exchange rate between the home and host country.
4) The Net Spendable Salary

-Host Gross Salary: The Host Net Spendable Salary is “grossed up” by the amount of tax, social contributions and any other statutory deductions applicable in the host country, to establish the host gross salary that will provide the expatriate with the same standard of living as they had in their home country.

The Host Gross Salary is established in local host currency. As a result it is no longer subject to changes in the exchange rate. Over time the salary may be eroded by local inflation which will be reflected in the cost of living indexes. It is recommended that the Host Gross Salary be reviewed on a quarterly basis, to monitor the impact of any change in cost of living and the exchange rate.

Steven Coleman runs the most comprehensive international cost of living website available www.xpatulator.com an internet service that provides free cost of living and hardship information for 276 global locations to registered users. The premium content calculators allow you to customise your own cost of living index by choosing your own basket groups and includes a COLA calculator. Follow Steven on twitter
http://twitter.com/steveninseattle/.

How to Calculate a Cost of Living Allowance

A Cost of Living Allowance (COLA) is a salary supplement paid to employees to cover differences in the cost of living, particularly as a result of an international assignment.

The amount of COLA should enable an expatriate to be able to purchase the same basket of goods and services in the host location as they could in their home country. The basis for calculating a COLA is the Cost of Living Index (COLI) which indexes the costs of the same basket of goods and services in different geographic locations. COLA is a simple accurate method of measuring fluctuating salary purchasing power and ensuring parity.

Cost of Living Index
Our cost of Living Indexes measure the cost of 230 products and services across 13 different basket groups in 276 cities across the globe. The data is gathered by a team of research analysts who survey comparable items that are available internationally. A minimum of 3 prices for the same brand/size/volume of product is used to determine the average price for each item in each location. The items are priced on a quarterly basis and tend to rise and fall with inflation. The 13 different basket categories are as follows:
· Alcohol & Tobacco: Alcoholic beverages and tobacco products
Alcohol at Bar
Beer
Cigarettes
Locally Produced Spirit
Whiskey
Wine
· Clothing: Clothing and footwear products
Business Suits
Casual Clothing
Children’s Clothing and footwear
Coats and hats
Evening Wear
Shoe Repairs
Underwear
· Communication
Home Telephone Rental and Call Charges
Internet Connection and service provider fees
Mobile / Cellular Phone Contract and Calls
· Education
Crèche / Pre-School Fees
High School / College Fees
Primary School Fees
Tertiary Study Fees
· Furniture & Appliances: Furniture, household equipment and household appliances
DVD Player
Fridge Freezer
Iron
Kettle, Toaster, Microwave
Light Bulbs
Television
Vacuum Cleaner
Washing Machine
· Groceries: Food, non-alcoholic beverages and cleaning material
Baby Consumables
Baked Goods
Baking
Canned Foods
Cheese
Cleaning Products
Dairy
Fresh Fruits
Fresh Vegetables
Fruit Juices
Frozen
Meat
Oil & Vinegars
Pet Food
Pre-Prepared Meals
Sauces
Seafood
Snacks
Soft Drinks
Spices & Herbs
· Healthcare: General Healthcare, Medical and Medical Insurance
General Practitioner Consultation rates
Hospital Private Ward Daily Rate
Non-Prescription Medicine
Private Medical Insurance / Medical Aid Contributions
· Household: Housing, water, electricity, household gas, household fuels, local rates and residential taxes
House / Flat Mortgage
House / Flat Rental
Household Electricity Consumption
Household Gas / Fuel Consumption
Household Water Consumption
Local Property Rates / Taxes / Levies
· Miscellaneous: Stationary, Linen and general goods and services
Domestic Help
Dry Cleaning
Linen
Office Supplies
Newspapers and Magazines
Postage Stamps
· Personal Care: Personal Care products and services
Cosmetics
Haircare
Moisturiser / Sun Block
Nappies
Pain Relief Tablets
Toilet Paper
Toothpaste
Soap / Shampoo / Conditioner
· Recreation and Culture
Books
Camera Film
Cinema Ticket
DVD and CD’s
Sports goods
Theatre Ticket
· Restaurants, Meals Out and Hotels
Business Dinner
Dinner at Restaurant (non fast food)
Hotel Rates
Take Away Drinks & Snacks (fast Food)
· Transport: Public Transport, Vehicle Costs, Vehicle Fuel, Vehicle Insurance and Vehicle Maintenance
Hire Purchase / Lease of Vehicle
Petrol / Diesel
Public Transport
Service Maintenance
Tyres
Vehicle Insurance
Vehicle Purchase

Each basket category does not count equally and are weighted in the final calculation based on expatriate spending patterns.

In order to calculate an accurate cost of living index for a specific individual the basket items that are not relevant to the individual should be excluded from the calculation. For example if education and housing is provided by the employer these basket categories would be excluded from the cost of living index calculation. This increases the accuracy of the cost of living index and makes it possible for each individual to have their own customized cost of living index based on their specific arrangements rather than using an overall “generic” index which is likely to contains costs that are not relevant to the individual.

The formula for calculating the specific cost of living index for an international assignment is as follows:

Cost of Living Index = Customized Cost of Living Index for Host City / Customized Cost of Living Index for Home City

When moving to a higher cost of living host city, the index will be greater than 1 (positive). When moving to a lower cost of living host city the index will be less than 1 (negative). Where the index is negative it means that in real terms the cost of living in the host city is lower than the home city. This means that if the negative index where to be applied to the employee’s salary, they would actually be paid proportionately less spendable salary in the host city. It is important to note that the majority of organizations do not apply a negative cost of living index because it makes it difficult to persuade an employee to take up an assignment as they tend to see it as a reduction in salary.
Examples of Cost of Living Index Calculations using our data:

Example 1) An Australian employee moving from Perth to London where healthcare and communication will be provided by the employer

More Expensive in London:
Alcohol & Tobacco +4.77%
Clothing +21.85%
Education +31.53%
Furniture & Appliances +16.03%
Groceries +16.35%
Household +50.72%
Miscellaneous +137.47%
Personal Care +11.18%
Recreation & Culture -6.82%
Restaurants Meals Out and Hotels +34.99%
Transport +19.80%

The overall difference in cost of living moving from Perth and London is +28.06%.

In this case the cost of living index is positive and would be applied as it is.

Example 2) A British employee moving from London to Mumbai where the employer will provide housing and education

More Expensive in Mumbai:
Alcohol & Tobacco -37.53%
Clothing -9.58%
Communication -44.92%
Furniture & Appliances -19.31%
Groceries -24.03%
Healthcare -31.24%
Miscellaneous -72.43%
Personal Care -24.94%
Recreation & Culture -35.73%
Restaurants Meals Out and Hotels -33.11%
Transport is -27.99%

The overall difference in cost of living moving from London Mumbai is -30.53%.

In this case the cost of living index is negative and would not be applied.

Net Spendable Salary

Differences in cost of living only impact the portion of the salary that is spendable in the host country. Items in the home country such as retirement funding, medical insurance and other home based costs are not impacted by the cost of living in the host country.

To determine the Net Spendable Salary establish what amount / portion of the current salary (in home currency) is spent in maintaining the employee’s current standard of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the employee pay rent, will healthcare be provided etc. Deduct all items that are either provided in kind or are spendable in the home country. Deduct the hypothetical amount of tax, social contributions and any other statutory deductions applicable in the home country from the Spendable Salary. What is left is the Net Spendable Salary.

Cost of Living Allowance (COLA)
The formula for calculating the cost of living allowance using the above inputs is as follows:

(Net Spendable Salary X Cost of Living Index X Hardship Index X Exchange Rate) less (Net Spendable Salary X Exchange Rate) = COLA

Examples of COLA Calculations using our data

Example 1) An Australian employee with a net spendable salary of AUD$100,000 moving from Perth to London where healthcare and communication will be provided by the employer

($100,000.00 X 1.2806 X 1 X 0.4768) less ($100,000.00 X 0.4768) = COLA of £13,379.44 (GBP)

Based on all the above factors a person would require a Cost of Living Allowance of £13,379.44 (GBP), in addition to their current salary of 100,000.00 Australian Dollar (AUD) to compensate for relocating from Perth to London. This Cost of Living Allowance compensates for the overall cost of living difference of +28.06% and the relative difference in hardship of 0%.

Example 2) A British employee with a net spendable salary of £18,000 moving from London to Mumbai where the employer will provide housing and education

Note: Because the Cost of Living Index is negative it is not applied.

(£18,000.00 X 1 X 1.3 X 67.2852) less (£18,000.00 X67.2852) = COLA of 363,340.32 Indian Rupee

Based on all the above factors a person would require a Cost of Living Allowance of 363,340.32 (INR ), in addition to their current salary of £18,000.00 British Pound (GBP ) to compensate for relocating from London to Mumbai. This Cost of Living Allowance compensates for the overall cost of living difference of [-30.53%] and the relative difference in hardship of 30%.

COLA Payment
The COLA is paid as a salary supplement (i.e. as an additional allowance) net of tax in the host country. If the COLA is a taxable allowance in the host country it should be grossed up in order that the full amount of calculated COLA is paid net of tax given that the basis of the calculation is Net Spendable Salary. The COLA is often accompanied by other allowances and benefits such as flights home, relocation / settling in allowance, and furnishing allowance.

Exchange Rate Fluctuations
Significant changes in the exchange rate can make a considerable difference in the COLA calculation. In 2008 some of the major global exchange rates changed by as much as 30-40%.

The cost of living index reflects the changes caused by inflation and exchange rates. In the short-term there may be disequilibrium between inflation and the exchange rate (the one pushes the other), however over time the cost of living index provides the most accurate view of the cost of living.

It is important to remind expatriates that when the cost of living difference is negative, and the negative value has not been applied, they have higher purchasing power in the host country than they would at home.

Where a negative cost of living index has not been applied (our recommended approach), and a change in the exchange rate indicates an upward adjustment in COLA may be required, it is recommended that the COLA should not be adjusted upward until the cost of living index becomes positive i.e. the cost of living reflects that there is a “real” increase in cost of living between home and host countries. This may mean that their would be no increase in the COLA as a result of exchange rate fluctuations for some considerable time. During this time the employee’s purchasing power decreases. But it is important to remember that until the cost of living difference becomes positive, the individual will still have a higher purchasing power than they do in their home country.

It is advisable to stipulate a currency protection rule, rather than reacting to every fluctuation in the exchange rate. For example the rule may state that COLA will be reviewed if exchange rates or local inflation move by more than +10% during a year. It is important to keep in mind that the prices of goods and services are unlikely to drop in local currency. This would only occur in a period of deflation (negative inflation). Therefore the currency protection rule would normally make provision for upward adjustments in COLA and not downward adjustments during an employee’s assignment. Downward adjustments to an existing COLA due to exchange rate fluctuations without a corresponding drop in the prices of local goods and services puts immense pressure on an employee’s host currency budget commitments and can lead to the employee experiencing financial difficulty.

Using an independent service provider provides an independent, objective basis for determining an employee’s COLA.

We recommend therefore that a COLA is calculated by applying the specific (customized) cost of living index to the net spendable salary at the beginning of the assignment and monitoring exchange rate fluctuations thereafter in addition to the annual salary review.

Steven Coleman runs the most comprehensive international cost of living website available www.xpatulator.com an internet service that provides free cost of living and hardship information for 276 global locations to registered users. The premium content calculators allow you to customise your own cost of living index by choosing your own basket groups and includes a COLA calculator. Follow Steven on twitter
http://twitter.com/steveninseattle.