Deploying employees on overseas assignment raises multiple procedural and practical issues for employers, including how best to approach remuneration. One option when paying oversees assignees is to use split pay, but this comes with pros and cons.
In this guide for employers, we look at what split pay is for workers on overseas assignment and how it is used in practice.
What is split pay for overseas assignees?
Split pay is a type of pay delivery strategy that can be used by employers to pay any employees being sent on overseas assignment. This is where the assignee’s pay is split between the currencies of the host and home country, where some of their salary is paid in the host-country currency and the remainder is paid in the home-country currency.
An overseas assignee’s compensation package is typically split into the following two parts, where a split pay approach would usually mean that the first part is paid in the host-country currency and the second part is paid in the home-country currency:
Spendable income: also referred to as “goods and services income”, the “spendable income” portion of pay is for daily living expenses in the host country;
Non-spendable income: the remaining portion of the assignee’s salary, commonly referred to as “non-spendable income”, is for savings and other expenses, such as furniture, education, holidays, as well as for any housing obligations, like a mortgage, in the home country. This remaining amount would mainly be spent or kept in the home country.
A cost-of-living allowance (COLA) will also usually be applied to the spendable income portion of the assignee’s remuneration package to help ensure that employees sent on international assignments will have broadly the same amount of income to spend, no matter what country they will be working in. The logic here is that the assignee only needs to be protected against goods and services differentials on the proportion of pay that is likely to be spent in the host country — so for food and groceries, clothing, travel, childcare and recreation etc — where the COLA is to compensate overseas assignees where the cost of goods and services are higher in the host location than in their home country.
Applying the same logic, by paying the assignee the amount that they will need to spend on good and services in the host currency, this will help to ensure that they are no better or worse off. The way in which the COLA is calculated — using a cost-of-living index linked to both inflation and exchange rates — the employer has already partly protected the assignee’s spendable income against currency fluctuations. As such, when using a split pay approach, the COLA will be to protect solely against the difference in the cost of living, where the payment of spendable income in the host currency should do the rest.
Why is split pay used for overseas assignees?
For employers, it can often seem that whatever approach they take, this can potentially cause issues. For example, a UK assignee working in the United States but paid in pound sterling may have cause for complaint when the pound weakens, demanding an exchange loss allowance to offset this unfair reduction in their purchasing power. The same assignee may happily cash their pounds into US dollars when the pound strengthens but, when this happens, local management may instead complain that overseas assignees are receiving an unwarranted windfall. Equally, paying in US dollars simply reverses the flow of complaints.
Currency fluctuations and exchange rates can have a significant impact on the amount that an overseas assignee receives in compensation. This can also affect the amount of the COLA that employers pay their assignees. For these reasons, determining the currency in which to pay the assignee’s salary is not a straightforward decision, although splitting an assignee’s pay between the currencies of the host and home country can often help to solve this problem. In this way, the amount paid in the host-country currency is meant solely for daily living expenses, while the amount paid in the home-country currency is intended for savings and less frequent purchases that are typically made outside the host country.
What both employers and employees are looking for is stability, where psychology is often the key. In particular, an overseas assignee is unlikely to feel satisfied with any pay approach that appears to be vulnerable to either currency or inflation fluctuations, although the majority will feel treated fairly by a “no gain/no loss approach”. In the same way that many employers will adopt a home-based approach when assessing the appropriate COLA for overseas assignees, in this way matching a person’s home-country purchasing power while on overseas assignment in the host location, so the employee is no better or worse off, employers will also adopt a split pay approach to help achieve this balance.
How does split pay compare to other pay strategies?
Assessing the different pay delivery approaches when it comes to how an assignee’s salary is paid can help to understand how this all works. Below we look at both a host currency and home currency approach, comparing these with the split pay approach.
Host currency approach
The first option for the employer is to pay the assignee their entire salary in the host-country currency, so both the spendable income portion and the non-spendable part. In this scenario, the spendable income portion of the assignee’s salary will be protected by any cost-of-living adjustment made by the employer, but the remaining portion will be exposed to currency fluctuations that might result in loss and gains for the assignee.
There is also something fundamentally flawed in the logic of this payment approach, where much of the non-spendable income amount will be used in the home country. As such, it makes absolutely no sense to provide this part of the salary entirely in the host currency.
In the context of the risks involved, the net effect is therefore as follows:
- Spendable income (paid in the host currency): there will be no risk, provided this portion of the assignee’s salary is protected by a cost-of-living allowance
- Non-spendable income (also paid in the host currency): there will be significant risk if this is subsequently converted into the assignee’s home currency.
Home currency approach
The second option is to pay the assignee their entire salary in the home-country currency. In this scenario, the non-spendable income paid in the home currency and spent in the home country is protected. The home currency approach also provides some stability, provided that the home currency stays strong. However, there is still a risk with the home currency approach, where the assignee must convert the spendable income into the host currency to pay for day-to-day living expenses. This means that the timing of the exchange could lead to a potentially pronounced loss or gain for the assignee if currency volatility is high.
In the context of the risks involved, the net effect is therefore as follows:
Spendable income (paid in the home currency): there will be some risk if this part of the pay is converted abroad
Non-spendable income (also paid in the home currency): there will be no risk if this part of the pay is spent at home, with some limited risk if spent abroad.
Split pay approach
When comparing the risks involved with the first two approaches, the split pay approach often appears to be the most logical option. This is because the spendable income, which is intended to be spent in the host country, is paid in the host currency. Equally, the non-spendable income, which is intended to be spent at home, is paid in the home currency.
In the context of the risks involved, the net effect is therefore as follows:
- Spendable income (paid in the host currency): there will be no risk, provided this portion of the assignee’s salary is protected by a cost-of-living allowance
- Non-spendable income (paid instead in the home currency): there will be no risk if this part of the pay is spent at home, with some limited risk if spent abroad.
Pros & cons of split pay
There are various different types of compensation strategies, or combinations of strategies, that can be used for overseas assignees. However, when comparing the different payment approaches to currency when it comes to paying salary, a split pay approach has clear advantages, limiting the risk of there being any pronounced gain or loss either way.
For the employer, the ideal scenario when deciding on a compensation package for overseas assignments is that the assignee should neither gain nor lose from differentials in either living costs or fluctuations in exchange rates. By splitting the assignee’s compensation package into two parts, and by applying a split pay approach to these separate portions of the assignee’s salary, this can go a long way to achieving a “no gain, no loss” balance sheet.
For overseas assignees, the split pay approach can also be perceived as the best way forward, where they will often feel psychologically satisfied that, even though they may not benefit from any windfall, they will be able to maintain the same standard of living as back home while on assignment in the host country. In turn, this will minimise the risk of any conflict or complaints, where everyone on the employer’s payroll feels fairly treated.
However, the split pay approach is not necessarily viable for every overseas assignment, where splitting the assignee’s salary payment between the home- and host-country currencies may cause problems in some cases. In particular, in countries with high inflation and/or weak currencies, such as in Eastern Europe, Africa and Latin America, employers should either pay in the home country currency or in a third “hard” currency. When setting an overseas payment policy, the employer may also need to take into account any specific laws and currency transfer restrictions for the host country. As with many issues that can arise in the context of overseas assignments, there is no “one-size-fits-all” approach.
Implementing split pay
When running a split payroll system for overseas assignees, much will depend on the proportion of spendable and non-spendable income to which the different currencies will be applied. Ideally, an employer would set a percentage of the assignee’s spendable income that exactly matches the needs of that individual. In this way, the spendable income would reflect what the employee needs in the host location for daily living expenses.
However, the reality is that the employer can only identify spending patterns, rather than being able to exactly match the spending behaviour of each individual assignee. As such, one option when implementing a split pay system could be to allow the assignee the flexibility to decide the percentage of their salary that will be paid in the host currency.
For example, where the employer sets a spendable income at 50% of total after-tax income (where this is the figure used to calculate any COLA), they could provide assignees with the option to have between 25% and 75% of the salary paid in the host currency.
Applying this example to a British expatriate on assignment in the USA who elects to receive 75% of their salary in US dollars, the 25% paid in pound sterling and spent in the UK is unlikely to create any problems. Equally, the cost-of-living index will be applied to the 50% of the salary paid in US dollars, where the spendable income is therefore protected from both inflation and exchange rate fluctuations by the index. As for the remaining 25% paid in US dollars, but not covered by the COLA adjustment, the employee can gain or lose on this amount due to exchange rate fluctuations. However, a possible approach would be to guarantee this 25% of the salary against fluctuations. In this way, the employer would cover any losses but also keep any gains, if the currency fluctuates more than say 10%.
However, regardless of what approach is decided upon by the employer, by having a clearly defined policy as to how adjustments will be made for overseas assignees to reflect the cost of living, and in what currency the overseas assignee will be paid, this will help to set expectations and provide financial reassurance. Before an overseas assignee even accepts an assignment in a host country, they will need to make an informed decision as to the fairness of any approach taken and if this is likely to leave them short. By giving employees much needed peace of mind, this is likely to result in a much higher acceptance rate.
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Split pay for overseas workers FAQs
What is split pay?
Split pay is where the pay of an overseas assignee is split between the currencies of the host and home country, in this way balancing out where the two currencies may potentially weaken or strengthen against each other.
Types of compensation strategies for overseas assignees?
There are various different types of compensation strategies for overseas assignees, including a host or home currency approach, as well as a split pay approach where the assignee’s salary is paid partly in the host and home currencies.
Last updated: 19 December 2023
Author
Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.
She is a recognised by Legal 500and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.
Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals
