MERCER WEBCAST Keeping Missionaries Pay Balanced Using Mercer s Cost-of-Living Compensation Data 21 MAY Kerry Jantzen Chicago

Transcription

1 MERCER WEBCAST Keeping Missionaries Pay Balanced Using Mercer s Cost-of-Living Compensation Data 21 MAY 2014 Kerry Jantzen Chicago

2 Today s Speaker KERRY JANTZEN Senior Associate, Global Mobility kerry.jantzen@mercer.com MERCER WEBCAST 1

3 Agenda Introduction to Missionary Compensation The Balance Sheet Approach The Balance Sheet Approach: Goods & Services What are G&S? How are G&S calculated? - Market Basket - Creating the index Effects of FX and Pricing on G&S Indices The Balance Sheet Approach: Goods & Services Index Options MERCER 2

4 MERCER Introduction to Missionary Compensation

5 Elements of Expatriate Compensation Base salary Assignment benefits and allowances MERCER 4

6 Base salary Composition of base salary Base salary is typically allocated to four main categories of expenditure: 1) Income taxes 2) Housing 3) Goods and services 4) Reserve The allocation of base salary within these categories adjusts with changes to income and family size. MERCER 5

7 Base salary Income taxes Income taxes City/state taxes Local taxes Social security taxes Housing Goods & Services Reserves MERCER 6

8 Base salary Income taxes Housing Rental rent, repairs, insurance Ownership mortgage interest, taxes, insurance, repairs and maintenance Fuel and utilities oil, gas, electricity, water, refuse, sewage charges Goods & Services Reserves MERCER 7

9 Base salary Income taxes Housing Goods & Services Reserves Food at home (meat, fish, dairy, groceries, fruit, and vegetables) Personal care Furnishings and household operations Clothing Medical care Recreation Transportation Domestic services Food away from home MERCER 8

10 Base salary Income taxes Housing Goods & Services Reserves Retirement/pension social security, employee pension contribution Insurance/disaster protection life insurance, disability, group life insurance Asset accumulation savings, mutual funds, mortgage payments, investments Other charitable contributions, education MERCER 9

11 The Balance Sheet Approach

12 Principles of the Balance Sheet Approach Method of calculating international assignment compensation from home country spending patterns, considering host country cost differentials. Income equalizers maintain equity within an established salary structure with the objective that the missionary should not experience a significant gain or loss as a result of the international assignment. Missionaries receive home-country salary. This: Inherently preserves home-country norms. Equalizes expatriates to peers in home country. Creates equalization among location assignments. Develops and promotes missionary mobility. Assists continuity of benefits. The foundation of equalization is consistent and fair approach. MERCER 11

13 The Balance Sheet Income Taxes Income Taxes Income Taxes Housing Housing Income Taxes Housing Goods & Services Goods & Services Goods & Services Housing Goods & Services Reserve Reserve Reserve Reserve Home-country Salary Assignment-location Cost Assignment cost differentials Assignment-location Costs Paid by Company and from Salary Home-country Equivalent Purchasing Power MERCER 12

14 The Balance Sheet Approach Goods & Services

15 What Are Goods & Services? MERCER 14

16 Goods & Services By establishing a relationship between the costs of goods and services in the home country and in the assignment location, the Balance Sheet approach minimizes changes to the standard of living if costs are higher abroad. Spendable Income: Home Spendable: The portion of salary spent on goods and services in the home location. Host Spendable: The corresponding amount in foreign currency needed for the same or similar items in the assignment location. To bridge the gap between the home costs and the host costs, the G&S differential is established There are a number of names for the differential. COLA, Goods & Services, G&S Allowance, G&S Differential MERCER 15

17 Goods & Services Step 1 Determine Home-location Goods & Services Spendable Income Step 2 Determine Cost of Living Price Differences Between Home and Host Locations Step 3 Goods & Services Index Step 4 Calculate Goods & Services Differential Step 5 Calculate Host-location Spendable Income MERCER 16

18 Goods & Services Step 1: Determine Home Location Goods & Services Spendable Income It is a function of Salary level or income Family size Derivation of Spendable Government consumer income and expenditures data (i.e., The Bureau of Labor Statistics in the United States). Note: Home Country Data and Tax Profile provides the source of data. MERCER 17

19 Goods & Services Step 1: Determine Home Location Goods & Services Spendable Income Home-Country Consumption Patterns Reflect purchasing preferences, which vary by country. Determine relative importance of each item / category has on spendable income. Are represented by weights. MERCER 18

20 Goods & Services Step 2: Determine Cost-of-Living Price Differences Between Home and Host Locations The Market Basket Sampling of items that are representative of the kinds of goods and services that are typically purchased by an individual/family while on assignment. Market Basket Pricings Used to establish broad price relationships between locations. Calculating the Index Priced in both the home and host country to determine cost differences. MERCER 19

21 Goods and Services Market Basket What It Includes Food at Home (meat, fish, dairy, groceries, fruits and vegetables Personal Care Furnishings and Household Operations Clothing Medical Recreation Transportation Domestic Service Food Away from Home In short: Goods and Services market basket includes everything we spend on daily living, outside of housing, taxes, and our savings (reserve). MERCER 20

22 Goods & Services Step 2: Determine Cost-of-Living Price Differences Between Home and Host Locations Mercer uses nearly 200 pricing agents worldwide: Host country pricings done by expatriates living in the location (expatriate perspective). Home country pricings done by local nationals. Objective; not performed by Mercer employees or associated with Mercer or client companies in the host countries. Provide local perspective as well as consistency and timely input on local conditions. Mercer Regional Research Coordinators (RRCs) recruit, train, manage, and audit all pricing agents. RRCs are full-time Mercer senior staff Assigned areas for RRCs are: the Americas, EMEA, and Asia. MERCER 21

23 Goods & Services Pricing Information Pricings are conducted every six months in most locations (more often in some, annually in others). Retail outlets are selected from input by: Agents Mercer s knowledge Expatriate Purchasing Patterns Survey Sale prices not included in survey of prices. VAT and other sales taxes are included. MERCER 22

24 Goods & Services Step 3: Calculating the Goods & Services Index Simplified Example - Can of Soda A can of soda can be purchased around the world. If a can of soda costs: USD 1 in the US GBP.90 in London Then for an assignment from the US to London Home Country Spendable = USD 1.00 = GBP.90 Host Country Spendable Note: Not actual prices, for illustration purposes only. MERCER 23

25 Goods & Services Step 3: Calculating the Goods & Services Index To effectively compare the price difference and develop an index, it is necessary to convert the GBP cost of the can of soda into USD. Exchange Rate: USD 1=GBP.6182 Convert the price of the soda from the host currency to home currency.90/.6182= USD 1.46 The can of soda costs USD 1.46 in London To determine the differential, subtract the Home Spendable (in USD) from the Host Spendable (in USD) to equal the differential or the difference in cost USD 1.46 USD 1.00 = 46 cents MERCER 24

26 Goods & Services Step 3: Calculating the Goods & Services Index The differential you receive the amount intended to make you whole when you purchase a can of soda in London is USD.46. The differential is a supplement that ensures you don t end up paying more out of your own pocket for a good or service than you would if you were living in your home location. In other words, if you were living in the US, you d pay USD 1. On assignment, you d still be expected to pay that USD 1, and your company gives you the extra.46 USD to ensure you don t pay more out of pocket. MERCER 25

27 Goods & Services Step 3: Calculating the Goods & Services Index What does the Goods & Services Index really mean? If index is = 100, prices are equal in the home and host location. If index is > 100, prices in the host location are higher. For example, if the index is 146, it means the host location is 46% more expensive than home for the market basket of goods and services. If index is < 100, prices in the host location are lower. MERCER 26

28 Goods & Services Step 4: Calculating the Goods & Services Differential Simplified example - can of soda Now that we know the index, we need to calculate the Goods & Services Differential (or COLA) using the following formula: (G&S Index - 100) x Home Spendable = COLA 100 ( ) x USD 1.00 = USD MERCER 27

29 Goods & Services Step 5: Calculating the Total Assignment-location Spendable This is the amount the employee will need to maintain their home-country spending patterns: (Home Spendable + Differential) x FX rate= Total Assignmentlocation Spendable (Host Currency) MERCER 28

30 Why will my G&S Differential (COLA) change? MERCER 29

31 What Will Cause the Goods & Services Differential to Move? Exchange Rate Fluctuation Home currency weakens: Need more home currency to buy the same amount of goods in the host currency. This causes index and COLA to increase. USD 1 = GBP.58 USD GBP 100 Home currency strengthens: Need less home currency to buy the same amount of goods in the host currency. This causes index and COLA to decrease. USD 1 = GBP.62 USD GBP 100 MERCER 30

32 What Will Cause the Goods & Services Differential to Move? Relative Price Movement Host prices increase faster: The gap between home-country spendable and assignmentlocation spendable gets wider. This causes index and COLA to increase. Home Host Home prices increase faster: The gap between home country spendable and assignment location spendable gets narrower. This causes index and COLA to decrease. Home Host MERCER 31

33 What Will Cause the Goods & Services Differential to Move? Change in Home-Country Spendable Income Changes in salary and family size If your salary or family size increases, you spend more money on goods and services. If your salary or family size decreases, you spend less money on goods and services. Changes in Home-country consumption patterns Changes to home-country economic conditions will impact how you would spend your money in your home country. MERCER 32

34 Goods & Services Tables Mercer s Default Update Schedule Standard updates four times a year. 2x pricing 2x interim FX updates* ( quarterly updates ) Currency fluctuations +/- 6% over two consecutive weeks +/- 3% over four consecutive weeks High inflation Extraordinary economic conditions *FX rates are updated on a weekly basis from data provided by OANDA MERCER May 23,

35 MERCER The Balance Sheet Approach Goods & Services Index Options

36 Index Types: Expatriate and EPI (Efficient Purchaser Index) Expatriate Available in all locations Based on comparison of prices in retail outlets used by local nationals in the home location to prices from retail outlets used by expatriates in the assignment location. Assumes assignee will purchase globally recognized, imported brands. Used in less-developed locations where appropriate local brands / outlets are not available. Efficient Purchaser Available where appropriate Based on comparison of prices in retail outlets used by local nationals in the home country to prices of an efficient shopper in the host. Still appropriate for expatriates, but assumes assignee will purchase a combination of international and local/ regional brands and/or outlets versus globally recognized brands. MERCER 35

37 Questions KERRY JANTZEN Senior Associate, Global Mobility QUESTIONS Please type your questions in the Q&A section of the toolbar and we will do our best to answer as many questions as we have time for. imercer.com/webcasts View past recordings and sign up for upcoming global mobility webcasts. To submit a question while in full screen mode, use the Q&A button, on the floating panel, on the top of your screen. CLICK HERE TO ASK A QUESTION TO ALL PANELISTS MERCER

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