Base Salary – Not So Basic!

Author:
Chuck Csizmar – CMC Compensation Group

Ever find yourself confused when asked to provide an international employee’s annual rate of pay?   Compared to the US, you will find scant uniformity between countries as to when and how monies are paid to employees, and this diversity can lead to confusion, misreporting of data and the potential for internal equity squabbles.  It is especially a concern when a US Manager attempts to hire a foreign local national without being certain of country-specific pay practices.

To a US employer, the term “annual base wage” or “annual salary” is simply the cumulative amount of payroll dollars (regular paychecks) dispensed over a twelve month cycle.  However, in many parts of the international community, it’s a bit more complicated.

Numerous countries consider statutorily required or common practice holiday (vacation) pay and Christmas (December) payments as part of what they term “basic salary” – which they report as a monthly calculation.  So what is the annual salary?

Defining Your Terms

In the US, annual salary is a common reporting term, an identifier to the company and the employee of the value paid to each position. To quote an annual salary is common practice.

The trick when considering global practices is to remember the distinction between the two annual terms:

• Base pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed

• Basic pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed, but including additional payments (usually in monthly increments) not directly related to the work effort

Some US companies prefer not to deal with the issue, relying instead on the US model of quoting an annual salary – then dividing by the total number of monthly payments due in order to calculate the monthly gross paycheck.

A client of mine once insisted on offering a candidate 75,000 euro, but no more for a key position.  When informed that in Belgium an extra month (13^th) is common, and in fact mandated in many collective agreements, the response was “fine, as long as the total base pay isn’t higher than 75,000 euro.”

That candidate did not accept the position.

Here are a few representative examples to illustrate the diversity of practices across the globe.

• Singapore:  While a 13^th month payment (Annual Wage Supplement) is not mandated, it is common practice.  Executives typically receive 1 to 2 months pay as an additional bonus.

• Mexico:  Companies are mandated to give employees a Christmas bonus equal to 15 days pay.  Common practice is to grant 30 days.

• Peru:  Employees are entitled to a 13^th and 14^th month bonus; the 1^st extra month is paid in July and the 2^nd in December

• Italy:  In December, employees are paid a Christmas bonus equal to a month’s salary.  In many contracts a 14^th month’s salary is included and is paid in June.

The extra payments are not rewarding work performance, but typically provide extra monies for either vacation time or Christmas.  These practices are not commonly followed in the US.

What to do

To avoid confusion when dealing with local national employees it is helpful to talk in terms of monthly pay, the term commonly used by the employees.  No matter how many monthly payments are made, for whatever reason, simply multiply the payments to reach the annual figure.  To your international employee that is considered an annual pay entitlement, though not an annual salary as practiced in the US.

When reading compensation surveys make sure to check the definitions used; oftentimes the survey will report both an annual salary and a “guaranteed annual cash” – the latter inclusive of holiday bonuses and extra month’s pay.

Avoid setting a US-style annual salary and then dividing by the number of required payments to derive a monthly pay.  Instead, determine what you will pay on a monthly basis and multiply those payments by country-specific statutory requirements and common practice to derive (build-up) the annual salary.  It’s a bit more confusing for US companies, but it will be more meaningful for your international employees and likely save you employee relations issues down the road.

More About Chuck:

• Chuck on LinkedIn
• CMC Compensation Group
• Contact Chuck