There has been much talk and speculation in recent years about establishing pan-European and even pan-global pay rates. Certainly it is a preoccupation of many multinational enterprises to harmonise their reward policy. Generally, however, it is the local salaries market that imposes a constraint on such a practice and the only measure of equity in this circumstance is to base market readings on a common framework of job evaluation.
It remains, however, a legitimate exercise to measure the salaries paid in different locations according to a common scale or formula. One approach that FedEE has developed in recent years is the ‘advanced parity method’ (APM). This takes pay practices in a reference country and establishes benchmarks defined according to purchasing power parities, economic performance (GDP/head) and the tax and social security “take” in a particular country. This produces the equivalent salary that should be paid if other factors did not intervene (such as local pay markets and an individual company’s ability to pay).
Let us take a simple example based on German pay practice. A particular job attracts an annual salary in Berlin, Germany of 50,000 euros gross. What would be the equitable equivalent salary in the USA and Australia? If we take a single individual, aged 25 with no children in each country and take into account deductions at a national and local level then the net pay in the three locations would be as follows:
Germany (Berlin) Gross: 50,000 Net: 30,156 euros. 60.3%
USA (NY) Gross: US$ 53,329 Net: US$ 40,161. 75.3%
Australia (NSW) Gross: AU$ 70,121 Net: AU$ 54,382. 77.6%
These figures indicate how much tax, social security and other charges bite into gross pay in each locality. But what is the relative spending power of net pay earned in each country? If we take the latest PPP figures from the OECD we find the following adjust spending power figures adjusted to Germany as a benchmark for spending power :
Germany: Net 30,156 euros (PPP = 100)
USA: Net US$ 40,161 Adjusted Net: US$ 46,587
Australia: Net AU$ 54,382 Adjusted Net :AU$ 72, 872
Finally we need to adjust for affordable living standards in the USA and Australia relative to Germany. We do this by multiplying through by the difference in GDP/Head in each country (at current exchange rates).
Germany: Net: 30,156 euros
USA: Per capita GDP adj: US$ 55,384
Australia: Per capita GDP adj: AU$ 73,601
Finally we need to adjust net pay back to gross pay to discover the equivalent adjusted levels.
Germany: Gross 50,000 euros
USA (NY): Gross US$ 78,348 (equal to 73,507 euros)
Australia (NSW): Gross AU$100,355 (equal to 71,265 euros)
In other words, the equivalent gross salary of 50,000 euros per annum in Germany is 47% higher in the USA, whilst in Australia it is 43% higher – once adjustments are made for currency exchanges, social security, tax, other deductions, spending power and comparative wealth in the three economies. Although the tax-take is highest in Germany, other factors intervene to make it a better value location to hire staff than the chosen two comparator countries. Such a calculation would need to be tailored to the actual family circumstances of the individual concerned and extended to other positions. But then it would provide a useful point of reference when making assessments about the true parity of individual salary levels within a company’s global remuneration system.