How do companies cope with the even trickier issue of applying a negative index?
Scott Cullen reports. HR managers faced with applying a negative index to salaries of expatriates moving to countries with a lower cost of living need to balance the issues of staff morale with the need for a consistent and fair approach to salary calculations. Companies that don’t apply negative indices argue that to do so would decrease staff morale and may also make it difficult to move staff to cheaper locations. However not applying a negative index will give staff moving to those locations a windfall gain. Consider an assignee with a spendable income of 20 000 euro, sent to a location 40 percent cheaper than his home location, thus having a COL index of 60. If the negative index is not applied they will effectively receive a net gain of 8 000 euros. Fine, you might say, to give them an additional incentive to take the assignment at no cost to the company. There are drawbacks, however. First there is a cost to the company. If the assignee’s salary is tax equalised there will be an
