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Why Employees Need a Relocation Cost of Living Analysis

By July 27, 2018 August 14th, 2018 No Comments
Why Employees Need a Relocation Cost of Living Analysis

A crucial part of any global expansion plan is determining the most appropriate international market(s) for an organization’s needs. But deciding on which employees will lead the charge in these new markets is of equal (if not more) importance. Will new, in-country employees fulfill the role? Or do employee transfers make more sense? Numerous factors are at play when making this decision—and performing a relocation cost of living analysis for each employee will help determine how (or if) the salary should be adjusted.

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Why Perform a Relocation Cost of Living Analysis?

When considering relocating employees, it’s important to entertain how this will impact not only the employers’ costs of relocating the employee, but the potential costs employees may face when relocating to a new city. As each town, city, and country has its own cost of living, researching these costs can give both employees and employers a clearer sense of what to expect—and how the employees’ salaries may need to be adjusted.

Purchasing Power

Purchasing power—or the value of a currency expressed in terms of the amount of goods and services that a specific currency can purchase—is a key consideration when performing a relocation cost of living analysis. It’s important to keep purchasing power in mind, as inflation impacts both the goods and services an employee can purchase given their location.

Additionally, considering purchasing power parity (PPP) can help determine an appropriate salary. PPP estimates the adjusted amount needed to determine the price of an item between two currencies. For example, if an American company is considering hiring a German employee for a position in Hamburg, considering the PPP between the dollar and euro can help employers find how (and if) there needs to be a cost of living adjustment. As with most relocation analyses, employers may expect that an adjustment will be needed.

Cost of Housing and Goods

Housing and consumer product prices are two of the most important factors to consider when performing a relocation cost of living analysis. This is exceedingly true for employees who live in relatively cheaper areas of a country. For example, if an organization has an employee who works remotely in rural Wyoming—a state within the U.S.—  but is being considered for a relocation assignment to Stockholm, the cost of housing, food, transportation, and many other factors will need to be considered when performing the cost of living analysis.

For an employee to maintain the same standard of living to which they are accustomed, the employer will need to seriously weigh the cost of relocating the employee and providing them with a significant salary increase—or whether it makes more financial sense to keep the employee in their current location and adjust operations accordingly. This is particularly important for employers who are increasingly turning to globally mobile employees who welcome the opportunity to relocate, whether permanently or on a temporary basis.

Taxes Considerations for both Employer and Employee

Tax structures vary wildly from town to town, city to city, and country to country. For employers and employees alike, considering the ramifications of taxes in both the original and potential relocation area could be the determining factor in deciding to relocate. Employers should be abreast of how relocating an employee (for any amount of time) to another country will impact the taxes owed—both at home and potentially in the new country—and should speak with a tax professional to learn more about how the potential relocation will impact taxes in each location.

For employees, taxes owed could lead to less net income. If an employee relocates to a location that has a comparable cost of living to that of their home city/country, but the tax obligations are significantly higher, then the employee’s standard of living may decrease simply because of these taxes. Employers should be mindful of tax obligations incurred by the employee, and strongly consider a base salary increase to offset any additional tax requirements in the new country. This is just as true for an employee relocating from the Unites States to Sweden as it is for a Brazilian employee relocating to Portugal.

Work with an Experienced Expansion Partner

Whether your global expansion efforts consist of relocating one employee to Hanover or several to Singapore, understanding how your global mobility strategy impacts both your organization’s costs and your employee’s net income and tax obligations is crucial. Velocity Global’s team of visa and immigration experts can assist with each step of the visa application process, and its global consultants can provide country-specific reports that include economic and political insight to help you determine the best course of action for your expansion needs. Get in touch with us today to learn how we can assist your expansion efforts.