Creating Salary Scales in Developing Countries

Warren Heaps – Birches Group LLC

Many companies use salary scales together with salary grades to manage their compensation programs globally. There are many advantages to doing so, including cost management, positive employee relations and transparency which enables managers to be directly accountable for pay decisions.

In developing markets, creating salary scales is more challenging than in countries with more stable economic conditions. Developing country markets are volatile and often fluctuate from year to year based on a combination of factors. Cost of labor (supply and demand), tax and labor law changes, general economic conditions (such as inflation), business growth and expansion,  as well as unplanned events such as natural disasters, civil unrest and the like are all in the mix.

Maintaining a salary scale in such a market is even more important for employers, to ensure competitive market rates are maintained under even the most difficult conditions. What makes it even more complex is the myriad of allowances and in-kind benefits that are typically provided in a developing country. These allowances cover a broad range – from 13th month to vacation allowance to housing, food, transportation, mobile phone allowances and more. In-kind benefits include various food and beverages, company cars, recreation, travel, even Pilgrimage benefits every few years. The scope of allowances and in-kind benefits is large and variable between countries, and even between employers in the same country.  In our surveys, we see the percentage of total compensation represented by allowances and in-kind benefits ranging from as little as 4.7% in Mozambique to over 35% in Nigeria.

So, how do you set a salary scale that reflects the allowances and benefits you offer, compared to the market (and the allowances and benefits offered by others)?  At Birches Group we have developed an approach which allows employers to set scales that include specific allowances and benefits, and that deliver a fully comparable market position. Here’s how we do it.

  1. Establish your desired market position (e.g., 60th percentile), based on total compensation, inclusive of base salary, allowances, in-kind benefits and incentives.
  2. Determine how much to adjust your scale to make it fully comparable to your target.
  3. Calculate the value of all of your over-base compensation elements. Decide which ones you want to include in the scale (13th month or all fixed allowances, for example) and which ones are not included. Be sure to consider the tax treatment if any allowances are exempt from tax.
  4. Subtract those allowances, benefits and incentives not included from the fully comparable scale in step 2.
  5. The resulting scale is now good to go. When the scale amounts are combined with the items subtracted, the resulting total compensation is still fully comparable to your desired market position.

Why do it this way?  Each employer in the market has a different pay mix. Some offer many over-base elements and some offer few or even none. The only way to consistently measure such a market is to ignore the variations and use total compensation as the comparison point. The subtraction of your company’s specific over-base elements allows you to maintain a unique pay mix and still measure your overall competitive position.

What challenges have you faced in managing scales in developing countries? Please share your experiences in the comments.

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