How to master payroll processing in emerging markets

International business expansion holds great opportunities for business growth. With traditional markets becoming more and more saturated, global businesses are seeking new opportunities in emerging markets that have a high demand for goods and services while simultaneously promising lower labor and operational costs.

But while expanding into developing economies holds many promises for multinationals, it also represents significant challenges when it comes to managing and paying local employees. Payroll management in emerging markets is characterized by unique challenges. In order to succeed, organizations need a robust strategy for processing and managing payroll in these regions.

This article highlights the distinct challenges of processing payroll in emerging markets and offers practical solutions and tips for overcoming common obstacles, such as developing a localized compensation strategy and identifying suitable payment methods to ensure cost-efficient payments in local currency.

Emerging markets are countries that are in the process of transitioning from developing country to developed country status. They are characterized by rapid industrialization, infrastructure improvements, increasing integration with global markets, and a rising standard of living.

These markets are mainly located in Africa, Asia, and LATAM, with notable emerging market economies including the BRICS countries (Brazil, Russia, India, China, South Africa), Mexico, Indonesia, Turkey, and Saudi Arabia. What all these regions have in common is that they offer great business opportunities for multinationals, such as:

• Rapid economic development and increasing GDP,

• Growing customer base with rising purchasing power,

• Lower market saturation compared to developed countries,

• Lower labor and operational costs paired with favorable tax incentives and government subsidies in some countries,

• Access to a young, dynamic, and skilled workforce,

• Logistics and supply chain advantages due to geographic proximity to other high-growth regions,

• Rapid urban development that drives demand for goods and services, and

• Potential to reduce dependence on established economies.

Expanding into new and emerging markets is therefore a highly attractive endeavour for multinationals. However, business expansion initiatives into Africa, LATAM, and APAC will inevitably have an impact on payroll operations, since these markets face specific issues regarding banking infrastructure, economic stability, and more.

Payroll processing in emerging markets presents unique challenges compared to developed countries due to the distinct political and economic conditions of these regions. Key characteristics of payroll in emerging markets include:

• Diverse legal and tax regulations,

• Complex labor laws,

• Currency volatility and exchange rate fluctuations, and

• Economic and political instability.

Additionally, employee expectations and needs differ from employee populations in developed countries. The lack of banking infrastructures makes employees in these regions more vulnerable to emergency expenditure, leads to greater uncertainty, and generally renders the access to funds more difficult.

Due to their socioeconomic situations, emerging markets pose particular challenges for multinationals when it comes to payroll processing. These challenges range from regulatory complexity to cultural differences to lack of banking infrastructure. Here is an overview of the main hurdles global organizations need to overcome when hiring and paying employees in emerging markets.

Navigating regulatory complexity

Ensuring compliance with local regulations is one of the key challenges in global payroll management, but especially in emerging markets. Developing economies often have complex tax regulations and labor laws, making it difficult for multinational organizations to set up and run payroll in full compliance with local laws. To make matters even more complex, the legal landscape in emerging markets is often subject to frequent changes which requires a high level of adaptability and flexibility.

Maintaining transparency and visibility

Detailed insights into workforce costs are crucial for strategic decision-making. However, since emerging economies often only have a limited technology infrastructure, achieving the level of transparency in payroll data that is needed to optimize local operations and make informed decisions to successfully build a local presence can be difficult. Without access to the necessary data, leveraging global payroll analytics is simply not possible.

Managing multiple currencies and exchange rate fluctuations

Multi-currency management is a well-known challenge global enterprises need to overcome when running a multi-country payroll. In developing economies, however, this challenge reaches a new level of complexity due to currency volatility. Frequent exchange rate fluctuations make it difficult to ensure correct payments to employees in local currency and avoid salary inconsistencies.

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Ensuring timely payments despite poor banking infrastructure

Paying employees in emerging markets is challenging due to a number of different factors. Organizations not only need to account for potential currency fluctuations when issuing salary payments in local currency, but they also need to find alternative solutions for cross-border payments to prevent the high cost of traditional payment methods and avoid payment disruptions due to slow payment processing.

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Overcoming cultural and language barriers

Depending on the region, proficiency in English might not be a given which can be a major obstacle to communicating effectively with local teams. Another hurdle that needs to be overcome in this context is navigating local workplace norms. Potential cultural differences businesses could encounter in developing economies are differences in standard business hours, communication standards, and in the way working relationships are handled.

Preparing for political or economic disruptions

Economic and political factors can have a major impact on payroll in emerging markets. Political instability often leads to changes in government policies and constantly evolving regulatory frameworks which are complex to navigate for multinational businesses. At the same time, economic factors, such as high inflation rates or short-term minimum wage adjustments, can create complicated conditions for payroll processing.

There are two important aspects multinationals need to take into consideration when managing payroll for employee populations in developing markets. For one thing, they need to establish a working payment solution. For another thing, they need to develop a compensation strategy that responds to local cultural norms. Let’s look at these two crucial aspects in more detail.

Establishing a working payment infrastructure

As said before, managing salary payments for employees in developing economies can be challenging due to factors like inflation, exchange rate fluctuations, and poor payment infrastructure. Given that employees in these regions are often more vulnerable to financial problems, payment disruptions need to be avoided at all costs.

Yet traditional payment methods like SWIFT are unsuitable for paying employees in developing economies. The exotic nature of their currencies and the lack of connection to established banking systems typically result in slow, complicated, and expensive transactions and fairly unpredictable payment landing dates.

Managing payroll in emerging markets therefore requires a high level of pay flexibility. Instead of relying on traditional payment methods like bank transfers, multinationals should seek to implement alternative solutions like payroll cards or Earned Wage Access (EWA) which allows employees to access their accrued wages on a day-by-day basis through a mobile app or a similar digital system.

Here are some best practices and tips for developing a payment strategy for emerging markets:

• Understand the local banking infrastructure and payment landscape, including popular payment methods.

• Prioritize internal payment needs, such as simplifying cross-border settlement management and reducing FX volatility.

• Engage with local payment service providers (PSPs) to ensure local expertise and robust processes.

Developing a local compensation strategy

Developing an appropriate compensation strategy is yet another aspect multinationals need to consider when paying employees in emerging economies. Different cultural norms and customs might impact what pay elements need to be included in employee compensation. Multinationals that fail to recognize this are likely to face problems in attracting and retaining local talent—which might ultimately hinder their chances of successfully setting foot in the market.

Another aspect to consider in this context is that expanding into emerging markets might also have an impact on the organization’s global compensation strategy. Compensation requirements and benefits standards vary greatly between emerging markets and developed countries which makes it near impossible for multinationals to follow a globally unified compensation strategy. 

Before making any pay-related decisions, businesses should research the market and benchmark industry standards and competitor rates to gain a better understanding of expected compensation standards.

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There are several best practices multinationals should keep when it comes to payroll management in emerging markets. Here are a few valuable tips to ensure smooth payroll operations.

• Leverage global payroll software: Global payroll software can help businesses overcome many challenges linked to international payroll management, including multi-currency management, communication issues, and lack of data transparency.

• Stay updated on legal changes: Given the economic and political instability that characterizes developing economies, businesses should expect frequent legal changes that affect payroll. The best way to prepare is to set up robust processes to ensure no legal updates are missed.

• Create a payroll contingency plan: Payroll contingency planning involves establishing back-up plans and alternative strategies for managing payroll during economic crises or political instability. In volatile markets, having a sound payroll contingency plan in place is crucial.

• Consider a hybrid global payroll model: Hybrid global payroll models combine in-house and outsourced payroll management to achieve greater flexibility and enhanced compliance. Under such a model, payroll management for emerging markets could easily be outsourced to experienced in-country partners (ICPs) to guarantee compliance.

• Prioritize data security: Data security in payroll is paramount, but especially so in developing economies. Implementing robust payroll security measures should therefore be a top priority.

• Work with local partners: Collaborating with local payroll service providers that are familiar with the intricacies of country-specific rules is the best way for multinationals to navigate local payroll regulations and ensure global payroll compliance.

Outsourcing payroll to local payroll providers is the best route for multinationals to ensure smooth, accurate, and compliant payroll in emerging markets. Thanks to their local expertise and in-depth understanding of country-specific regulations and the fine cultural nuances that affect local payroll processing, global businesses can significantly increase their chances of attracting and retaining much-needed local talent.

With Lano’s global payroll services, businesses can access a global network of vetted in-country payroll partners across more than 170 countries to manage payroll for their global teams effortlessly and compliantly. Book a demo with one of our payroll experts to learn more.