EXPATRIATE COMPENSATION

A good compensation package is one that is considered fair by an expatriate, but it must also be
cost-effective for the organization. It should be planned to achieve the mobility and staffing goals
of the organization.

OBJECTIVES

It can be extremely expensive to live in some countries. Therefore, determining equitable wage
rates in many countries is not a simple matter of equality in pay. Most expatriate compensation
plans are designed to achieve four major objectives:

1. Attract employees who are qualified and interested in international assignments. Thus, the
compensation policy works to attract and retain staff in the areas where the multinational has
the greatest needs and opportunities
2. Facilitate the movement of expatriates from one subsidiary to another, from home to
subsidiaries, and from subsidiaries back home. To achieve this policy must be competitive and
recognize factors such as incentives for Foreign Service, tax equalization, and reimbursement
for reasonable costs.
3. Provide a consistent and reasonable relationship between the pay levels of employees at
headquarters, domestic affiliates, and foreign subsidiaries.
4. The policy must be made cost-effective by reducing unnecessary expenses. It must give due
consideration to equity and ease of administration.

Besides the above major objectives, the international employee will also have a number of
objectives that need to be achieved from the firm’s compensation policy:

1. The employee will expect that the policy offers financial protection in terms of benefits, social
security, and living costs in the foreign location.

2. The employee will expect that a foreign assignment will offer opportunities for financial
advancement through income and/or savings.

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3. The employees will expect that issues such as housing, education of children and recreation will
be addressed in the policy.

Determining equitable wage rates in many countries is no simple matter. One of the greatest
difficulties in managing total compensation on a multinational level is establishing a consistent
compensation measure between countries that builds credibility both at home and abroad.

APPROACHES TO INTERNATIONAL COMPENSATION

There are two basic approaches to determine the international compensation package:

Going Rate Approach

This is based on the local market rates. It relies on comparisons of survey of the local nationals,
expatriates of same nationality and expatriates of all nationalities’ pay packages. In this approach,
the compensation is based on the selected survey comparison. The base pay and benefits may be
supplemented by additional payments for low pay countries.

The advantages of Going Rate Approach are,

 Equality with local nationals

 Simplicity
 Identification with the host country
 Equity amongst different nationalities

The disadvantages of Going Rate Approach are,

 Variation between assignments for the same employees

 Rivalry between expatriates of the same nationality in getting assignments to some
countries
 Potential re-entry problems in the home country.

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Balance Sheet Approach:

The Balance Sheet Approach to international compensation is a system designed to equalize the
purchasing power of employees at comparable position levels living abroad and in the home
country and to provide incentives to offset qualitative differences between assignment locations.
The balance sheet approach is widely used by international organizations to determine the
compensation package of the expatriates. The home-based, or balance sheet approach, is the most
popular of these approaches and used by more than 85% of U.S. multinational companies. The
balance sheet approach provides international employees with an expatriate compensation package
that equalizes cost differences between the international assignment and the same assignment in
the home country of the individual or the organization. The balance sheet approach is based on
some key assumptions and is designed to protect expatriations from cost differences between their
home and host countries.

The basic objective is the maintenance of living standards of the home country plus financial
inducement. Major parameters considered are:

Goods and Services: Outlays incurred in the home country for food, personal care, clothing,
household furnishing, recreation, transportation and medical care.

Housing: Expat executives usually earn a housing allowance as an annual, quarterly or monthly
sum. The allowance is adjusted to the cost of housing in a good, safe area in the work city of the
host country. Depending on the expat package, housing may include basic utilities and domestic
help. In countries where security can be an issue, the home should be fitted with alarms and 24/7
security response or 24/7 on-site security guards/dogs for personal and family safety. Electric
generators, inverters and water storage and purification systems may also be included depending
on the infrastructure available in the country.

Income Taxes: Parent country and host country income tax expenditures.

Reserve: Contribution to savings, payments for benefits, pension contributions, investments,

education expenses, social security taxes etc.

Education: For education allowance (in countries where private schools are the only viable
education), expat executives are given a maximum value per child up to a certain age, typically
18. As with all allowances, any amount exceeding the maximum will be an out of pocket

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expense for the employee. Most expats use this for international boarding schools in the home
country or their country of choice.

Automobile: Automobile allowance may include options such as a company-leased automobile

or a monthly sum allowing the expat to purchase a car locally. The monthly allowance may
include a stipend to cover insurance, a local driver and a gas card to cover fuel costs.

Home Travel: The package will pay expenses for travel costs to the home country on a recurring
basis of once or twice per year. Typically, this includes the cost return flights to the home county
and city of origin for the entire family. Most packages allow the total flight value to broken down
allowing children in international boarding schools to travel to the host country or the entire
family to travel elsewhere for holidays.

Hardship: A hardship allowance is available for relocations to developing countries and is

sometimes available for relocations to developed countries.

Other benefits: The majority of host countries require expats to pay income tax on all earnings.
Depending on the country and laws, tax assistance and equalization is a welcome benefit; the
host country’s tax forms can be complicated, not to mention in a foreign language. For
Americans who are required to report and pay taxes in both their home and host country, this
benefit can be particularly attractive as the new rules for reporting foreign income and bank
accounts is cumbersome.

Another benefit expats are given is tax equalization. This will reimburse the expat for any taxes
paid in the host country that are greater than what the executive has to pay in their home country.

Additional expat benefits could include language courses and club access. Expats can take foreign
language classes to integrate more smoothly into the new location and work environment. While
less common, one might also find the expat package includes the cost of membership to a local
golf club, yacht club, gym, etc. – and include subscriptions to magazines, newspapers and trade
journals of choice.

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Standard benefits such as bonuses, annual leave, medical leave and insurance should always be
available. One item to note is evacuation coverage. If you are moving to a remote part of the
world where healthcare is limited, your health plan should cover evacuation costs to the nearest
country with adequate medical facilities.
At the end of the foreign assignment, expect repatriation to the home country. This will include
all moving expenses and typically a lump-sum value to cover any out of pocket expenses.

Expat Lite:

The Expat Lite package will be a subset of the benefits offered under the Full Expat package.
Relocation will likely include coordination of the work and residence permits and basic moving
expenses with 30 days temporary lodging. Again, depending on the length of the assignment,
storage of household goods in the home country may be available. Before accepting the
assignment, expats must negotiate any other relocation benefits they desire.

Allowances will also be less generous. A housing allowance is often included and education may
or may not be included. This package typically offers lower financial compensation than a Full
Expat package. If you are in a position to negotiate the terms of your relocation, you can request
some or the entire full expat package above

The advantages of the Balance Sheet Approach are:

 Equality between assignments and between expatriates of the same nationality.
 Facilitates expatriate re entry
 Easy to communicate to the employees
The disadvantages of the Balance Sheet Approach are:
 It can result in considerable disparities between the expatriates of different nationalities
and between expatriates and local nationals.
 It can be quite complex to administer due to changing economic conditions, taxation etc.

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Host-Based Approach/ local-market package

The host-based approach means the assignee transfers to the host country payroll and receives base
and incentive pay based on host country compensation practices and regulations. There are limited,
if any, assignment related allowances. The host payroll typically delivers base pay and incentive
pay and above-base allowances. With organizations looking for cost-cutting opportunities, they
have looked to localize assignees. The host-based approach may be a cost-effective option to the
traditional home-based approach, including local plus policy components. Difficulties can occur
in repatriating assignees, if applying this approach, because it integrates employees into the local
host salary structure. It can make it very difficult to move the assignees to another destination or
back to their home country.

Expatriates are paid according to the host- country compensation structure. Besides the above,
some multinational companies conduct their own local annual compensation survey. The survey
covers all forms of compensation including cash, short- and long-term incentives, retirement plans,
medical benefits, and pre-requisites. The information collected from the survey becomes the basis
for annual salary increases and proposed changes in the benefits package.

Global Market Approach

Unlike the balance-sheet approach, a global market approach to expatriate compensation requires
the international assignment be viewed as continuous, even though the assignment may be for
various periods of time and the employee may be in various countries. All assignees are on the
equivalent compensation scale, regardless of their home country. This approach is much more
inclusive. Regardless of which country the assignee is assigned, the main benefits are provided.

There are benefits and drawbacks to each approach. Variations in laws, living costs, tax policies,
and other factors all must be considered in establishing the compensation for expatriates. If one
wants to maintain equity and consistency among the expatriate group ,this type of international
compensation is very complex.

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International Citizen’s Approach

In this approach to expatriate compensation, an international basket of goods is used for all
expatriates, regardless of country of origin. The basket of goods includes food, clothing,
housing. However, expatriates are not provided salary adjustments that would allow them to
purchase exactly the same items in the host country as in the home country. Rather, they receive
adjustments that would allow them to purchase a comparable local product of the same nature.

Lumsum Approach

This involves giving expatriate a pre-determined salary and letting the individual decide about
how to spend it. Finally, there is the regional system, under which the MNC sets a
compensation system for all expatriates who are assigned to a particular region. Under this,
MNC determines the total package in money value that covers the base salary, all kinds of
allowances and benefits. The employee is provided with the freedom of allocating the money
& deciding up on the type and quality of housing, medical, conveyance, education for self &
family members, air travel, recreational facilities, taxation, repatriation of savings, setting-in,
setting-out, exchange rate production etc.

Negotiating/ bargaining Approach

Some employees as well as MNC’s prefer to determine the compensation package through
mutual negotiations between the employee & the employer.
•It would be possible when –
•The number of expatriates is relatively less
•The company & prospective employee have full knowledge of on-going salary levels.
•The skills of the prospective employee are in short supply.

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Buffet Approach

Under this, the total salary level is determined by the organization & the employee given an
option to decide the cash component & benefits component in the total compensation package
•Employees normally select more components of benefits depending upon their needs &
remaining portion of the compensation in the form of cash.
•This option reduces the tax burden

Cluster Systems Approach

MNC’s segment the countries and/or cities into clusters based on the cost of living & other
factors like hardships & danger issues that affect the compensation package. They determine
more or less same compensation package foreach job within the same cluster of cities.
This approach reduces the cost of complexities in the compensation administration.

Conclusion

Expatriate compensation packages can vary enormously from company to company and
location to location. When considering an expatriate compensation packages one needs to be
capable enough to consider several factors, so as to enable the similar standards of living in
the host country. Now a day’s companies mostly follow balance sheet approach for this.