Three Expatriate Compensation Approaches
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. There are a few methods commonly used to determine global compensation. These include: home-based approach (also known as the balance sheet approach), the host-based approach, and the global market approach. And one of the greatest challenges is determining which method is best for your organization.
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 a 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 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.
Global Market Approach
Unlike the balance-sheet approach, a global market approach to 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. The objectives of each assignment, among other issues, should be measured before choosing the right compensation approach. Variations in laws, living costs, tax policies, and other factors all must be considered in establishing the compensation for expatriates. You want to maintain equity and consistency among the expatriate group. Many organizations look for a company specialized in this practice, as it is clear that international compensation is very complex.