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Compensation & Benefits

June 11, 2008 1

Expatriate Compensation & Benefits
Organization’s Com-
pensation Policy

Employment and Competitors

Taxation Laws

Benefits Economic

Political and Social

Standard of Living

June 11, 2008 2

Expatriate Costs
• Expatriate costs may pose a multiple-fold expense in
relation to employees who are not sent as expatriates to
foreign destinations, and are usually significantly higher
than the compensation accorded to HCNs and TCNs


– a Chinese manager with 15 years experience costs

less than USD 70,000 per annum, while
– a US expatriate manager with corresponding
expertise would cost his or her organization USD
300,000 per year
June 11, 2008 3
Goals of an International Organization’s
Compensation Policy (1)

1) Policy should be consistent with the overall strategy,

structure and business needs of the international

3) Policy must work to attract and retain staff in those

areas where the international organization has the
greatest needs and opportunities. As a consequence,
the policy must be competitive and recognize factors
such as incentive for serving in a foreign location, tax
equalization and reimbursement for reasonable costs

June 11, 2008 4

Goals of an International Organization’s
Compensation Policy (2)
1) Policy should facilitate transfer of international
employees in the most cost-effective manner

3) Policy must give due consideration to equity and ease of


June 11, 2008 5

Employee Expectations and International
Organization’s Compensation Policy

 Financial protection in terms of benefits, social security

and cost of living in the foreign location

 Foreign assignment offers opportunities for

advancement through income and/or savings

 Issues such as housing, education of the children and

recreation are addressed
Note that the expectations of the employees often do not
coincide with the interests of the organization

June 11, 2008 6

Key Components of International
Compensation Programme for Expatriates
Base Salary

 The base salary is usually the main component in

international compensation, and is the main benchmark
used for other elements in an expatriate compensation
package, such as bonuses and benefits

 The base salary is either paid in the expatriate’s home or

parent country currency, or in the currency of the
expatriate’s host country

 The base salary can be quite a controversial issue, i.e.

when it is linked to the different home countries of the
respective HCNs and TCNs working in an international
June 11, 2008 7
Key Components of International
Compensation Programme for Expatriates
Hardship Premium

 For expatriate’s (usually PCNs, TCNs) who will

encounter “hardships” caused by the transfer to a foreign
location, determining the appropriate level of payment
can be difficult

 Factors determining the hardship premium, usually

expressed in terms of an expatriate’s base pay, are

 Assignment
 Actual hardship
 Tax consequences
 Length of assignment
June 11, 2008 8
Key Components of International
Compensation Programme for Expatriates

Allowances: There are many types of allowances in

an international compensation package:

 Cost of Living Allowance – Payment made to the

expatriate with a view to compensating for differences in
expenditure between the home or parent country and the
host country. Factors such as inflation differentials and
the price level need to be considered. Often, the cost of
living allowance is difficult to determine

June 11, 2008 9

Key Components of International
Compensation Programme for Expatriates
 Housing Allowance – Payment made to the expatriate with
a view to ensuring that he or she can maintain their home-
country living standard in the host country. Alternatively, an
organization may provide housing facilities on a mandatory
or optional basis. Also, support services may be provided to
the expatriate, for example, by helping sell or rent the
expatriate’s house in the home country

 Home Leave Allowance – Payment made to the expatriate

with a view to facilitating their visit back to the home country,
once or twice a year. Home leave enables the expatriate to
renew business, family and social ties, and thus avoid
adjustment problems subsequent to repatriation
June 11, 2008 10
Key Components of International
Compensation Programme for Expatriates
 Education Allowance – Payment made with a view to
supporting the education of the expatriate’s children, i.e.
tuition, language class, school enrollment fees, books and
supplies, transportation to educational establishment, room
and boarding, school uniforms etc. Problems regarding the
level of education required and adequacy of schools in the
host country, and transportation to other localities may pose
significant problems for organizations

 Relocation Allowance – Payment made with a view to

enable the relocation of the expatriate to the assignment
location. Includes moving, shipping, storage costs, subsidies
for purchase of appliances and (possibly) an automobile
June 11, 2008 11
Key Components of International
Compensation Programme for Expatriates
 Miscellaneous Allowances – Depending on the level of
seniority of the expatriate, payments to him or her for club
memberships, sport associations, maintenance of
household staff etc. may be rendered

In addition, the organization may render financial assistance

to the spouse for her or his loss of income as a result of the
transfer of the expatriate

June 11, 2008 12

Key Components of International
Compensation Programme for Expatriates
 Benefits – Support rendered to an expatriate in addition to the
allowances provided. There are several types of benefits,
more prominent examples being:

 Social Security Benefits (home country or host country?)

 Paid Vacations for expatriate and family
 Rest and Rehabilitation leave (especially for expatriates
based in “hardship” assignment locations)
 Emergency Cases (severe illness, death)

June 11, 2008 13

Calculating International Compensation

There are two basic approaches used to

determine an international compensation

The Going Rate Approach

The Balance Sheet Approach

June 11, 2008 14

The Going-Rate Approach
 Based on local market rates

 Relies on survey comparisons

– Local nationals (HCNs)
– Expatriates of same nationality
– Expatriates of all nationalities

 Compensation based on the selected survey comparison

 Base pay and benefits may be supplemented by additional

payments for low-pay countries

 Example: Should a Pakistani bank operating in London use

local British salaries, the salaries other Pakistani competitor
banks in London or the average salary offered by all foreign
banks operating in London as the reference point for the base
salary offered
June 11, 2008 15
Disadvantages of the Going-Rate Approach

Variation between assignments
Equality with local nationals for the same employee

Simplicity Rivalry between expatriates

of same nationality in
Identification with host country getting assignments
to some countries
Equity amongst different
nationalities Potential reentry problems in
the home country

June 11, 2008 16

Logic of the 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 t
offset qualitative differences between
assignment locations

June 11, 2008 17

The Balance Sheet Approach

The balance sheet approach is widely used by

international organizations to determine the compensation
package for expatriates:

 Basic objective is the maintenance of home-country living

standard, plus financial inducement
 Home-country pay and benefits are the foundations of this
 Adjustments to home package to balance additional
expenditure in the host country
 Financial incentives (expatriate / hardship premium) added
to make the package attractive
June 11, 2008 18
Outlays Considered in the Balance Sheet Approach
The balance sheet approach considers four types of outlays which are
incurred by expatriates:

 Goods and services – Outlays incurred in the home country for food, personal
care, clothing, household furnishings, recreation, transportation and medical

 Housing – All major costs associated with housing in the host country

 Income Taxes – Parent country and host country income tax expenditures

 Reserve – Contributions to savings, payments for benefits, pension

contributions, investments, education expenses, social security taxes, etc.

Where costs of host country > costs of home country  organization

pays the expatriate to make up the difference

June 11, 2008 19

Disadvantages of the Balance-Sheet

Can result in considerable
Equality between assignments
disparities between expatriates
and between expatriates
of different nationalities
of the same nationality
and between expatriates
and local nationals
Facilitates expatriate
Can be quite complex
to administer (e.g. changing
Easy to communicate
economic conditions,
To employees

June 11, 2008 20