2.
Key components of international compensation for expatriates
Understanding the Context:
Before delving into the components of international compensation, it's essential to
recognize the diverse workforce of multinational enterprises (MNEs):
● PCNs (Parent Country Nationals): Employees from the country where the
MNE's headquarters are located.
● TCNs (Third-Country Nationals): Employees from a country other than the
home or host country.
● HCNs (Host Country Nationals): Employees from the country where the MNE
operates.
Core Components of International Compensation
1. Base Salary:
● Globalized vs. Localized:
○ Globalized: A standardized base salary across all locations, often used
for global roles or key talent.
○ Localized: A base salary aligned with local market rates, considering
factors like cost of living and local compensation practices.
● Currency:
○ Paid in home or local currency, or a combination.
● Factors Affecting Base Salary:
○ Job level, experience, skills, performance, and market rates.
2. Foreign Service Premium and Hardship Allowance:
● Purpose: Compensates for inconvenience, risk, and cultural adjustment.
● Factors Affecting Premium:
○ Location, political instability, economic conditions, and quality of life.
● Considerations:
○ Tax Implications: These premiums may be subject to higher taxes in
some countries.
○ Equity: Ensuring fair compensation for all expatriates.
3. Allowances:
● Cost-of-Living Allowance (COLA):
○ Compensates for differences in the cost of goods and services between
the home and host countries.
○ Factors: Housing, transportation, food, utilities, and entertainment.
● Housing Allowance:
○ Covers housing costs, including rent or mortgage payments.
○ Factors: Local housing market, family size, and job level.
● Home Leave Allowance:
○ Covers travel expenses for periodic visits to the home country.
● Education Allowance:
○ Covers tuition, fees, and other education-related expenses for children.
● Relocation Allowance:
○ Covers costs associated with moving, such as shipping, storage, and
temporary living expenses.
● Spouse Assistance:
○ Provides financial support or job placement assistance for the spouse.
4. Benefits:
● Core Benefits: Essential benefits like health insurance, retirement plans, and life
insurance.
● Required Benefits: Benefits mandated by local laws and regulations.
● Recommended Benefits: Additional benefits offered to enhance the expatriate's
overall compensation package.
● Optional Benefits: Benefits tailored to specific needs and preferences.
Additional Considerations:
● Tax Equalization: To ensure consistency in tax burdens across different
countries.
● Currency Exchange Rates: To mitigate the impact of fluctuations.
● Security and Risk Management: To provide adequate security measures and
insurance coverage.
● Cultural Training and Support: To facilitate adaptation to the host country's
culture.
● Repatriation Planning: To ensure a smooth transition back to the home country.
By carefully considering these factors and tailoring the compensation package to the
specific needs of each expatriate, organizations can effectively manage the
complexities of international compensation and attract and retain top talent.
International Assignment Compensation Strategy
successful international assignment (IA) compensation strategy is crucial for attracting
and retaining top talent. By carefully considering the following factors and implementing
a suitable compensation approach, organizations can effectively manage the
complexities of global mobility.
Key Determinants of IA Compensation
1. Employee Type:
○ Core Employees: High-potential individuals critical to future growth.
○ Functional Experts: Specialized skills essential for specific projects.
○ Managers: Overseeing operations in foreign locations.
2. Assignment Purpose:
○ Project-Based: Temporary assignments for specific projects.
○ Developmental: To develop employee skills and career.
○ Strategic: To establish or strengthen the company's global presence.
3. Assignment Duration:
○ Short-Term: Less than one year.
○ Medium-Term: One to three years.
○ Long-Term: Three years or more.
4. Post-Assignment Plans:
○ Repatriation: Returning to the home country.
○ Permanent Transfer: Remaining in the host country.
○ Third-Country Assignment: Moving to another foreign location.
5. Overall Cost of Assignment:
○ Direct Costs: Salaries, benefits, housing, relocation expenses.
○ Indirect Costs: Lost productivity, training, potential repatriation costs.
6. Host Country Factors:
○ Cost of living, tax rates, currency exchange rates, political and economic
stability.
7. Home Country Factors:
○ Tax implications, social security contributions, pension plans.
8. Peer Group:
○ Comparable positions in the home and host countries to determine
appropriate compensation levels.
Three Primary Compensation Approaches
1. Going Rate Approach:
○ Pays the IA a salary comparable to local nationals in similar positions.
○ Pros: Simplicity, equity with local employees.
○ Cons: May not adequately compensate for additional costs and risks of
expatriation.
2. Balance Sheet Approach:
○ Aims to maintain the employee's home-country standard of living.
○ Pros: Maintains home-country lifestyle, reduces financial stress.
○ Cons: Complex to administer, can be costly.
3. Local Plus Approach:
○ Pays a base salary comparable to local nationals, plus additional
allowances and benefits.
○ Pros: Simpler than the balance sheet approach, more cost-effective.
○ Cons: May not fully compensate for all expatriate costs, can lead to
dissatisfaction.
Key Considerations for Effective IA Compensation
● Cultural Sensitivity: Understand cultural nuances and preferences.
● Tax Implications: Adhere to tax regulations in both home and host countries.
● Currency Fluctuations: Mitigate risks associated with exchange rate volatility.
● Security and Risk Management: Provide adequate security measures and
insurance coverage.
● Employee Well-being: Offer support services, such as counseling and
relocation assistance.
Example: A Core Employee on a Three-Year Strategic Assignment to a High-Cost
Country For a core employee on a long-term strategic assignment to a high-cost
country, a balance sheet approach might be most suitable. This approach would
ensure the employee maintains their home-country standard of living by providing
additional allowances for housing, goods and services, income tax equalization, and a
hardship premium.
By carefully considering these factors and selecting the appropriate compensation
approach, organizations can effectively attract, retain, and motivate international
assignees, while also managing the associated costs and risks.
