INTERNATIONAL HUMAN

RESOURCE MANAGEMENT

Compensation & Benefits

 Expatriate Compensation &
Benefits
Organization’s Com-
pensation Policy

Employment and Competitors

Taxation Laws

Compensation
Compensation
Allowances Benefits
Benefits Economic
Conditions

Political and Social

Standard of Living
Environment

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 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

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•Example:

•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

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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 organization

2) 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
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Goals of an International Organization’s
Compensation Policy (2)

3)Policy should facilitate transfer of

international employees in the most
cost-effective manner

4)Policy must give due consideration to

equity and ease of administration

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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

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 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
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 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

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• Factors determining the hardship premium,
usually expressed in terms of an expatriate’s
base pay, are typically:

Assignment
Actual hardship
Tax consequences
Length of assignment

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 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

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 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

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 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
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 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

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 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)

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Calculating International Compensation

There are two basic approaches used

to determine an international
compensation package:

The Going Rate Approach

The Balance Sheet Approach

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 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

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Disadvantages of the Going-Rate Approach
ADVANTAGES
Equality with local nationals
Simplicity
Identification with host country
Equity amongst different
nationalities
DISADVANTAGES
Variation between assignments
for the same employee
Rivalry between expatriates
of same nationality in
getting assignments
to some countries
Potential reentry problems in
the home country
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 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

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 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 approach
 Adjustments to home package to balance additional
expenditure in the host country
 Financial incentives (expatriate / hardship premium)
added to make the package attractive
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 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 care

 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

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 Disadvantages of the
Balance-Sheet Approach
DISADVANTAGES
ADVANTAGES
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
reentry Can be quite complex
to administer (e.g. changing
Easy to communicate economic conditions,
To employees taxation)

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