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• Some form of incentive for an employee to accept an expatriate assignment (e.g.,
money, benefits, career mobility/advancement)
METHODS FOR COMPENSATING EXPATRIATES
These recommendations for expatriate compensation plans raise the question of exactly how
multinationals can go about constructing those plans. A variety of options exist. The most
popular approaches include the ad hoc, localization, and balance sheet methods. These are not
I. The Ad Hoc Approach
This method has serious drawbacks, especially for larger multinationals with many
expatriates. It tends to be used more by smaller or emerging multinationals with little
experience overseas who must often send an expatriate to “fix problems” abroad.
That can mean doing a quick search and then paying whatever is necessary to entice
an employee to go. In operation, the ad hoc method is simple—the company and its
expatriates negotiate on a case-by-case basis to cover the costs inherent in a foreign
assignment.
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II. The Localization Method
This more systematic method involves paying the expatriate essentially the same as
local employees in similar positions. Localization may be especially useful when
expatriates want to extend their stay in particular locations or are interested in being
permanent expatriates who travel from assignment to assignment. In both cases, the
expatriate is less likely to use home country wage standards in evaluating their
compensation.
There are complexities associated with localization, e.g., foreigners often cannot
participate in local pension plans or the versions of social security programs found in
the U.S. and Europe. Moreover, being posted in a foreign country may preclude
III. The Balance Sheet Model
A. The model
The most common approach to expatriate compensation is the balance sheet
model. Nearly ¾ of firms who responded to a recent global survey said that they
use this approach. The key aim of the model is that expatriates should not suffer a
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The balance sheet method starts the process of smoothing out cost of living and
tax differences across countries by dividing expenses into four basic categories:
1. Housing
2. Income taxes
Typically, expatriates would receive allowances to cover the increased taxes,
more expensive housing, and higher living costs encountered abroad. More often
than not, multinationals engage consulting firms like AIRINC or Mercer to
B. Foreign service premiums, hardship and danger pay
The balance sheet does not impact the expatriate’s base salary. Using the balance
sheet method, salary would be determined in the same way as for domestic
employees, i.e., if domestic employees receive 4% average pay raises, then so
would expatriates. The particular economic conditions in the foreign location to
C. Ensuring similar purchasing power
The main goal of the balance sheet method is to smooth out expenses and protect
D. Housing costs
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According to one survey, over 80% of multinationals provide free expatriate
housing or a location-specific housing allowance with some expected contribution
by the expatriate. The same survey showed that Asian, Latin American, and
European multinationals are more likely to provide free housing than housing
E. Tax expenses
A major category of expenses addressed by the balance sheet method is income
taxes (see Table 8.7). The goal is to tie expatriates’ tax burdens to their home
Implementing tax equalization requires that multinationals 1) determine the total
hypothetical income tax burden facing expatriates had they stayed home; 2) assess
what the total tax obligation will likely be while posted overseas; and 3) deduct an
Agreements across countries that allow for tax equalization or the avoidance of
double taxation for citizens posted to foreign countries can help reduce
expatriates’ tax exposure. The U.S. has such tax agreements with over 65
countries. These provide Americans with exemptions or lower rates from foreign
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F. Goods, services, and the balance sheet
Besides housing, no other piece of the expatriate compensation package causes
more consternation for employees than allowances for goods and services.
Multinationals—or the consultants that work for them—construct allowances by
Product prices are continually fluctuating and currency swings can play havoc
with goods and services differentials—swelling the value of differentials when
local currencies drop significantly and shrinking them when those currencies soar.
Consequently, goods and services differentials should be monitored and
periodically adjusted up or down to take these changes into account. Sometimes
multinationals pay expatriates in the home and local currency for this reason
(referred to as split pay) to even out currency fluctuations between countries.
Regardless of what index is used, goods and services will inevitably be more
expensive in some countries than in others. Some companies calculate goods and
services differentials using an efficient purchaser index (EPI). The prices in these
calculations use cheaper or on-sale products, and thereby encourage expatriates to
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G. The balance sheet on balance
The major goal of the balance sheet method is to treat expatriates fairly. The
effect of many of the adjustments is to make a foreign posting less of a hardship,
if not altogether pleasant. However, the balance sheet approach is not without
Practical problems also emerge when expatriates are sent to places where costs
What seems to be more popular among firms is to move away from thinking
about foreign assignment as something automatically deserving of a special
CHAPTER SUMMARY
There aren’t many managers who enjoy conducting performance evaluations. And, adding
foreign employees into this mix adds to that feeling. There are many problems associated with
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Several methods of compensation exist, including the ad hoc and localization approaches. The
balance sheet method remains the most popular. Its goal is to maintain the same lifestyle for
International business can be tough going. Difficulties faced by expatriates include constant
travel, little contact with friends or family, trouble in understanding others, difficulty in getting
DISCUSSION QUESTIONS
1. How are problems in evaluating employee performance complicated in an
international setting? What are some key features to keep in mind when actually
providing feedback about performance levels to employees in different locations with
different cultural values
• Employees are scattered around the world and may embrace different cultural
values and expect localized practices for performance management.
• Different set of core questions face multinationals when it comes to managing
and appraising employee performance:
o Rely on a standardized set of policies, procedures and practices for
appraising employee performance worldwide?
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o Who will provide the feedback?
o How frequently will feedback be provided
•
2. What are some problems in compensating employee performance, and how are
these problems complicated by an international setting?
• Problems compensating employee performance
o Attract and retain the best people to staff positions worldwide
• Complications for multinationals
o Requires extra time on performance evaluation to help set and manage
compensation levels around the world.
3. How might cultural beliefs regarding the basis for compensation affect an approach
to rewarding expatriates and host-country/third-country nationals in the same firm?
• Differences in expectations about the employment relationship
• Relatively little exposure to performance-based incentives in some countries
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4. What are some of the ways that employees and executives alike can be
compensated for their international service?
• Incentives to accept assignment
• Housing costs differential
5. How should expatriates be compensated? In your view, what is the best approach,
and why?
• Potential approaches to determine compensation of expatriates
o Ad hoc
ADDITIONAL ACTIVITIES
DEVELOPING YOUR INTERNATIONAL CAREER – Giving Negative Performance
Feedback across Cultures
BOXED FEATURES
CULTURE CLASH – Do Not Necessarily Give as You Expect to Be Given: Advice for
Providing Performance Feedback to International Employees
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GLOBAL INNOVATIONS – What Do Zippers, Prozac, a Dozen Roses, and a Box of
Titleists Have in Common? They Are all in a Day’s Survey
ADDITIONAL RESOURCES
Table 8.1 –
Table 8.2 –
Table 8.3 –