Compensation

* 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.

* 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 typically:

 Assignment

 Actual hardship

 Tax consequences

 Length of assignment

* 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.

 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.

 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.

 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

* 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)

APPROACHES TO INTERNATIONAL COMPENSATION

There are two main options in the area of international compensation -

The Going Rate Approach (also referred to as the Market Rate Approach) and the Balance Sheet Approach (sometimes known as the build-up Approach).

* The Going-Rate Approach

 The base salary for international transfer is linked to the salary structure in the host country.

 Relies on survey comparisons

o Local nationals (HCNs)

o Expatriates of same nationality

o Expatriates of all nationalities

 Compensation based on the selected survey comparison

 If location is in a low-pay country, base pay may be supplemented with additional benefits and payments.

 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.

ADVANTAGES:

 There is equality with local nationals (very effective in attracting PCNs or TCNs to a location that pays higher salaries than those received in home country)

 The approach is simple and easy for expatriates to understand

 Expatriates are able to identify with the host country

 There is often equity amongst expatriates of different nationalities

DISADVANTAGES:

 Variation between assignments for the same employee

 Variation between expatriates of the same nationality in different locations. It can lead to rivalry for assignments to locations which are financially attractive and little interest in locations considered to be financially unattractive

 Problems upon repatriation when the employee's salary reverts to a home-country level that is below that of the host country

* 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.

The balance sheet approach is widely used by international organizations to determine the compensation