Expat Salary: Expatriation Compensation Approaches

Coline Michaux

Whether an overseas assignment will succeed or fail mostly depends on the quality of the expatriation compensation employees receive while working abroad. A lucrative compensation package will guarantee that your foreign employees feel entirely supported financially during their assignment.

They also attract the best possible candidates for the job from within your organization or when recruiting externally. When designing a competitive expatriate compensation package, there are several approaches that you should be well-informed about. As each has its distinct benefits and limitations, we will share with you our conseil fiscal about what you need to know about them in this article.

Approaches To Expatriate Compensation

A competitive expatriation compensation plan is one that an expatriate considers to be fair while still being cost-effective for the firm. It’s essential to plan these expat salary packages in such a way that they can achieve both the organization’s mobility and personnel objectives. Developing one, however, is difficult given that a three-year abroad assignment can cost more than $3 million.

There are several typical approaches to international compensation. Figuring out which method works best for an organization can be one of the most challenging things to do.

The Home-Based Approach

The home-based approach aims to match the employee’s usual living standards in their native country, considering taxes, housing, commodities, and services. This approach divides the employee’s basic pay into four broad categories. They are: taxes, commodities and services, housing, and discretionary income.

The home-based approach is the most popular approach to international compensation worldwide. Almost 76% of long-term postings worldwide and 85% of US multinational organizations follow this pay structure to compensate their expatriate workers.

The Host-Based Approach

The host-based approach means that the organization assigns an employee to the payroll of their host country. The organization also follows that country’s procedures, rules, and regulations to determine the compensation and other incentives. When employing a host-based approach, your employees will likely not earn additional allowances for their assignments.

So, this approach is the most cost-effective option for businesses that wish to save expenses. However, even after returning to their home countries, the employees may remain too absorbed in the compensation systems of their host countries. This strategy often faces challenges.

The Balance Sheet Approach

The balance sheet approach protects the employees from cost disparities abroad. This approach is considered an extension of the home-based approach and is the most popular alternative for expat salary. As per this approach, you will need to employ the home-based approach to calculate an employee’s compensation.

Then you convert the resulting amount into the currency of the host nation. You can use a worksheet to compare the home and host country expenditures, in this way, the Cost of Living Adjustment (COLA) can be determined. For instance, if renting expenses are significantly lower in the host country, you can decrease the employee’s remuneration to a certain degree.  

balance sheet

The Global Market Approach

The global market approach considers an international assignment to be continuous. Even if the project is for varying lengths of time and the employee is assigned to various countries, this approach uses only one compensation scale. Simply put, regardless of their country of origin, the organization treats all employees according to the same scale.

The global market approach seeks to be more inclusive, and the principal benefits don’t depend on the employee’s country of assignment. Even though companies want to make their compensation packages more international, this approach is still only used by about 4 to 5 percent of companies.

We help you with the expatriation compensation

Designing an expatriation compensation package is a complex process for every organization. To develop a good expatriate compensation package for your employees, we have shared the different approaches to international compensation in this article. We hope it has been helpful for your organization to develop an ideal compensation plan.

If you are still confused about designing your expatriation compensation be sure to contact us and our qualified professional will provide you with the right consultation to guide you through the process.  

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Expat Salary: Expatriation Compensation Approaches