The most common approach to expatriate pay is the balance sheet approach. According to Organizational Resources Consulting, some 80 percent of the 781 companies it surveyed used this approach.58 This approach equalizes purchasing power across countries so employees can enjoy the same living standard in their foreign posting that they enjoyed at home. In addition, the approach provides financial incentives to offset qualitative differences between assignment locations.59 Figure 17.2 shows a typical balance sheet. Note that home-country outlays for the employee are designated as income taxes, housing expenses, expenditures for goods and services (food, clothing, entertainment, etc.), and reserves (savings, pension contributions, etc.). The balance sheet approach attempts to provide expatriates with the same standard of living in their host countries as they enjoy at home plus a financial inducement (i.e., premium, incentive) for accepting an overseas assignment.
FIGURE 17.2 The Balance Sheet Approach to Expatriate Pay
The components of the typical expatriate compensation package are a base salary, a foreign service premium, allowances of various types, tax differentials, and benefits. We shall briefly review each of these components.60 An expatriate’s total compensation package may amount to three times what he or she would cost the firm in a home-country posting. Because of the high cost of expatriates, many firms have reduced their use of them in recent years. However, a firm’s ability to reduce its use of expatriates may be limited, particularly if it is pursuing an ethnocentric or geocentric staffing policy.
An expatriate’s base salary is normally in the same range as the base salary for a similar position in the home country. The base salary is normally paid in either the home-country currency or in the local currency.
ANOTHER PERSPECTIVE Expat Resources on the Web
Not so many years ago, business professionals whose companies sent them overseas to work had few outside resources to help them become acclimated to their new status as expatriates. Today, however, a wealth of information is available online.
A simple keyword search for “expatriate” on a search engine yields an almost endless supply of links: newspapers and magazines published exclusively for expats; websites catering to expatriates in specific regions or countries; general information sites offering insiders’ guides to different countries and their finance, culture, and health care systems; not to mention blogs and chat rooms, forums and groups. The expatriate boom has even fueled an industry offering a broad array of services for expats, from mail forwarding to tax preparation to health and life insurance.
Foreign Service Premium
A foreign service premium is extra pay the expatriate receives for working outside his or her country of origin. It is offered as an inducement to accept foreign postings. It compensates the expatriate for having to live in an unfamiliar country isolated from family and friends, having to deal with a new culture and language, and having to adapt to new work habits and practices. Many firms pay foreign service premiums as a percentage of base salary, ranging from 10 to 30 percent after tax, with 16 percent being the average premium.61