INTERNATIONAL COMPENSATION-BALANCE-SHEET APPROACH

Organizations with employees in many different countries face some special compensation pressures. Variations in laws, living costs, tax policies, and other

factors all must be considered in establishing the compensation for expatriate

managers and professionals. Even fluctuations in the value of the U.S. dollar must be tracked and adjustments made as the dollar rises or falls in relation to currency rates in other countries. Add to all of these concerns the need to compensate employees for the costs of housing, schooling of children, and yearly transportationhome for themselves and their family members. When all these different issues are considered, it is evident that international compensation is extremely complex.

Balance-Sheet Approach

Many multinational firms have compensation programs that use the balancesheet approach. The balance-sheet approach provides international employees with a compensation package that equalizes cost differences between the international assignment and the same assignment in the home country of the individual or the corporation. The balance-sheet approach is based on some key assumptions, which are discussed next.

HOME-COUNTRY REFERENCE POINT

The compensation package is developed to keep global employees at a level appropriate to their jobs in relation to similar jobs in the home country. Special benefits or allowances are provided to allow the global employees to maintain a standard of living at least equivalent to what they would have in the home country.

LIMITED DURATION OF GLOBAL ASSIGNMENT Another basic premise of the balance- sheet approach is that expatriate employees generally have international assignments lasting two to three years. The international compensation package is designed to keep the expatriates “whole” for a few years until they can be reintegrated into the home-country compensation program. Thus, the “temporary” compensation package for the international assignment must be structured to make it easy for the repatriated employee to reenter the domestic compensation and benefits programs. Also, it is assumed that the international employee will retire in the home country, so pension and other retirement benefits will be homecountry- based.

Increasingly, global organizations have recognized that attracting, retaining, and motivating managers with global capabilities requires taking a broader perspective than just sending expatriates overseas. As mentioned earlier, in many large multinational enterprises, key executives have worked in several countries and may be of many different nationalities. These executives are moved from one part of the world to another and to corporate headquarters wherever the firms are based. It appears that there is a high demand for these global managers, and they almost form their own “global market” for compensation purposes.

Unlike the balance-sheet approach, a global market approach to compensation requires that the international assignment be viewed as continual, not just temporary, though the assignment may take the employee to different countries for differing lengths of time. This approach is much more comprehensive in that the core components, such as insurance benefits and relocation expenses, are present regardless of the country to which the employee is assigned. But pegging the appropriate pay level, considering rates in the host country, home country, and/or headquarters country, becomes more complex. Further, the acceptability of distributing compensation unequally based on performance varies from country to country. Therefore, global compensation requires greater flexibility, more detailed analyses, and greater administrative effort. Some factors affecting executive compensation include the “cultural distance” from headquarters and how much responsibility and autonomy the subsidiary incurs.

Tax Concerns

Many international compensation plans attempt to protect expatriates from negative tax consequences by using a tax equalization plan. Under this plan, the company adjusts an employee’s base income downward by the amount of

estimated U.S. tax to be paid for the year. Thus, the employee pays only the foreign-country tax. The intent of the tax equalization plan is to ensure that expatriates will not pay any more or less in taxes than if they had stayed in the

United States.