Page 148 - DMGT548_GLOBAL_HRM

Unit 8: International Compensation

Advantages of the Going Rate Approach: Following are the advantages of this approach: Notes
1. Equality with local nationals (very effective in attracting PCNs or TCNs to a location that
pays higher salaries than those received in the home country).

2. Approach is simple and easy for expatriates to understand.
3. Expatriates are able to identify with the host country and there is equity among expatriates
of different nationalities.

Disadvantages of the Going Rate Approach: Following are the disadvantages of this approach:
1. Variation between assignments for the same employees.
2. Variation between expatriates of the same nationality in different countries.
3. Potential re-entry problems.

8.2.2 Balance Sheet Approach

It is widely used approach for international compensation. The basic objective is to “keep the
expatriate whole”, i.e., maintaining relatively to PCN colleagues, and compensating for the
costs of an international assignment through maintenance of home-country living standard,
plus a financial inducement to make the package attractive. The approach links the base salary
for PCNs and TCNs to the salary structure of the relevant home country.

Example: U.S. executive taking up an international position would have his or her
compensation package built on the U.S. base-salary level rather than that applicable to the host
country.

The key assumption of this approach is that foreign assignees should not suffer a material loss
due their transfer, and this is accomplished through the utilisation of what is generally referred
to as the balance sheet approach.
Features of the Balance Sheet Approach: Following are the features of the balance sheet approach
are:

1. The basic objective is maintenance of home-country living standard, plus financial
inducements.
2. Home-country pay and benefits are the foundations of this approach.

3. Adjustment to home package to balance additional expenditure in host country.
4. Financial incentives (expatriate/hardship premium) added to make the package attractive.
5. Most common system in usage by multinational firms.
There are four major categories of outlays incurred by expatriates that are incorporated in the
balance sheet approach:
1. Goods and services: home-country outlays for items such as food, personal care, clothing,
household furnishings, recreation, transportation, and medical care.
2. Housing: major costs associated with housing in the host country.
3. Income taxes: parent-country and host-country income taxes.
4. Reserve: contributions to savings, payments for benefits, pension contributions,
investments, education expenses, social security taxes, etc.

LOVELY PROFESSIONAL UNIVERSITY 143