There are two basic approaches to determine the international compensation package:
1. Going Rate Approach
This is based on the local market rates. It relies on comparisons of survey of the local nationals, expatriates of same nationality and expatriates of all nationalities’ pay packages. In this approach, the compensation is based on the selected survey comparison. The base pay and benefits may be supplemented by additional payments for low pay countries.
The advantages of Going Rate Approach are,
- Equality with local nationals
- Identification with the host country
- Equity amongst different nationalities
The disadvantages of Going Rate Approach are,
- Variation between assignments for the same employees
- Rivalry between expatriates of the same nationality in getting assignments to some countries
- Potential re-entry problems in the home country
2. 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 to offset qualitative differences between assignment locations. The balance sheet approach is widely used by international organizations to determine the compensation package of the expatriates. The basic objective is the maintenance of living standards of the home country plus financial inducement.
- Goods and Services: Outlays incurred in the home country for food, personal care, clothing, household furnishing, recreation, transportation and medical care.
- Housing: All major costs associated with housing in the host country.
- Income Taxes: Parent country and host country income tax expenditures.
- Reserve: Contribution to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes etc.
The advantages of the Balance Sheet Approach are:
- Equality between assignments and between expatriates of the same nationality.
- Facilitates expatriate re entry
- Easy to communicate to the employees
The disadvantages of the Balance Sheet Approach are:
- It can result in considerable disparities between the expatriates of different nationalities and between expatriates and local nationals.
- It can be quite complex to administer due to changing economic conditions, taxation etc.