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Issue No. 6


Global Compensation:  Learn the ABCs



For U.S. companies to be able to succeed abroad, the key factor is the expatriate's compensation package.  With the continual growth of U.S. companies today, expansion abroad, even through acquisitions, these companies need to evaluate their compensation packages both abroad and within the United States.  With ever changing cultures, Human Resource Managers need to be able to ensure fairness, but also maintain cost-effectiveness in today's global marketplace.  Today, with the increase in overseas assignments, costs will take on more importance.  "Compensating expatriates in a cost-effective way that maximizes performance is one key element to accomplishing the business mission."  Solomon mentions that effective companies will be able to balance their business objectives with a compensation package.  Within this compensation package, for example, will be the base salary, taxes, allowance, COLAs, housing and reimbursable expenses.

Solomon relates to five issues for the Human Resource Manager to be aware of so as to accomplish a competitive compensation package.  With the ever-changing cultures and growth of companies, it is of great concern to assure that full analysis of compensation packages is done without having to penalize the employees or the company with "cut backs on personnel".

First consideration is that "compensation policies should support business objectives".  Basics to consider for international compensation should include:  "different methods of calculating payment, remuneration packages and cost-containment alternatives."  Even though a small proportion, expatriates are an important part of the staffing efforts of the global organization.  If the organization desires to maintain an effective compensation policy, all of these factors should be considered and they should also support the objectives of the business itself.  Calvin Reynolds, President of New York-based Industrial Relations Counselors, Inc. states an excellent thought that needs to be considered:  "The most important thing is to know what you're trying to accomplish."  Definitely, if you do not know what you want to accomplish in regards of mobility and staffing, then Reynolds' statement "it's impossible to develop a sound international compensation policy" says it all.

When looking at the international compensation issue, look at what the business strategy plans prevail.  The question that needs to be answered is why are these expatriates being sent abroad?  What type of revenue will be benefited from this intention?  Is the issue of whether these individuals will be only abroad for a certain amount of time, or will this be a permanent transfer (relocation)?  Again, the consideration is the "costs" to the development of the compensation package along with the actual interlocking of the business strategy.  What benefits will be gained from this plan?

Second consideration is to "use a variety of methods to calculate compensation:.  Definitely the most common approach used in the United States is the Balance-Sheet approach (also know as the Home-Based approach).  The concept of the balance-sheet approach is to begin with the home-country salary (basically, where home base is).  The balance-sheet approach is popular due to the ability to incorporate mobility as the employees move from their home base to host-country operations.  Another positive aspect of this approach is that the individuals should not lose or gain in their spending power as they are transferred from one location to another.

Even though the Balance-Sheet approach is the most popular method to calculate compensation, again, "costs" enter the equation.  Where the "costs" begin to escalate may be when the individual is being transferred to a higher-cost country.  An example of such given by Reynolds is an individual going from the United States to Japan, or if reversed, say the individual is going to a lower-cost country such as South Asia.  Guidelines should be developed for utilizing the Balance-Sheet approach so as to not remove spending power for the expatriates, yet, to be able to control overall costs to the organization so as to not destroy profits over time.

Third consideration is that "some companies tie compensation to host-country standards".  When a company utilizes this method, it appropriately is called the destination-based approach.  Compensation is calculated based on the host-country standards.  The expatriate has their compensation tied to the local organization, and by utilizing this method, the organization maintains a close relationship with the location organization. The disadvantages to this method are the currency differentials between countries.  What will this entail in terms of salary of the expatriate for the first year as compared to their equals in the United States (or vice versa)?  There could be the issue of the first year showing no changes in equality, yet the second year that the expatriate is retained to continue their transfer, salary comparisons could show an inequality due to the fluctuating dollar market.

What about the international approach instead?  Discussion within this article brings about an interesting system with this approach as applied to senior-level management.  "The international approach tries to create an equitable system among all international employees.  It's especially useful for highly placed executives who will be moving from location to location.  Usually, this approach begins with a common point of reference for senior-level management who receive equivalent pay and benefits regardless of country or origin or destination."  One question that can be asked reference this type of approach is -- why would utilizing the international approach with "senior-level management" be more suitable for the "costs" issue?  Feelings might surface in that by utilizing this approach for this type of expatriate may show extensive profits for the individuals, yet, in the long term, become destructive for the organization itself.

Fourth consideration is that "housing and taxes constitute the greatest expenditures".  Definitely the most costly expenditure of the compensation package will be the housing allowance.  Even though it is difficult to be able to recreate, for example, the exact living conditions/style that an expatriate will have in the United States, consideration and appropriate planning must go into the housing allowance so as to maintain a comparable lifestyle and living conditions for the individual.  But, this must also be done within a reasonable limit.  Appropriate planning must go into this part of the compensation package with consideration of the expatriate's status and the size of their family.  Much research will need to be spent in this area so as to assure that outstanding costs are not entailed, which in turn will financially reflect back to the organization over time.  Within the research, consideration on whether to totally compensate for the housing and taxes or implement a percentage to be the responsibility of the expatriate.  Again, if the expatriate is being transferred as a benefit to the organization, costs along with profits must be calculated within the research of how much to set the housing allowance budget to.

Fifth and final consideration brought out in this article is to "pay attention to cost control in developing policies".  Again, "costs" become an issue.  If the organization does not pay attention to the costs control when developing their international compensation packages, costs control becomes non-existent.  Mentioned in this article, which summarizes the nature of the article is "in addition to a more consistent application and fairer treatment of employees, a centralized policy can help contain costs.  Centralizing policies further helps cut costs because international HR practitioners can look at their compensation packages in a company-wide context."  With this final consideration being the basis of the development of a sound international compensation package, then the quest to request employees to accept international assignments as a business, career and personal opportunity will definitely enhance organizations in expanding their international quests and employees equally.  Even though the task of developing a sound international compensation package is a deeply involved project, if time is given to the development, then the organization has a better opportunity in obtaining their business objectives.

Charlene Marmer Solomon, "Global Compensation:  Learn the ABCs" Personnel Journal, July 1995, Vol. 74, No. 7, pp. 70-76 (if you have problems getting to the link to read Solomon's article, you may have to register for member to Workforce, but, registration is free and you receive a method of receiving great methods of doing research)


"Global Compensation: Learn the ABCs" Personnel Journal