Compensating Expatriates
Compensating Expatriates
One of the greatest challenges of managing expatriates (A person who lives outside their native country) is determining the compensation package. Most organizations use a balance sheet approach to determine the total amount of the package. This approach adjusts the manager’s compensation so that it gives the manager the same standard of living as in the home country plus extra pay for the inconvenience of locating overseas. After setting the total pay, the organization divides this amount into the four components of a total pay package:
• Base salary. Determining the base salary is complex because different countries use different currencies (dollars, yen, euros, and so on). The exchange rate—the rate at which one currency may be exchanged for another—constantly shifts in response to a host of economic forces, so the real value of a salary in terms of dollars is constantly changing. Also, the base salary may be comparable to the pay of other managers at headquarters or comparable to other managers at the foreign subsidiary. Because many organizations pay a salary premium as an incentive to accept an overseas assignment, expatriates’ salaries are often higher than pay for staying at headquarters.
• Tax equalization allowance. Companies have different systems for taxing income, and in many countries, tax rates are much higher than in the United States. Usually, the employer of an expatriate withholds the amount of tax to be paid in the parent country, and then pays all of the taxes due in the country where the expatriate is working.
• Benefits. Most benefits issues have to do with whether an employee can use the same benefits in the foreign country. For example, if an expatriate has been contributing to a pension plan in the United States, does this person have a new pension in the foreign country? Or can the expatriate continue to contribute to the U.S. pension plan? Similarly, health benefits may involve receiving care at
One of the greatest challenges of managing expatriates (A person who lives outside their native country) is determining the compensation package. Most organizations use a balance sheet approach to determine the total amount of the package. This approach adjusts the manager’s compensation so that it gives the manager the same standard of living as in the home country plus extra pay for the inconvenience of locating overseas. After setting the total pay, the organization divides this amount into the four components of a total pay package:
• Base salary. Determining the base salary is complex because different countries use different currencies (dollars, yen, euros, and so on). The exchange rate—the rate at which one currency may be exchanged for another—constantly shifts in response to a host of economic forces, so the real value of a salary in terms of dollars is constantly changing. Also, the base salary may be comparable to the pay of other managers at headquarters or comparable to other managers at the foreign subsidiary. Because many organizations pay a salary premium as an incentive to accept an overseas assignment, expatriates’ salaries are often higher than pay for staying at headquarters.
• Tax equalization allowance. Companies have different systems for taxing income, and in many countries, tax rates are much higher than in the United States. Usually, the employer of an expatriate withholds the amount of tax to be paid in the parent country, and then pays all of the taxes due in the country where the expatriate is working.
• Benefits. Most benefits issues have to do with whether an employee can use the same benefits in the foreign country. For example, if an expatriate has been contributing to a pension plan in the United States, does this person have a new pension in the foreign country? Or can the expatriate continue to contribute to the U.S. pension plan? Similarly, health benefits may involve receiving care at