The whole area of international compensation presents some tricky problems. On the one hand, there is logic in maintaining company wide pay scales and policies so that, for instance, divisional marketing directors throughout the world are paid within the same narrow range. This reduces the risk of perceived inequities and dramatically simplifies the job of keeping track of disparate county by country wage rates.
Yet not adapting pay scales to local markets can produce more problems than it solves. The fact is, it can be enormously more expensive to live in some countries (like Japan) than others (like Spain) if these cost of living differences aren’t considered it may be almost impossible to get managers to take high cost assignments. However, the answer is usually not just to pay, say marketing directors more in one country than in another. For one thing you could get resistance when you tell a marketing director in Tokyo’s who’s earning $4,000 per week to move to your division in Spain, where his or her pay for the same job will drop by half (cost of living notwithstanding). One way to handle the problem is to pay a similar base salary company wide and then add on various allowances according to individual market conditions.
Determining equitable wage rates in many countries is no simple matter. There is a wealth of packaged compensation survey data available in the United States but such data are not so easy to come by overseas. As a result one of the greatest difficulties in managing multinational compensation is establishing consistent compensation measures between countries.
Some multinational companies conduct their own local annual compensation surveys. For example, Kraft conducts annual study of total compensation in Belgium, Germany, Italy, Spain and the United Kingdom. It focuses on the total compensation paid to each of 10 senior management positions held by local nationals in these firms. The survey covers all forms of compensation including cash and short and long term incentives. The employers then use this information for things like annual; salary increases and proposed changes in benefits.
The balance sheet approach
The most common approach to formulating expatriate pay is to equalize purchasing power across countries, a technique known as the balance sheet approach. More than 85% of North American companies reportedly use this approach.
The basic idea is that each expatriate should enjoy the same standard of living he or she would have had at home. With the balance sheet approach four groups of expenses – income taxes, housing good and service and discretionary expenses, (child support, car payments and the like) – are the focus of attention. The employer estimates what each of these four expenses is in the expatriate’s home country and what each will be in the host country. The employer then pays the differences – such as additional income taxes or housing expenses.
In practice this usually boils down to building the expatriate’s total compensation package around five or six components. For example, base salary will normally be in the same range as the manager’s home country salary. In addition however, there might be an overseas or foreign service premium. The executive receives this as percentage of his or her base salary in part to compensate the cultural and physical adjustments he or she will have to make. There may also be several allowances including a housing allowance and an education allowance for the expatriate’s children. Income taxes represent another area of concern. A US manager posted abroad must often pay not just US taxes but also income taxes in the host country.