The Challenge of Expatriate Compensation

Reward and pay are important factors for attracting, retaining and motivating employees. When developing an international reward programme it is important for organisations to ensure that the benefits outweigh the costs.

If it’s decided that an expatriate assignment is the best decision, the employee’s reward should be considered carefully to compensate the inconvenience of the international move. Nevertheless, employees should be also reminded of the benefits associated with the international assignment in terms of career prospects and personal development.

Should a reward strategy be developed centrally or should each subsidiary set its own strategy?

CIPD suggests that organisations adopt one of the following main approaches:

  • Set reward centrally: The advantage of setting a reward strategy centrally is to ensure consistency and control over cost. However this approach might cause difficulties as it does not take diversity into consideration.
  • Develop a central reward approach that is adapted for each subsidiary: The benefits of this approach is that it takes the local culture into consideration yet consistency across the organisation and cost control will be reduced.
  • Permit each subsidiary to set its own reward packages: The local culture and the regulatory environment is taken into consideration and the reward approach is compliant. However, the lack of control can lead to increasing costs and an inconsistency across the organisations with some locations being perceived as less/more appealing to work for.

Expatriation compensation approaches:

The most common approaches to compensation are; home-based pay, host country-based pay and headquarters-based balance sheet.

The home-based approach sets the reward package that the employee received at the home country as the foundation for the reward and then considers cost of living, housing costs, taxation and allowances relevant to the assignment. Home-based pay should be developed carefully as it can create inequalities between the expats and the local employees.

The host country-based pay reward package approach offers the same compensation as employees of the country hosting the expatriate assignment.  The downside of this is that the employee might reject the offer if the salary is lower than in their home country.

The headquarter-based balance sheet approach is an international approach in which the expat’s compensation is in line with what they would be paid if they were working for the headquarters.

Creating a global reward strategy to support diversity

HR professionals need to consider reward packages carefully depending on the location, the cultural and legal variations, as well as recognise multigenerational and diverse workforces with multiple requirements. However, it is important that this is kept in line with the organisation’s culture and reflects its compensation philosophy. Local pay scales, practices, and tax need to be considered alongside employment law when setting up a reward package.

Cultural differences affect the way employees perceive attractiveness of various benefits. Therefore it is important to give the option of choice to meet the diverse needs of a global workforce.Whilst there is still work to be done, the understanding of importance of diversity and inclusion in the workplace has increased.

Developing a flexible global reward strategy to meet local requirements and expectations can be a complicated and expensive process but it has been proven that the most attractive packages are personalised.

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