The balance sheet approach of compensation is whereby remuneration of expatriates is based on the payment rates of an equivalent job in the home country. Additional allowances are given to the employee depending on the cost of expenditures like housing, utilities, goods, services, discretionary income, and taxes in the host country. This approach tends to favor companies with a high degree of centralization and is based on norms established in the home country. There is no single expatriate compensation approach that is always used by all multinationals; therefore, various factors are considered before implementing any compensation approach.
The going rate approach of compensation, on the other hand, is when the remuneration of expatriates is based on the salary structure of the host country hence also known as the host-country-based approach. It relies on comparisons between the compensation of host-country nationals, expatriates of the same nationality, and expatriates of all nationalities. This approach fits companies that have a majority of their activities decentralized across the world.
The balance sheet approach of expatriate compensation has various merits and limitations. The first merit is that the expatriates receive similar remuneration packages to their colleagues back at home. Secondly, the employee does not struggle financially when repatriated or relocated back home after the tenure in a foreign country. The third merit is that this approach considers all necessary factors and ensures employees do not experience significant gains or losses when relocating, making it a holistic approach (Harzing and Pinnington, 2015).
Lastly, this approach can be applied in various scenarios even when the expatriate moves to a higher or lower-wage country. The first limitation of the balance sheet approach is that the ever-transforming economic conditions make it complex and time-consuming during implementation. Secondly, the personal financial situation of a worker is intruded upon, and the disparities in compensation packages between the expatriates and local employees can cause tension in the workplace if known.
The host-country-based approach has the advantages of being simple, nurturing equality between expatriates and nationals of the host country, and finally promoting identification with the host country. The disadvantages of this approach are that it can cause rivalries between international employees of the same country in getting assignments to some nations and result in financial problems during repatriation to the home country. The human resource manager settles on the most suitable approach depending on several factors.
These factors include the home and host country’s legal systems, the organization’s political and cultural situation, nationality of the expatriate, the cost of the compensation approach, and the nature of the expatriate’s assignment (Harzing and Pinnington, 2015). For instance, if an expatriate is on a long-term assignment, then the host-country-based approach is more suitable. At the same time, the balance sheet approach is more appropriate if the expatriate is on a short-term assignment.
Different forms of rewards motivate employees and improve performance and productivity. In addition to the base pay, expatriates are paid specific amounts of money called premiums related to the assignment. Examples of these premiums include Hardship premiums, Mobility premiums, and Foreign Service Inducements. Hardship premiums compensate employees to cover them for excessive physical hardship and difficult living conditions associated with some assignments.
Countries associated with difficult living conditions include Afghanistan, Belarus, India, Sierra Leone, Venezuela, and the Dominican Republic; therefore, expatriates assigned in their jurisdictions are eligible for Hardship premiums. This additional compensation prevents demotivation of the employees deployed in the hardship countries and makes it worth their while. In summary, human resource managers apply compensation approaches that best suit the company’s philosophy and overall strategy.
National or regional institutions create challenges for multinational companies to adopt their preferred compensation approach globally. For example, social welfare institutions in countries like Sweden, Germany, and Japan may insist that companies also provide other benefits besides financial remuneration. This complicates issues for multinational companies from the United States of America that view compensation from a financial perspective, especially when these multinationals apply the balance sheet approach. Taxation institutions may also pose a problem to multinationals who use the balance sheet approach because the taxation system varies between countries.
The host-country-based approach has the outcome of creating unity between local employees and foreign employees in the workplace because both groups of employees earn an equivalent amount of money. It also saves costs if the host country is a developing country and makes this approach appropriate for long-term appointments (Harzing and Pinnington, 2015).
On the other hand, the balance sheet approach has the outcome of making it easier for the expatriates to relocated back to their home country because it averts financial difficulties. This approach also forges equity and unity between different expatriates and their assignments which translates into the overall growth of the organization.
Compensation policies should have fairness and effectiveness in multinational companies by considering factors like career paths of the expatriates, nature of the assignment, and legal systems in host and home countries. The advantages and the problems of the balance sheet approach can vary depending on national and regional institutions. For instance, issues may arise when the immigration institutions in host countries insist that foreigners cannot work in the home country.
This makes implementation of the balance sheet approach impossible because multinational companies have to employ locals. In situations like these, the going rate approach is the most appropriate compensation approach because it allows remuneration of employees who are locals to be similar to that of the host country. This averts problems of compensation inequality between workers, and fosters unity in the workplace.
The balance sheet approach may address the fairness and effectiveness of compensation policies in multinationals by ensuring that employees working in foreign countries get the same compensation as their colleagues in the home country. Multinational companies commonly use compensation packages, including ad hoc negotiation, balance sheet, localization, lump sum, global plan, regional plan, and multiple programs. There is no single best approach for expatriate compensation, and the organization has to modify the compensation packages depending on factors that keep on changing continuously.
Harzing, A. and Pinnington, A. (2015). International human resource management. 4th ed. London: Sage, pp. 418-460.