It can be extremely expensive to live in some countries. Therefore determining equitable wage rates in many countries is not a simple matter of equality in pay.
Most expatriate compensation plans are designed to achieve four major objectives: 1. Attract employees who are qualified and interested in international assignments. Thus the compensation policy works to attract and retain staff in the areas where the multinational has the greatest needs and opportunities. 2. Facilitate the movement of expatriates from one subsidiary to another, from home to subsidiaries, and from subsidiaries back home.
To achieve this policy must be competitive and recognise factors such as incentives for Foreign Service, tax equalisation, and reimbursement for reasonable costs. 3. Provide a consistent and reasonable relationship between the pay levels of employees at headquarters, domestic affiliates, and foreign subsidiaries and 4. The policy must be made cost-effective by reducing unnecessary expenses. It must give due consideration to equity and ease of administration.
Besides the above major objectives, the international employee will also have a number of objectives that need to be achieved from the firm’s compensation policy: 1. The employee will expect that the policy offers financial protection in terms of benefits, social security, and living costs in the foreign location. 2. The employee will expect that a foreign assignment will offer opportunities for financial advancement through income and/or savings. 3. The employees will expect that issues such as housing, education of children and recreation will be addressed in the policy. Determining equitable wage rates in many countries is no simple matter. One of the greatest difficulties in managing total compensation on a multinational level is establishing a consistent compensation measure between countries that builds credibility both at home and abroad.
There are four basic approaches to compensation: 1. HQ-based model: Expatriates are paid according to the headquarters compensation structure. 2. Modified home-country model: Expatriates are paid according to their home- country salary structures, and their living standard is protected so as to be comparable to the home country or some other chosen standard. 3. Better of home or host model: Expatriates receive the higher of the home-country system or the host-country system. 4. Host-country/local-market package: Expatriates are paid according to the host- country compensation structure.
Besides the above, some multinational companies conduct their own local annual compensation survey. The survey covers all forms of compensation including cash, short and long term incentives, retirement plans, medical benefits, and pre-requisites. The information collected from the survey becomes the basis for annual salary increases and proposed changes in the benefits package.