What is the balance sheet approach for US expatriates compensation packages?
In this second article, a series on global mobility, learn about how the balance sheet approach helps companies calculate expatriate compensation. Show
Balance sheet approach sounds like a financial term and is well meant to reflect the principles of a financial balance sheet. Like in a Balance sheet, the sum of items on the left-hand side (LHS) will equal the sum of items on the right-hand side (RHS). Similarly, the Balance Sheet approach of compensation is aiming to balance the host vs. home costs for income taxes, social security, goods and services, and housing. Thus, the employee is no better or no worse off. Trends:According to Mercer’s 2017 WIAPP Survey, 79% of the companies globally and 49% of Indian companies follow the Balance Sheet approach. Fundamentals of Balance sheet approach:Balance Sheet approach starts with the understanding that an employee typically partitions their guaranteed cash compensation in four big buckets.
There are tools available by consulting firms such as Mercer, AirInc, and ECA, which help in the calculation of balance-sheets for each assignee. These consulting companies update the values for inflation, currency, cost of living and quality of living, regulations on tax and social security on a regular basis, through thorough research. Thus, as an HR person, you do not need to collect all the external data but instead rely on tools and calculators, readily available. Let’s understand balance-sheet calculation, with an illustration below:Part A We start with the Gross Home Country Income, for India that would refer to annual guaranteed cash + PF (defined contribution social security)
Part B We net the same, post income tax and social security. This will be called Net Home Country Income. We park this value, for computation of Net Host Country Income
Part C Calculation of allowances:
It is important to note that two incumbents, going to the same location and having same net home country income, may get different cost of living allowance, if one is taking their family of 4 and the other is not taking their family. Since spendable income takes into account the family size.
Hardship Index may also be called 'quality of living' index. All global mobility consulting organizations provide this index. This index could be based on only host city or a comparison of home city and host city. Evaluated factors include political stability, violence, and hostility, natural conditions and disasters, availability of schools of international standards, availability of medical services, public infrastructure such as roads, etc. Part D Arriving at Net Host Country Income (guaranteed)
Part E Arriving at Net Host Country Income (with benefits):
Part F Gross up Net Host Country Income (with benefits) with Income tax and social security to arrive at the total international assignee package What is the balance sheet approach to expatriate compensation?The balance sheet approach to expatriate compensation is used to ensure employees are able to maintain their home purchasing power while on a temporary international assignment.
What is the most common form of expat compensation?By far, the most commonly used form of expat compensation by U.S. multinationals is the balance sheet approach. As Carolyn Gould outlined in “What’s the Latest in Global Compensation?”, Price Waterhouse’s 1996 survey results show that 92.1 percent of 370 respondents use some form of a balance sheet program.
What are the methods of salary determination for expats?1 Localization. The localization approach involves basing the expatriate's salary on the local (host country's) salaries. 2 Lump Sum. The lump sum approach uses the home country's system for determining base salary. ... 3 Cafeteria Approach. Most popular for senior-level expatriates, this approach can be more cost-effective than other methods.
What is the best pay structure for expatriate employees?Approximately 76% of long-term assignments use a home-country pay structure for their expatriate employees. Large multinationals often offer employees a lump sum relocation payment, in addition to the home-country base salary, to spend how they choose. 2. The Balance Sheet Approach
What is the balance sheet approach to expatriate compensation?The balance sheet approach to expatriate compensation is used to ensure employees are able to maintain their home purchasing power while on a temporary international assignment.
Which is an approach used for expatriate compensation?Home-based approaches have been traditionally the most commonly used to compensate international assignees. Assignees on a home-based approach retain their home-country salary and receive a suite of allowances and premiums designed to cover the costs linked to expatriation.
What are the three approaches to international compensation?Decrypting expatriate compensation: The three common approaches – Balance Sheet, Local+ and Local.
What are two primary approaches towards international compensation?Current Approaches to International Compensation
Localization and a host country-based strategy are considered.
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