What Is the Balance Sheet Approach to Expatriate Compensation?

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Organizing the expatriation of an employee is a complex process, particularly when it comes to calculating an expatriate compensation package. Employers must consider a range of factors including an employee’s personal circumstances, the desirability of the relocation destination, and the overall cost of living.

A failure to grant adequate compensation could result in a lack of employee motivation and satisfaction, ultimately impacting the organization’s retention rate and lessening the chance of success for the overseas assignment.

The balance sheet approach, which is used by more than 85% of U.S. multinational companies, is a good way to regulate the costs of expatriation and ensure the fair payment of employees.

How the Balance Sheet Approach Works

The balance sheet approach determines an expatriate’s salary based on the going rate for the same — or a similar — position in their home country. Organizations will typically allocate additional allowances or reimbursements as appropriate, which ensures employees can maintain their usual standard of living once they relocate. Ultimately, this method preserves the employee’s current purchasing power, no matter where they end up working.

Step 1: The organization determines the employee’s net salary based on their home country’s going rates.

Step 2: The employee’s salary is broken into four categories:

• Taxes
• Housing – including rent, bills, utilities, etc.
• Goods and services – including expenses such as food, clothing, recreation, medical care, and transport
• Reserve – including savings, benefits, pension contributions, education, etc.

The employee is expected to contribute a portion of their salary to each of these four categories, equivalent to what they would typically pay for each one at home. If, for example, rent in the host country is more expensive than an employee’s home country, the organization will pay the difference. This serves to protect employees from cost differences between the home and host countries.

In some cases, when an expatriate is relocating to a country where living costs are considerably cheaper, their employer will decrease the compensation accordingly.

Step 3: The organization provides additional benefits or allowances, based on specific circumstances. For example, an employee relocating with their partner and/or children might receive an additional allowance, particularly if a partner is unable to work in the host country.

The provision of a hardship allowance, sometimes called a quality of living allowance, is also fairly common to incentivize employees to accept a relocation proposal. This takes into account factors in the host country that might make it unappealing to expatriates, such as political instability, safety, health care, natural disasters, and the quality of schools.

Advantages of the Balance Sheet Approach

• Employees receive equivalent compensation to their colleagues back at home.
• Repatriation or a subsequent relocation is straight-forward because employees understand that they will be adequately compensated and will not struggle financially when they return to their home country.
• The balance sheet approach takes a holistic approach to expatriate packages, taking all the necessary factors into account to ensure employees don’t experience major gains or losses when they relocate.
• Whether an employee is moving to a higher or lower wage country this method can still be applied.

Disadvantages of the Balance Sheet Approach

• This method is time-consuming and complex to administer due to ever-changing economic conditions.
• It intrudes on an employee’s personal financial situation.
• If known, pay disparities between expatriates and host country employees may cause tension in the workplace.

The balance sheet approach is perhaps most appropriate for mid- and senior-level employees, where the return on investment is higher. Employers should be mindful of fluctuations in the exchange rate as well as inflation, and they should consistently monitor their compensation packages. Consulting firms, such as Mercer and Airlnc, can also be used to help companies with their balance sheet calculations and keep an eye on changing circumstances in host countries.

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