Expatriate Compensation

THE BALANCE SHEET APPROACH

Employers need a way to combine all of the factors previously discussed. The most common method is called the balance sheet approach, which borrows from accounting.

There is an underlying assumption in the balance sheet approach that the expatriate is on a time-limited assignment and expects to return home and therefore does not intend to become fully assimilated into the local culture.

The purpose of the balance sheet approach is twofold:

1. Keep the international assignee cost neutral: This idea relates to how the expatriate's living standard compares to life in their home country.
2. Control costs: Sending an employee to an assignment in another country is an expensive proposition typically costing upwards of three times the normal compensation. The balance sheet approach gives the employer some ability to control the overall cost of the assignment.

How Does It Work?

The balance sheet approach begins by assuming that the expatriate's base salary is divided into four major expenditure categories:

• housing and utilities
• goods and services (consumables, transportation, and health expenses)
• reserve or discretionary income
• income taxes

Let's take a look

Here's a hypothetical allocation based on living costs for an expatriate using ERI's Relocation Assessor. (The Interactive Exercise of this course will take you step-by-step through the use of this software.)

James Rivera is being transferred from the headquarters office in Chicago, Illinois, to Madrid, Spain. He has a wife and two children. The Callaghan’s can expect to rent a 1,500 sq. ft. home in Madrid. Jim will have one car, valued at $40,000, during the assignment in Madrid and will drive 10,000 miles a year. The market value for his position is $125,000.

The following illustrates the Balance Sheet approach as it relates to Jim's situation. His overall cost-of-living in Madrid is less than in Chicago so he would not receive any adjustment.