Compensation Systems For Expatriate Employees

In multinational corporations, compensation systems must be developed  in manner that compensate expatriate employees and managers on an equitable  basis. Who are then expatriates? Expatriate employees are  parent establishment  and  third-country  nationals  as-signed to a foreign subsidiary or foreign nationals assigned to the parent establishment.

Relocating individuals in foreign countries requires consideration of compensation. A fair and  reasonable  compensation package  in one  location may not be  fair  and equitable  in  another. The compensation package given  to expatriate employees must  represent  labor market  factors, cost-of-living considerations, and inflation rates and recognize tax consequences of that country. An expatriate’s base salary and fringe benefits should represent what a person would have been paid domestically. This base should then be adjusted for reasonable cost-of-living factors. These factors could be quite apparent   or they could be less obvious.

Expatriate employees may be paid in the currency of the country in which they are present in or in their home currency or a combination of both. Frequently, price-level adjustment should be built  into  the  compensation  system  to  counteract  any  local  currency  inflation  or deflation. But,  regardless of  the currency makeup of  the pay package,  the  fringe benefits related to retirement must be related to the home country and should be paid  in  that currency.

Income  taxes  are  significant  in  the  compensation  package  of  expatriate employees  because they may pay taxes in the local country, home country or both. Some countries  exempt  expatriate employees  from  taxation on a specified amount of  income earned  in a  foreign country due to double taxation relief agreement.

Binding compensation to performance is essential because everyone in business recognizes that what gets measured and rewarded is what gets accomplished. Businesses must focus their reward structures to motivate employees to succeed at all activities  that will  create  shareholder  and personal value.

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