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.