#557  Innovative Leader                 Volume 11, Number 7        July 2002

Fundamentals of International Compensation
by Donald L. Caruth, Ph.D., SPHR and Gail D. Handlogten-Caruth, SPHR

Dr. Caruth and Ms. Handlogten-Caruth are human resource management consultants  in Rockwell, Texas (email caruth@flash.net).  They are authors of Managing Compensation (and Understanding, Too) (Quorum Books, Westport, CT, 2001). 

Increasingly, today, globalization is a reality for organizations of almost any size. Only the smallest companies seem unaffected by the disappearance of global boundaries among organizations, markets, and people. Globalization has increased awareness of and concern for creating internationally equitable compensation systems in many companies. The complex nature of international compensation dictates that it receives special attention from organization operating in a multi-national environment. It is crucial that organizations understand the kind of employees employed by international firms, the elements that comprise an international compensation system, and the special problems associated with returning citizens on overseas assignments to their home corporation.

An expatriate, sometimes referred to as an expat, is a citizen of the country in which the organization's headquarters is domiciled. For example, an American working for U.S. subsidiary or branch located in Thailand is an expatriate. An organization may elect to send a domestic employee or manager to an overseas assignment for any number of reasons: to broaden an employee's or manager's perspectives relative to international operations, to start or staff new ventures, to train local employees, to utilize specific expertise possessed by the employee, to protect the organization's interests, to help develop the employee or manager, to assist in the transfer of technology or skills, or to market products. Evidence suggests that American firms use expatriates to a much lesser extent than do Japanese firms.

Components of International Compensation

Compensation for employees of U.S. organizations operating in an international environment consists of four components: base salary, indirect monetary compensation (benefits), equalization benefits, and incentives.

Base Salary. Two alternatives exist for determining base salary for an expatriate: (1) adhering to the established policies and procedures of the parent company's country, including formal job evaluation; or (2) following the policies and practices of the country in which the expatriate works. Since many international assignments are for short durations, usually 3 to 5 years, it may be wise to keep base salary aligned with salaries in the home country. Doing so makes the transition back to the U.S. less complicated since major salary changes do not have to be made.

Indirect Monetary Compensation (Benefits). The benefits package for expatriates is generally the same as the one provided in the home country. However, an organization must be aware that specific countries require benefits that may not be offered in the home country. For example, in France employers are required by law to provide every employee with 25 days of vacation. Although an American working for an American company in France is not legally entitled to such a vacation, the organization may want to follow this practice to avoid morale problems with expatriates. Other countries have retirement, disability, and termination that are different from the U.S.

Equalization Benefits. These benefits are intended to keep expatriates in the same financial condition they were in before accepting an overseas assignment and to reduce any negative aspects of living in a foreign country. A limited selection of the benefits available includes the following:

* Housing allowance

* Educational allowance for children

* Foreign service premium

* Assignment completion bonus

* Emergency leave

* Home leave

* Language training

* Domestic staff

* Club membership

* Spousal employment

* Cultural training for family

This list only scratches the surface of the equalization benefits that can be offered in terms of financial allowances, social adjustment assistance, and transitional support for the expatriate's family.

Incentives.  Expatriates may receive a variety of incentives ranging from cash bonuses of various kinds, to stock options, and performance-related payments. Crafting an effective international compensation plan requires a careful consideration of the various types of compensation as well as the specifics of the assignment and employee involved.

The Problem of the Repatriate

While some may regard an overseas assignment as glamorous, others may also view it as hindering career progression. Organizations must be sensitive to those employees it is considering sending on overseas assignments. The organization must provide as much information as possible about returning from an international assignment. This repatriation policy must be well thought out and incorporated into a repatriation plan.

Additionally, organizations must provide information about career path opportunities for employees accepting overseas assignments. The organization must do as much as possible to let employees working abroad know that they will not be forgotten and will be re-assimilated into the organization upon their return to the home country. Failure to have a sound repatriation policy and plan will make it difficult to get sufficient numbers of employees to accept international assignments.