Employees accept job offers not only upon the salary, but on the benefits that accompany many positions. Employee benefits are a "job perk" that may convince a potential employee to join a specific company. Evaluate what benefits are valuable to you when looking for a package.
Example of Benefits that may be offered:
- Company pension and additional voluntary contributions
- Additional Holiday Time
- Child care Assistance
- Company Car
- Discounted Products
- Life Assurance (employee & spouse)
- Retirement counseling
- Private Health care
- Sports Facilities
- Travel vouchers
- Home PCs
- Retail Vouchers
- Training and Development Schemes
To convince an employee to go abroad, there may be additional benefits to help ease the transition. The most common is an increase in salary.
Other benefits may include:
- Relocation benefits - Covers the cost of the actual move plus the help of a relocation agent to ease the transition
- Accommodation benefits - Subsidized housing and a rental agent to help find accommodations
- Language Training - Courses at home and abroad to help the employee integrate
- Expatriate Family Benefits - Aid tuition payments for children, obtain visas and compensate for potential loss of income of spouse
However, these packages are not as cushy as they once were. An ability to understand what exactly is being offered for what price is essential.
The Balance Sheet
The most common approach is the Balance Sheet (or buildup system). An estimated 83 percent of companies use this method for their long-term expatriate compensation. It is designed to or ensure an employee is "no worse off" during the assignment than they were at home. The employee should retain the same amount of purchasing power and savings of the same capacity as his country of origin. The expatriate neither gains nor loses from a financial perspective.
To establish compensation, the package must
Establish Home Spendable Income - A balance sheet starts by establishing how families spend their money at home. This is done by using statistical averages based on each national government's consumer expenditure survey.
Home spending is calculated by:
- Establishing taxes by income and family size
- Apportioning the remaining disposable income between savings and consumption
- Using a consumption model of Goods and Services and Housing and Utilities
Compare Prices - The next step is to compare prices collected at the host location and compare the cost of that lifestyle in the last location. Of course, a family's lifestyle will never be exactly the same and elements like international telephone calls, domestic help, etc. should be calculated. This is more than establishing simple price differences and takes a bit of art as well as science.
Evaluate Cost of Living Index - The "cost of living index" represents the difference in the cost between comparable goods and services at the home and host location at a particular exchange rate. A cost of living index above 100 indicates the host location is more expensive, whereas an index below 100 indicates it is less expensive. To determine the amount paid to the employee, the cost of living index is applied to the home spendable income with the resulting "cost of living allowance" (COLA) determining what supplement is required to make the employee "whole". The package should provide enough for both the home spendable income, plus the COLA.
Changes to pay over time are necessary to keep up with inflation and changes in exchange rate. Calculations are usually based on studies like Mercer's cost of living. Most companies change the COLA every six months to reflect these economic changes.
- The COLA will go up when there is higher inflation in the host location than in the home country and/or devaluation of the home country currency requiring a greater amount of home country currency to purchase the same amount of host currency.
- The COLA will go down when there is lower inflation in the host location than in the home country and/or devaluation of host currency requiring a smaller amount of home country to purchase the same amount of host currency.
Alternative Approaches for Compensation
- Localization - The localization approach involves basing the expatriate's salary on the local (host country's) salaries. While less confusing to implement, this can be a difficult position for the employee. The same position in different countries can have vastly different salaries. This approach also provides for cost-of-living allowances, which can be applied to taxes, housing, and dependents and which is similar to the balance sheet method.
- Lump Sum - The lump sum approach uses the home country's system for determining base salary. In addition to this salary, the expatriate is offered a lump sum of money to apply to items that he or she values versus a specific amount for taxes, housing, etc. This approach is typically used in shorter assignments of 1 to 3 years.
- Cafeteria Approach - Most popular for senior-level expatriates, this approach can be more cost-effective than other methods. Similar to the lump sum plan, this approach provides a single sum of money and the expatriate is offered a selection of options. These may include such benefits as a company car, company-paid tuition, or a range of other assets.