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Employees who are assigned to overseas positions usually receive a pay package different from domestic employees. The international compensation typically provides employees with a base salary plus allowances to cover the higher cost-of-living in the foreign country and incentives to provide encouragement for employees to accept and remain at foreign assignments.
Generally, U.S. companies use one of three approaches to determine base pay for expatriate and third- country national employees:
A home-country based pay approach: Base salary for expatriates and third-country nationals is comparable to the base salary paid employees in their home country;
A host-country based pay approach: Base salary for expatriates and third-country nationals is comparable to the base salary paid employees at the host location; or
A headquarters based pay approach: Base salary for expatriates and third-country nationals is comparable to the base salary paid employees at the headquarters location.
A fourth approach used by some companies is a hybrid approach, "higher of home or host" policy, whereby companies compare the benefits of a home-country and host-country policy and choose that which is most favorable to the expatriate.
Most U.S. multinational companies administer their international pay plan using a balance sheet approach. The balance sheet approach is a method of breaking down an expatriate's salary into major expenditure categories - such as housing, goods and services, and income taxes - and adjusting compensation within each category to reflect differences in living costs between the home country and the foreign post. This approach seeks to ensure that employees on foreign assignment are treated no worse financially than their home-country colleagues.
See ERI's INTERNATIONAL REFERENCE REPORT and the Relocation Assessor software and databases