One of the most common, but
also one of the most complicated to administer approaches to compensating an
employee while they are on an overseas assignment is to use the buildup or
balance sheet approach. This approach normalizes the employee’s overseas compensation
with what they would earn in a similar position at the home office.
The Xpatulator.com IAM calculator allows HR departments to calculate an equitable package of
compensation and benefits during the employee’s overseas assignment. At the end
of the assignment the employee is able to maintain the same relative purchasing
power and standard of living when they return to the home base salary and
benefits structure. The IAM calculator is recommended for extended overseas
assignments of from 6 months to 5 years.
Here are the major
components used to calculate an overseas assignment compensation package.
Home Net Salary
The employee’s home net
salary is calculated using their gross cash payments minus any variable
payments such as performance bonuses. Hypothetical tax is then subtracted to
calculate the net salary. From this amount the employee is expected to spend
40% on essential living expenses and 60% on discretionary spending such as
savings, vacations, maintaining a residence at their home location etc.
Home Component
The home component of the
employee’s compensation typically includes their discretionary spending amount
plus hardship and expatriate premiums. This amount is paid in the home
currency. (60% Net Salary + Location Hardship Premium + Expatriate Premium)
Hardship premiums help to
offset relative quality of life issues that employees and their families are
likely to encounter while on their overseas assignment. Xpatulator.com
maintains hardship ratings on over 700 locations worldwide and calculates a
hardship premium based on the relative difference of the hardship rating
between the host and home locations.
The expatriate premium is an
incentive offered to employees to encourage them to take overseas assignments.
The international standard is 15% but this number can be adjusted based on
company policy or negotiation.
Host Component
The host component includes
the amount needed for essential living expenses adjusted for any differences in
the cost of living. It is typically paid in the host location currency. (40%
Net Salary X Cost of Living Difference X Exchange Rate)
The difference in the cost
of living is calculated using the Xpatulator.com Cost of Living Index (COLI).
The COLI uses price information on approximately 200 common goods and services
in each location. Data is verified and updated quarterly by trained analysts.
Price information is grouped into 13 baskets of related expenses such as
groceries, communication, education etc. The COLI baskets are weighted based on
surveys of actual expat spending habits and the applicable COLI uses only those
items that the employee will be responsible for paying out of their salary.
Benchmark Housing Allowance
The host location will
typically be responsible for providing housing or reimbursement for housing.
The IAM calculator includes a benchmark housing allowance based on the host
location and the employee’s level and family size.
Transportation Allowance
If company transportation
was provided at the home location, that benefit will typically be extended in
the host location. If transportation was the responsibility of the employee at
the home location and they will receive company transportation or a
transportation allowance at the host location, then that amount should be excluded
in the calculation of the employee’s net salary. The IAM calculator provides a
benchmark transportation allowance for each host location.
Medical, Education and
Benefits
Providing appropriate
medical services and maintaining equivalent quality education for the
employee’s children are normally the responsibility of the host location. Where
appropriate, private and/or boarding school may be included.
Company benefits such as
retirement plans and performance bonuses will continue to be paid as part of the
home component of the employee’s compensation package.
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