Balance sheet approach

Definition

The balance sheet approach is a method used in international compensation that ensures expatriates maintain their purchasing power and financial stability when assigned to a foreign country. This approach focuses on comparing the costs of living and the expatriate’s current compensation to create a salary package that compensates for any potential financial disadvantages they may face abroad, including currency fluctuations and different taxation systems.

5 Must Know Facts For Your Next Test

1. The balance sheet approach typically involves a base salary plus additional allowances for housing, education, and other benefits to maintain the expatriate's standard of living.
2. It helps organizations attract and retain talent by ensuring that employees are not financially disadvantaged while working abroad.
3. This approach requires regular assessments of currency rates and cost indices to accurately reflect changes in living conditions over time.
4. Employers often utilize market data and benchmarks to determine the appropriate compensation levels under the balance sheet approach.
5. The balance sheet approach can be more complex than other compensation methods due to its need for ongoing adjustments based on various economic factors.

Review Questions

• How does the balance sheet approach ensure that expatriates maintain their financial stability when working abroad?
  • The balance sheet approach ensures expatriates maintain their financial stability by comparing their current compensation with the cost of living in the host country. By analyzing factors like housing, education, and local prices, organizations can create a tailored salary package that compensates for potential losses in purchasing power. This way, employees feel secure about their finances, making it easier for them to focus on their work abroad.
• Discuss the role of currency fluctuations in the balance sheet approach and how organizations manage these risks.
  • Currency fluctuations play a significant role in the balance sheet approach, as they directly affect an expatriate's purchasing power. Organizations manage this risk by regularly monitoring exchange rates and adjusting salaries accordingly to maintain equitable compensation. This includes creating safeguards such as fixed allowances or ensuring that expatriates receive payments in their home currency when possible, thereby minimizing the impact of unpredictable currency changes.
• Evaluate the advantages and disadvantages of using the balance sheet approach for international compensation compared to other methods.
  • The balance sheet approach has advantages such as maintaining expatriates' purchasing power and ensuring fair compensation relative to local standards. However, it can also be more complex and resource-intensive, requiring constant monitoring of economic variables. In contrast, simpler methods like flat-rate compensation may be easier to administer but could leave expatriates financially disadvantaged due to varying costs of living. Evaluating these factors helps organizations decide on the most effective compensation strategy for their international workforce.

Related terms

Cost-of-Living Adjustment (COLA): A salary adjustment made to compensate employees for differences in living costs between their home country and the host country.

Expatriate: An employee who is sent to work in a foreign country, often requiring adjustments in compensation and benefits.

Tax Equalization:

A policy that aims to ensure that expatriates do not pay more or less tax than they would have if they had stayed in their home country.