The Balance Sheet approach preserves equity between international
assignees of the same nationality and between assignments, and is easy to com-
municate. It also facilitates repatriation (Dowling et al., 1999). However, it can
create disparities and inequities between PCNs and TCNs and between them
and host country nationals (HCNs). It can also be expensive. Cost of living
allowances can provide unintended financial windfalls to assignees, if for
example the data upon which the allowance is calculated is inaccurate, or for
other reasons it is overestimated. A negative cost of living allowance occurs
when an expatriate is unintentionally overpaid through a cost of living
allowance that is higher than the actual cost of living in a particular location.
ORC’s research indicated that the majority of MNCs replying to their survey
indicated they did not act to recover overpayments, or negative cost of living
allowances. The distribution of such windfalls to certain international
assignees and not others challenges the equity principle. ORC suggests that for
73 per cent of the MNCs surveyed, the Balance Sheet remains the system of
choice (Stanley, 2001).
Host country and region-based expatriate compensation strategies are the
best-known alternatives to the Balance Sheet approach. These are often referred
to as localized approaches. Host country compensation places higher priority
on local equity than on home country equity, compensating the assignee to
host country standards, and often participation in a home country retirement
scheme is the only compensation link with the home country (Dwyer, 1999).
It is suited to long-term assignments where comparisons with home country
peers are less relevant to assignees. However, some countries might find this
approach more difficult to adopt due to the nature of their taxation and social
security reporting requirements. For example, according to Dwyer, a host-
country-based approach ‘is often more difficult to apply to U.S. expatriates due
to strict home country tax and social security reporting obligations’ (1999: 51).
This approach may also result in some repatriation problems if the home salary
is lower than that being paid by the host country subsidiary.
A regional approach attempts to capitalize on apparent similarities in cul-
ture, compensation and taxes, for example by adopting the same compensation
for all countries within a particular region. There is some evidence that MNCs
are beginning to view the 11 countries that have adopted the Euro, or the
‘Eurozone’, as a region for compensation structures. For example, Portal
Software Europe has equalized car allowances and some other benefits for
employees in 8 of their 11 Eurozone bases, (Crabb, 2002; Dwyer, 1999). As
Dwyer (1999) notes, while the Eurozone is a relatively easy region to define, one
of the challenges with this approach can be that of defining a region. Consider
Australia, for example, geographically close to but culturally distant from Asia.
Localization involves integrating the assignee into regional or host country
compensation levels and systems to the extent that the law allows. This is obvi-
ously best suited to the longer-term international assignment.According to ORC,
while reasons such as cost reduction by the MNC or the assignee wanting to
International Compensation and Performance Management 315