Going Rate Approach to International Compensation: An Overview

The going rate approach is a method of determining compensation for expatriate employees based on the prevailing market rates in the host country. This approach aims to align the expatriate’s compensation with that of local employees, promoting equality, simplicity, and identification with the host country.

Key Facts

  1. Definition: The going rate approach is based on comparing the pay packages of local nationals, expatriates of the same nationality, and expatriates of all nationalities in the host country.
  2. Compensation Determination: In this approach, the compensation for expatriates is determined by selecting a survey comparison that reflects the local market rates.
  3. Advantages of the Going Rate Approach:
    • Equality with local nationals: This approach ensures that expatriates receive compensation similar to that of local employees.
    • Simplicity: The going rate approach is relatively straightforward and easy to implement.
    • Identification with the host country: By aligning compensation with local market rates, expatriates may feel more connected to the host country.
    • Equity amongst different nationalities: This approach aims to treat expatriates of all nationalities equally in terms of compensation.
  4. Disadvantages of the Going Rate Approach:
    • Variation between assignments: The compensation for the same employee may vary between different assignments, depending on the local market rates.
    • Rivalry between expatriates: Expatriates of the same nationality may compete for assignments in countries with more favorable compensation packages.
    • Potential re-entry problems: Returning to the home country after an assignment may pose challenges in terms of compensation expectations.

Compensation Determination in the Going Rate Approach

Under the going rate approach, compensation for expatriates is determined by conducting surveys and comparing the pay packages of local nationals, expatriates of the same nationality, and expatriates of all nationalities in the host country. The compensation package is then set at a level that is competitive with the local market rates, ensuring that the expatriate receives a salary and benefits that are comparable to those of their local counterparts.

Advantages of the Going Rate Approach

The going rate approach offers several advantages for organizations and expatriate employees:

  • Equality with Local NationalsBy aligning compensation with local market rates, this approach ensures that expatriates receive compensation similar to that of local employees, promoting fairness and equity in the workplace.
  • SimplicityThe going rate approach is relatively straightforward and easy to implement. Organizations can rely on market data and surveys to determine appropriate compensation levels, reducing the complexity of the compensation process.
  • Identification with the Host CountryBy aligning compensation with local market rates, expatriates may feel more connected to the host country and its culture. This can foster a sense of belonging and integration, which can be beneficial for both the expatriate and the organization.
  • Equity Amongst Different NationalitiesThe going rate approach aims to treat expatriates of all nationalities equally in terms of compensation. This can help prevent discrimination and ensure that all expatriates are treated fairly and equitably.

Disadvantages of the Going Rate Approach

While the going rate approach offers several advantages, it also has some potential drawbacks:

  • Variation Between AssignmentsThe compensation for the same employee may vary between different assignments, depending on the local market rates. This can lead to inconsistencies in compensation across different locations and may create challenges for organizations in managing compensation expectations.
  • Rivalry Between ExpatriatesExpatriates of the same nationality may compete for assignments in countries with more favorable compensation packages. This competition can lead to tension and conflict among expatriates and may make it difficult for organizations to attract and retain top talent.
  • Potential Re-Entry ProblemsReturning to the home country after an assignment may pose challenges in terms of compensation expectations. Expatriates who have become accustomed to a higher salary in the host country may face difficulties in adjusting to a lower salary upon their return, leading to dissatisfaction and potential turnover.

In conclusion, the going rate approach is a widely used method for determining compensation for expatriate employees. It offers advantages such as equality with local nationals, simplicity, identification with the host country, and equity amongst different nationalities. However, it also has potential drawbacks, including variation between assignments, rivalry between expatriates, and potential re-entry problems. Organizations should carefully consider these factors when determining the appropriate compensation approach for their expatriate employees.

References

  • Approaches to International Compensation and Benefits: https://theintactone.com/2019/02/09/shrm-u4topic-4-approaches-to-international-compensation-and-benefits/
  • Approaches to International Compensation: https://www.vskills.in/certification/tutorial/approaches-to-international-compensation/
  • Expatriate Compensation: A Review: https://blog.iese.edu/expatriatus/2011/11/05/expatriate-compensation-a-review/

FAQs

What is the going rate approach to international compensation?

The going rate approach is a method of determining compensation for expatriate employees based on the prevailing market rates in the host country. It aims to align the expatriate’s compensation with that of local employees, promoting equality, simplicity, and identification with the host country.

How is compensation determined under the going rate approach?

Under the going rate approach, compensation for expatriates is determined by conducting surveys and comparing the pay packages of local nationals, expatriates of the same nationality, and expatriates of all nationalities in the host country. The compensation package is then set at a level that is competitive with the local market rates.

What are the advantages of the going rate approach?

The going rate approach offers several advantages, including:

  • Equality with local nationals
  • Simplicity and ease of implementation
  • Identification with the host country
  • Equity amongst different nationalities

What are the disadvantages of the going rate approach?

The going rate approach also has some potential drawbacks, such as:

  • Variation in compensation between assignments
  • Rivalry between expatriates of the same nationality
  • Potential re-entry problems upon returning to the home country

When is the going rate approach most appropriate?

The going rate approach is most appropriate when organizations want to ensure that their expatriate employees are compensated fairly and equitably in relation to local employees. It is also suitable when organizations prioritize simplicity and ease of implementation in their compensation process.

What are some alternatives to the going rate approach?

Alternatives to the going rate approach include the balance sheet approach, which aims to maintain the expatriate’s standard of living at the same level as in their home country, and the third-country national approach, which involves hiring expatriates from a country other than the home or host country.

How can organizations mitigate the disadvantages of the going rate approach?

Organizations can mitigate the disadvantages of the going rate approach by carefully considering