The question of cost-of-living differentials has particular significance to multinational firms, where pay rates range widely from, say, France to Zambia. How should multinationals compensate expatriate employeesthose it sends overseas? Two basic international compensation policies are popular: home-based and host-based plans.

With a home-based salary plan, an international transferees base salary reflects his or her home countrys salary. The employer then adds allowances for cost-of-living differenceshousing and schooling costs, for instance. This is a reasonable approach for short-term assignments, and avoids the problem of having to change the employees base salary every time he or she moves. In the hostbased plan, the firm ties the international transferees base salary to the host countrys salary structure. In other words, the manager from New York who is sent to France would have his or her base salary changed to the prevailing base salary for that position in France, rather than keep the New York base salary. The firm usually tacks on cost-of-living, housing, schooling and other allowances here as well.

Most multinational enterprises set expatriates salaries according to the home-based salary plan. (Thus, a French manager assigned to Kiev by a U.S. multinational will generally have a base salary that reflects the salary structure in the managers home country, in this case France.) In addition, the person typically gets allowances including cost-of-living, relocation, housing, education, and hardship allowances (for more challenging countries). The employer also usually pays any extra tax burdens resulting from taxes the manager is liable for over and above those he or she would have to pay in the home country.

Why do you think most employers opt for the home-based salary plan?