What is balance sheet approach?

After setting the total pay the organization divides the amount into four components of the total pay package such as base salary, tax equalization allowance, benefits, allowances, . The balance sheet approach adjusts the manager's compensation so that it gives the manager the same standard of living as in the home country plus extra pay for the inconvenience of locating overseas.

There are four categories of outlays incurred by expatriates that are incorporated in the balance sheet approach.

a. Goods and services; Home country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care.

b. Housing; The major cost associated with the housing is the host country.

c. Income taxes; Parent and host country income taxes.

d. Reserve; Contributions to savings, payments for benefits, pension, contribution, investments, education expenses, social security taxes etc.

When costs associated with the host country assignment exceed equivalent costs in the parent country these costs are met by both the firm and the expatriate to ensure that parent country equivalent purchasing power is achieved.