Read the paragraph below and answer the questions that follows.

Question

In terms of the Botswana legal system expatriates are employed in terms of the employment of
non-citizens Act. Usually these are foreigners who are given a work permit to work for a given
period in Botswana. They have attractive packages than locals. The starting point when it comes
to understanding international compensation is to refer to a passage by Dowling and Schuler 1990
in which they point out that “Knowledge of the laws, customs, environment, and employment
practices of many foreign countries, familiarity of why special allowances must be supplied and
which allowances are necessary in what countries – all within the context of shifting political
economic and social conditions.” This passage summarizes all the important considerations which
must be taken into account in International compensation issues.
Required
a) Discuss internal factors affecting expatriate compensation (10 marks)
b) Discuss the external factors affecting expatriate compensation. (15 marks)

Answer 1

a) Internal Factors Affecting Expatriate Compensation (10 Marks)

1. Company Policy: Organizations often have established policies and frameworks for expatriate compensation, which can influence salary structure, benefits, and allowances. The compensation may vary based on the company's objectives, such as attracting talent or maintaining equity among employees.

2. Job Level and Role: The position or role of the expatriate within the organization is a crucial internal factor. Positions that require specialized skills or those at higher levels of responsibility typically command higher compensation packages.

3. Performance Metrics: Internal performance evaluations and expectations can directly impact compensation. Some companies link expatriate pay to performance metrics, ensuring that compensation reflects the value and output delivered by the expatriate.

4. Length of Assignment: The duration of an assignment can influence the compensation package. Longer assignments may warrant a different structure compared to short-term assignments due to the differing implications on relocation and adjustment costs.

5. Employee's Previous Experience: The prior experience and negotiation power of the expatriate can play a role. An expatriate with extensive international experience or specific expertise may negotiate a more favorable compensation package.

b) External Factors Affecting Expatriate Compensation (15 Marks)

1. Local Cost of Living: One of the primary external factors is the cost of living in the host country. Expatriates often receive cost-of-living adjustments (COLA) to help them maintain their purchasing power in locations where living expenses are higher than in their home country.

2. Taxation Policies: Host country tax regulations can significantly impact expatriate compensation. The company may offer tax equalization or reimbursement to mitigate any financial burdens an expatriate may face due to higher taxes in the foreign country.

3. Exchange Rates: Fluctuations in currency exchange rates can influence the expatriate’s compensation in terms of the real value of their salary when converted back to their home currency. Employers must consider these variances when determining compensation packages.

4. Labor Market Conditions: The demand and supply of skilled labor in the host country influence compensation structures. If there is a high demand for specific skills, expatriates may command higher salaries than local workers.

5. Legal Regulations: Local laws regarding employment practices, minimum wage, and expatriate rights must be considered. Non-compliance can lead to penalties and require organizations to adjust compensation accordingly.

6. Cultural Factors: Understanding cultural expectations regarding compensation can be vital. Acceptable salary ranges and benefit preferences (such as housing or schooling allowances) may vary significantly across cultures.

7. Social Security Policies: Host country social security and benefits regulations are essential. Organizations must consider the social security contributions required and how these affect overall compensation.

8. Economic Conditions: The overall economic environment in the host country, including inflation rates and economic stability, can impact the compensation package. A stable economy may offer different compensation dynamics compared to a fluctuating one.

9. Bilateral Agreements: Treaties between the expatriate’s home country and the host country can influence taxation and employment conditions, thereby affecting compensation packages.

10. Reputation of Company in Host Country: The standing of the employer in the host country can also affect compensation. A company’s reputation may allow it to offer lower salaries while still attracting talent or may necessitate competitive compensation to attract qualified expatriates.