HRM 7610 Module 7 Written Assignment: Paying an Expatriate and a Local Team Fairly Example

Paying the Engineer Who Opens the Mexican Plant: The Balance Sheet Approach and Local Equity

Student Name

MBA in Human Resource Management, Thomas Edison State University

HRM-7610: Human Resource Management in the 21st Century Global Workplace

Mentor Name

Month Day, Year

Paying the Engineer Who Opens the Mexican Plant: The Balance Sheet Approach and Local Equity

Introduction

Lenape Surgical will send a senior manufacturing engineer to lead the start-up of its new plant in Mexico for two years. He earns $140,000 at headquarters, is married with two children and owns a home in New Jersey. At the same time, the plant will hire Mexican engineers paid under local market rates and Mexican labor law. This assignment explains how to pay the expatriate and how to manage the equity issues that arise between him and his local colleagues. Harzing (2001) notes that expatriates sent to start a subsidiary often serve as a means of control as well as expertise, which is part of this engineer's role during start-up.

Objectives of International Compensation

Dowling et al. (2013) identify several objectives for international compensation: attracting and retaining employees qualified for international work, facilitating movement between subsidiaries and headquarters, maintaining consistency and fairness among employees, and remaining cost-effective. For the employee, the main concerns are protection from financial loss, recognition of the assignment's difficulty and prospects after return. These objectives sometimes conflict, especially fairness to the expatriate and fairness to local staff.

Two Approaches

The going-rate approach pays the expatriate according to the host country's market, with supplements for the move. It is simple and fair relative to local colleagues but can mean a pay cut when moving to a lower-paying country, which discourages acceptance. The balance sheet approach aims to keep the expatriate's standard of living equal to what it would be at home, adding allowances for differences in costs and for hardship and equalizing taxes. It protects the employee and supports mobility but is expensive and can create large pay gaps with local staff. For a short-term start-up assignment from a higher-paying country, the balance sheet approach is the usual choice.

A Balance Sheet Package

The cost-of-living allowance is zero because many goods and services cost less in the host region than in northern New Jersey, though the company should review it if prices change. Under tax equalization, the company deducts a hypothetical tax equal to what the engineer would pay at home and pays his actual U.S. and Mexican taxes, so he neither gains nor loses from the assignment's tax effects. The total cost is close to twice his salary, which is typical for expatriate assignments with families.

Paying Mexican Staff

Mexican engineers at the plant will be paid on Mexican market scales with statutory benefits. Mexican law guarantees a December bonus, the aguinaldo, worth at least fifteen days of wages; twelve days of paid vacation after the first year since a 2023 reform, with a premium of at least a quarter of vacation pay; social security; and a share of profits (PTU) equal to 10 percent of taxable profits, capped since 2021. Market pay for a senior engineer in Mexico's industrial regions is well below a comparable American salary.

The Equity Issue

The expatriate will earn several times what his Mexican counterparts earn, and they will know it. Equity theory predicts (Adams, 1963) that employees compare their ratio of rewards to contributions with others', and that perceived unfairness reduces motivation and increases turnover. Three steps can reduce resentment. First, limit the assignment to the start-up period and plan for a Mexican engineer to succeed the expatriate, with that successor named early. Second, explain that the expatriate's package compensates for relocation and preserves home-country pay, rather than reflecting greater value. Third, pay Mexican engineers competitively in their own market, with development opportunities, including short assignments at headquarters, that show a path to senior roles.

Conclusion

A balance sheet package protects the engineer's standard of living and encourages him to accept a demanding assignment, at roughly twice his salary. Mexican staff should be paid competitively under local law and market rates. The gap between the two creates equity risks that the company can manage through a time-limited assignment, a named local successor, clear explanation and visible development opportunities.

References

Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67(5), 422-436. https://doi.org/10.1037/h0040968

Dowling, P. J., Festing, M., & Engle, A. D. (2013). International human resource management (6th ed.). Cengage Learning EMEA.

Harzing, A.-W. (2001). Of bears, bumble-bees, and spiders: The role of expatriates in controlling foreign subsidiaries. Journal of World Business, 36(4), 366-379. https://doi.org/10.1016/S1090-9516(01)00061-X