What are the relevant contextual factors in international compensation?
Some of the most important contextual factors that impact international compensation plans, also called expatriate compensation plans, are cost of living in the country of employment, housing, health care, children's education, and tax payment assistance. If either of these factors are missing from an international compensation plan, the plan will significantly lower an employee's standard of living.
There can be significant differences between the cost of living in the country of employment, which we can also call the host country, and the employee's home country. For that reason, cost of living is one of the most important factors companies consider when developing compensation packages. Companies will raise compensation if the cost of living in the host country is higher but will not lower compensation if the cost of living is lower. Costs of housing, educating children, and healthcare are all factors companies use to determine the cost of living.
Aside from the cost of housing, since it can be difficult and even impossible for an expatriate to find housing in a host country that compares with the standard of housing the expatriate once had in America, housing has also become a significant part of the compensation plan. In other words, as researchers Robert H. Sims and Mike Schraeder phrase it, it can be quite a culture shock for an American family to move from a 2400 square-foot home in the US to a 1200 square-foot apartment in Tokyo ("Expatriate Compensation: An Explanatory Review of Salient Contextual Factors and Common Practices," Emerald). For this reason companies in host countries include housing allowances in their compensation plans and even offer free housing.
Healthcare provision is also a major source of concern in compensation packages. In the past, companies in host countries have had to contract with separate healthcare insurers just for expatriates working in the country. Insurers can often be in completely separate countries. For example, an American expatriate working in Hong Kong may need treatment in Hong Kong, but the expatriate's insurer may be in France. Such a situation can slow down the processing of paperwork and even of receiving treatments. Therefore, it is becoming very critical for companies to contract with health insurance companies that have developed healthcare plans just for expatriates.