In a multinational corporation, managers will be sent to many different countries. Different countries will have different costs of living. For example, by one reckoning at least, the cost of living in Tokyo, Japan, is more than twice as high as the cost of living in Manila, the Philippines. A firm that sends managers to both cities might need to account for this difference in their plans for employee compensation.
On the one hand, this might seem simple. The firm could simply determine the cost of living in the city to which the manager is being sent relative to the home country and adjust the manager’s salary accordingly. However, there are a number of issues with this. Let us examine two.
First, the managers are still based in the US and need to have their pay reflect that to some degree. They still need to save for sending their kids to US colleges and for their own retirements in the US. It would not be good to simply adjust their pay to account for local cost of living.
Second, and perhaps more problematically, there is the issue of morale among the managers. While intellectually managers might understand the policy, it might be emotionally problematic for those being sent to countries with a lower cost of living. There might be jealousy between managers. Those who are sent to low-cost countries might feel that they are less valued. This might reduce their productivity.
Thus, relative differences in cost of living can create headaches for determining the appropriate compensation for managers sent to different countries.