Balance Sheet Approach
What is Balance Sheet Approach?
A compensation methodology for international assignees that aims to keep employees financially 'whole' relative to their home country, by separately tracking income, taxes, housing, and goods and services costs.
The balance sheet approach is the most widely used compensation methodology for international assignments. It works by calculating the difference between what an employee would spend in their home country and what they will spend in the host country across key categories: goods and services, housing, taxes, and discretionary income.
The employer then provides allowances or deductions to neutralize these differences, ensuring the assignee neither gains nor loses financially from the move. This approach is typically paired with tax equalization and cost of living adjustments (COLA).
While the balance sheet approach provides fairness and consistency, it can be complex to administer and expensive at scale. Organizations with large assignment populations often invest in mobility technology to automate balance sheet calculations and reduce manual errors.
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Frequently Asked Questions
How is the balance sheet approach calculated?
The balance sheet approach starts with the assignee's home country gross salary, then deducts hypothetical home country taxes and a spendable income figure for typical living costs. The employer pays actual host country housing and a goods and services allowance based on cost of living differentials. The result keeps the assignee in roughly the same financial position as at home.
Why does the balance sheet approach matter for assignment programs?
The balance sheet approach matters because it removes financial barriers to accepting international assignments. Without protection, assignees would face large variations in tax rates, housing costs, and purchasing power across destinations. The approach gives the employer predictable assignment costs while keeping the assignee financially neutral, supporting talent mobility decisions on business need rather than tax arbitrage.
What is the difference between the balance sheet approach and localization?
The balance sheet approach maintains the assignee on home country compensation with allowances that protect their financial position during a temporary assignment. Localization moves the assignee fully to host country compensation, benefits, and employment terms. Balance sheet supports temporary assignments; localization supports permanent transfers. The two methods often appear together when an assignment converts to a local role.
Related Terms
Tax Equalization
A compensation policy designed to ensure that an employee on international assignment pays no more or less tax than they would have in their home country, with the employer absorbing any difference.
Hypothetical Tax (Hypo Tax)
A notional tax withheld from an assignee's paycheck under a tax equalization policy, representing what they would have paid in taxes had they remained in their home country.
Cost of Living Adjustment (COLA)
A compensation supplement given to assignees to account for differences in the cost of goods and services between their home and host locations, ensuring their purchasing power is maintained.
Relocation Package
A bundle of benefits and allowances provided by an employer to support an employee moving to a new location, which may include moving expenses, temporary housing, travel, and settling-in support.
Total Assignment Cost (TAC)
A comprehensive calculation of all direct and indirect costs associated with sending an employee on an international assignment, used to assess ROI and inform policy decisions.