 In this topic we are going to talk about another approach to international compensation which is the balance sheet approach. So let's take a look what is the balance sheet approach. Balance sheet approach is basically designed to pay the international assignee according to its home country compensation packages. So basic objective is maintenance of home country living standard plus financial inducements. So you pay according to the compensation package of your own country of the home country and then also pay some additional amount as financial inducement. That is basically the balance sheet approach. So balancing the living standard of the employee who is going to work in another location. So that is an approach which is based on the home country pay. Home country pay and benefits are the foundation of this approach. So the amount of money and compensation which is paid to the employee in the home country. That is the foundation of that adjustment to home package to balance additional expenditure in the host country. So if an organization uses balance sheet approach and sends a person to a location where the payment is very high. For example, if a Pakistani multinationals send sends a person to America and uses the balance sheet approach, which is the they pay in the according to the home country packages in America. That is something which is not going to fit. So some additional payments according to the cost of living of a country which has got a higher cost of living and additional expenditure of the host country. So balance sheet approach also needs to take into account these different factors. Financial incentives expatriate hardship premium added to make the package attractive. So as we discussed that financial inducements and hardship allowances they are part of the compensation package, whether you go for a going rate approach or you go for a for a balance sheet approach. That is the most common system which is used by the multinational firms. So usually why it is the most common system because multinationals they belong to the developed world than the developing world. And they have got subsidiaries in most of the developing world as well. So for example, multinational most of the multinational they come from America, Canada, the UK, the European countries where the cost of living is high, where compensations are high, where per capita income is high, where the living standards are high. And when those multinational they send people to subsidiaries which are in the developing countries. For example, the Pakistan or the South Asia or the Far East people have to be paid according to their home country standards because they will not go to those developing countries without securing the pay that they are already getting. So if a person in America is taking that $50,000 and they get that $5 lakh salary in Pakistan, then it is not something which is equitable. So you need to keep that $50,000 with him. We are not going to leave those $50,000 in America and come to Pakistan and also go to a hardship area to work in that place. So that is the reason why mostly balance sheet approach is employed in multinational organizations. There are four balance sheet approach categories in which the payment is calculated. For goods and services, how much amount of money is going to be spent on food and services which are required in that country. Then housing, what is the cost of housing or how do you provide housing? Apart from that, income taxes, parent country or host country's comparison in income taxes, sometimes that needs to be adjusted in that balance sheet approach. And then reserve contributions to savings, payments for benefits, pension contributions, investment, education, expenses, social security taxes, etc. So these things they are balanced in the balance sheet approach. How much is being paid in the parent country and how much is being paid or saved in the host country. All of that is then calculated and given in that balance sheet approach. These are the four categories of which are included in calculating the amount of balance sheet, calculating the amount of compensation package under the balance sheet approach. So there are various different advantages and disadvantages of the balance sheet approach. What are the advantages? Number one is that there is equity, first of all, between the assignments. When you are sending someone on the same assignment to various different locations, you will be paying them in the same amount which is the home country amount. Then between expatriates of the same nationality, when you are sending one country to different countries, then the equity will be created. Then it facilitates expatriates reentry. So if you keep them paying in the same amount, the same compensation package which was being paid to them when they were working in the home country, it would be easier for them to come back and re-patriate in the home country. Then it is something which is easy to communicate to the employees. That employee, they will just receive a basic worksheet on which their balance sheet, their compensation package according to the balance sheet approach is going to be calculated and it would be something which is easier to understand. Then what are the disadvantages of it? Disadvantages is that it can result in great disparities between expatriates of different nationalities. So if you are employing people from different nationalities and paying them according to the home country of that particular parent country, then it is going to create disparity between people of different nationalities. It can also create disparity between expatriates and local nationals. So if a person is coming from America and is being paid $50,000 and people on the same level of executive position are being paid 5 lakh rupees, who are the host country nationals, there is going to be a huge disparity between the two classes. And finally, it is something which is quite complex to administer. As we saw that the going rate approach, it is something which is easy to administer. Whereas the balance sheet approach, it is something which is difficult to administer and that is one of the disadvantage of the balance sheet approach. So these are the various different features and advantages and disadvantages of the balance sheet approach.