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Are your Expatriate Allowances Right? (part 1)

22 July, 2013

Are you confident your expatriate allowances are right? Are you sure your allowances are neither too costly, nor insufficient for the needs of your mobile talent? Can you explain and defend them to your expatriates and their managers?

More than 90% of companies provide their expatriates one or more allowances for long-term international assignments, including:

  • Cost of Living Allowance, also called a Goods and Services Allowance–intended to account for differing prices and for currency movements
  • Housing Allowance/Budget–intended to provide suitable host location housing for the expatriate and family
  • Hardship Allowance–provided when the assignee is send to a “hardship” location
  • Mobility Premium–to compensate for the disruption of leaving home
  • Location Premium–this could be a combination of two or more of the above allowances

The above allowances range in magnitude, depending normally on the home location, host location,  job level and family size. They vary as  well based on the company’s philosophy surrounding mobility and its mobility value proposition (MVP).

Cost of Living 

This post will focus on Cost of Living. Future posts will address housing and hardship allowances.

The difference in the cost of living between, say, a developed country like Singapore and a less developed country like Indonesia can be measured, using a “basket of goods” research process. Many companies conduct rigorous economic research, such as AIR-INC, ECA and Mercer, and provide their clients data, reports and tools to quickly determine allowances for cost of living, with regular updates. There are different methods, however, of defining a market basket and measuring the difference between locations, which will result in significant cost differences (currency and figures are fictitious, for illustration only):

Click to enlarge

Allowances types

As you can see, all three calculations of cost differences are objective and fact-based, yet they are radically different, based on the approach a company may wish to take. In fact, in any of the above approaches, the leading data providers are often able to modify the market basket to exclude, for example, transportation costs, medical costs or alcohol.

Calculation of cost of living allowances (COLAs) is complex, but the costs can be great, sometimes as much as half the employee’s salary. I have even seen allowances greater than the employee’s salary. I have also seen cases where no COLA is needed, such as moves from a high-cost country to a lower cost country.

“Keep Whole” versus “Control Costs”

We are in an era where the philosophy of “keep the expat whole” is being challenged on the basis of cost, and risk exposure. Multinationals no longer want to be told by HR/C&B/Mobility that expat allowances MUST BE such and such because that’s what the data provider says it is, and because the policy says we will keep the assignee/expat “whole” in terms of their purchasing power.

So which is right? It depends on the situation, really!

If you are asking an executive with school-age kids and a mortgage to go spend 2 to 3 years in another country, you cannot avoid the fact that their top concern will be the compensation package and some assurance he or she will not “go backwards” financially. I have never known of an expatriate with family financial obligations to take an assignment on the basis of “it will be culturally enriching” if they lack some level of assurance they will maintain their net purchasing power, ability to save, etc. The dollars are non-negotiable. The package must be sufficient, including tax protection, allowances such as those noted above, plus things like home leave, education, healthcare and perhaps a car. Anyone smart enough to have skills that are lacking in the host location will probably also be smart enough to calculate the cost items and evaluate a package financially.

On the other hand, if you have an employee who has been “stuck” in their current job too long, or has posters hung in their cube of the Great Wall of China with the caption “follow your dreams”, or whose parents migrated from another country and who wants to go back and discover his roots; or who sees a job posting in another country and applies due to job security fears… these are the people who may not require being kept whole financially.

These “volunteers” are not just the exception. Based on numerous conversations with recruiters and HR leaders, they are growing in number rapidly:

  • Many Euro-zone talents facing 15-20% unemployment rates are eager to explore opportunities in Asia or the Middle East, even on a local package with no relocation benefits.
  • Americans witnessing a “jobless recovery” and still collecting unemployment benefits are often eager to find opportunities in Singapore where tax rates are low, or in China where their talents are needed.
  • Brits facing high taxes and a sluggish economy are flooding the job boards with applications for roles in Hong Kong due to cultural attraction and better economic and career hopes.
  • Early career and Gen Y talents from Singapore, Indonesia, India, Philippines and China are eager to see the world, find meaning and life enrichment, gain cultural skills and a global perspective. Likewise, many people from developed countries are drawn to Southeast Asia for jobs as well as cultural attraction.

It is not necessary to provide a package that keeps these people economically whole. When given the chance, many people will take an international transfer or even a temporary assignment on local or near-local terms.

Local Equity

Apart from cost, organisations need to ensure pay equity at each location. I have never known an organisation where the costs of expatriate packages has been kept a secret. People talk. Local staff are rightly concerned when “another foreign boss” comes in and moves into a house that seems like a mansion to the locals, yet may seem barely sufficient to the expatriate. It’s not the cost that bothers them; it’s the fear that such a foreign boss will fall in love with their “expat lifestyle” and perform their assignment in such a way that it drags on and on, without end if possible. This damages employee engagement among locals and it can lead to a feeling of hopelessness about career growth opportunity for aspiring local talent.

Total Mobility Value Proposition

The decision to take an international assignment or transfer is complex for an individual or a family to make, in all cases. Fundamentally it is a personal and family decision. From there it starts with evaluation of the financial package, the career impact, and finally the appeal (or lack of appeal) of experiencing life in another country. Companies seeking to attract talent to move across borders must consider all these considerations, which comprise the total mobility value proposition (MVP):

Total Mobility Value Proposition

Some of these considerations are financial, but most are not. According to Brookfield’s 2013 Global Relocation Trends Survey, among family-related issues “Family adjustment” was a “critical” or “highly important” concern at 91% of companies, followed by “Children’s education” (89%) and “Spouse/Partner resistance to international assignment” (83%). The size of the financial package needed for someone to take a move depends on “pull factor” (attraction) of the intangible factors plus the value of the financial elements. The total mobility value proposition is what counts. Clearly a one-size-fits-all approach ignores these considerations, and can result in unnecessary cost, or obstacles to moving the talent you want to move.

So yes, it depends on the situation. You need multiple approaches in your tool box to move the talent you want to move, manage cost, balance local equity and provide the value that both the business and its people are looking for.

Contact Freelance Total Rewards for a free consultation on expatriate allowances. It could save your company many thousands–even millions–of dollars, while still ensuring you can attract the talent you want in the right place at the right time, purpose and duration.

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