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Are your Expatriate Allowances Right? (part 2)

29 July, 2013

In last week’s post I addressed Cost of Living Allowances, or COLA’s. There were over 100 views of that post, from people in 23 countries. So I will continue examining COLAs in this post.

In part 1, we looked at how COLAs can vary radically–for the same location combination and using objective data–depending on the methodology used. I also pointed out how the “Total Mobility Value Proposition” consists of both tangible and intangible factors, the importance of which vary from person to person, and situation to situation.

The COLA methodologies vary depending on whether you are assuming local buying habits in one or both locations, or expat buying habits in one or both locations. Let me take you a step further in deciding which is right for your organization, or for which moves. This is a very important decision each company must make as it has huge implications on mobility and cost outcomes. So I will drill down to a bit more detail on this issue. In future posts, I will address housing as well as some important issues on salary, incentives, performance management and benefits for expatriates.

Local to Local Approach

Local to Local–in this approach, you calculate a COLA on the assumption the person is currently purchasing goods and services in their home country like ordinary local citizens. In the U.S. that means taking the family to Applebees, buying groceries at Krogers or Ralphs, buying clothes at Target, and having a $6.50 coffee at Starbucks, Dunkin Donuts or Seattle’s Best or Peet’s. For Brits, local purchasing means shopping at Tesco, buying clothes at Marks and Spencer, eating sausage each week and going to a pub for a pint of ale or to Starbucks for 7 quid. For Singaporeans, it means having Kopi C (coffee with cream) at Ya Kun Kaya for S$ 1.80, buying groceries at NTUC FairPrice and clothing at BHG or occasionally at a luxury brand shop.

Under the Local to Local approach, you need to compare prices of what locals buy in the home country to what locals buy in the host country. This assumes 100% immediate assimilation to local buying habits. This also assumes that people will shop “efficiently”, meaning they will shop around to find the best value for money, and not simply shop where most convenient. This assumption results in generally low costs for goods and services, when calculating COLAs.

When to use Local-to-Local COLAs

A local-to-local approach to setting COLAs would make sense if your company 1) expects or encourages assignees to assimilate quickly to local purchasing habits or 2) does not want to foster an “expatriate” mentality, 3) cannot afford using a methodology based on expatriate costs in the host location, or a combination of these. It is highly appropriate when sending someone to a country when there is no confirmed need to repatriate the person. If your company sends someone to another country with the expectation that they may choose to stay there indefinitely, then any COLA you provide would be relatively lean, and help encourage the assignee to learn to shop like the locals do.

Expat to Expat Approach

Under the Expat to Expat approach, you calculate a COLA on the assumption that the goods and services purchased by your expats consist of product brands and shopping outlets that are globally well known. You would ignore Horlicks which is associated with the UK; you would ignore Kopi C at Ya Kun Kaya which is uniquely Singaporean, and you would ignore Applebee’s restaurants. Instead you would compare prices of consumer brands and outlets that expats would recognize anywhere, such as Starbucks, Apple, Heineken, Microsoft and KFC. Personal care outlets such as SuperCuts might be assumed since they operate in many countries and expatriates would therefore tend to go there due to their familiarity, even if local hair salons offer the same services at lower prices. Since this approach assumes global brands which sell on brand familiarity, prices may be higher. The expatriate pricing approach also assumes expatiates are, well, expatriates, and therefore have not time for things like shopping around, since after all they will be repatriated at some point and why take “risks” on unfamiliar local goods and services to save a few dollars?

When to use an Expat to Expat Approach

This approach would make sense for career expatriates who may never settle in one place long enough to fully assimilate local buying habits. Someone who is sent from their home office to go work in Country B for a few years, then move to Country C, and so on, would be a good candidate for this approach, since they will highly value continuity of food brands and shopping outlets, given the disruption of moving so often. It may also be used by companies that want to accommodate their expatriates well, support access to the best-known global brands and do not feel it is appropriate to expect expatriates and their families to localise their buying. Like Local to Local, Expat to Expat compares similar types of products and brands, so the index (numerical variance in prices) reflects location-related price differences mainly, not differences in the types of products.

Local to Expat Approach

Under the Local to Expat approach, you calculate a COLA on the assumption that the goods and services purchased by your expats prior to the assignment are local brands from local outlets, but consist of global brands and outlets at the assignment location. In this case, a Singaporean who drinks local coffee for less than two dollars today will arrive in New York and start drinking Starbucks for $8.00 since there is no longer a Ya Kun Kaya to be found. However, the same Singaporean who enjoyed KFC in Singapore will continue to eat at KFC. An Australian accustomed to a nice steak dinner each week back in Brisbane will be happy to find Australian steak in Shanghai, but will be shocked to find the price is much higher as it must be flown in. So local items that are affordable in the home country may be much more costly in the host location since they are imported. No wonder Luanda, Angola is being reported by Mercer as the world’s costliest city for expatriates: the expatriates cannot easily assimilate to cheaper local food, so much of what they buy must be imported into Africa, a very costly refrigerated journey! This approach compares what an efficient shopper spends at home with what they spend in a new unfamiliar place, which is more costly as the expatriate has less time to shop around and localise.

When to use a Local to Expat Approach

Companies may wish to use a Local to Expatriate approach if 1) they are new to sending people overseas, and want to ensure the expatriate and family are fully accommodated, and not pressured to localise their spending, eating, etc.; 2) to help attract people to taking difficult or less attractive international assignments; 3) where most expatriates are first-time or one-time expatriates, and have never had to adjust their buying habits before and you want to avoid the disruption since most expatriates will be repatriated after a few years. Although it is generally the most costly approach, it is in many ways the most realistic approach where you wish to bridge the gap between what a family spends at home and what they spend on assignment. Because this approach is “fair” in that sense, many companies have adopted and kept this approach for many years. In fact, historically this was once the primary approach used by governments and the first MNC’s to globalise.

How to Apply This

A “typical” expatriate assignment for a function head, lasting three years for a family of four can easily cost over USD 1 million dollars. The Cost of Living Allowance, depending on the locations involved could range from zero to more than $250,000 during this time. The methodology selected by the company will have a big impact on whether employees will agree to an assignment, and the company’s ability to sustain an assignment’s cost.

The major mobility data providers can help you determine the right allowance, but only you, as an employer, must first decide what your overall philosophy is on mobility and related allowances. They will have different names and terminology for these approaches, but if you say “local to local”, “local to expat”, they will know what to recommend to you, and in some cases they can modify allowances in various ways to more closely fit your needs.

Finally, it is ok for a company to use different methods for different types of assignments, job levels, etc.

Contact Freelance Total Rewards for assistance in determining the right approach for expatriate allowances. and helping you engage the right data provider, and select the right solution based on your needs.

P.S. Drink Ya Kun Kaya! Drink Starbucks! I hope this endorsement is sufficient for using the photos 🙂

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