Historically, international moves were managed using a tax equalised approach however, analysis has shown that this traditional type of expat package is on average 3 times more expensive than an equivalent local hire. Companies are therefore facing a ‘balancing act’ of making expat moves affordable to the business while ensuring that they remain attractive to the expat and therefore encourage mobility. The focus on affordability as well as an increase in mobility at non-executive level and a greater interest in flexible assignments (commuters, short term assignees etc), has lead to the introduction of alternative package types.
As a result, we have seen a number of companies introduce a host based / destination pay approach. Under this arrangement, the assignee is paid a host country salary in local currency on the host country payroll plus an additional payment to compensate for any differences in living and housing costs between the home and the host location. A home country ‘notional salary’ can be maintained during the assignment (for repatriation purposes) and a link back to the home country pension and social security schemes is still possible in most cases. This approach generally reduces the cost to the business as the package is not grossed up and the administration is reduced. This enables companies to continue to support mobility in the current economic climate as well as supporting non-executive, developmental and employee initiated moves.
As well as looking at alternative package types as a way to reduce costs, another area that has received increased focus in recent times is cutting the costs of an existing expat programme. For some companies it may have been some time since their expat policies were last fully reviewed and many of these are therefore benchmarking all elements of their existing policies to determine their competitiveness against the market. Some examples of elements to consider are outlined below…..
Cost of Living
Do you use the full expat standard or a conservative living pattern ? The full standard assumes that a significant amount of purchases will be made at speciality stores for imported goods and assumes a higher cost for services and entertainment in the host location. Due to increased globalisation and availability of international products and services over the past decade, many companies have determined that this full expat standard is no longer a necessary basis on which to calculate the host country allowances. The full expat standard often hinders integration of expats into the local market and therefore does not allow for localisation.
Do you know what elements are included in your cost of living calculations ? Unless you are clear as to what elements are being included there may be some elements that are being ‘double counted’. For example are you including transportation, medical, club membership while also providing separate company car / medical / club membership benefits under your programme ?
Is the salary used to calculate your cost of living allowances / deductibles capped ? Do your highest paid expats need to buy more goods and services in the host location than others on a slightly lower salary or is this additional salary more likely to be additional savings ?
Is your programme offering the highest level of housing in the host location ? If you offer a house savings programme (whereby any difference between the housing budget and the actual rent is shared between the company and the employee and paid as an additional cash allowance), do you know what your annual spend is on house savings allowances to employees ? If a large proportion of your expats receive house savings, this would most likely indicate that your host country housing budgets are higher than necessary and this may represent a significant additional cost to the company.
Do you deduct a home housing norm from your expats ? If your programme doesn’t include this deduction then you are giving your employees free housing in the host location and they are not making any contribution when they would have in all likelihood incurred housing costs at home. This is providing a windfall to the assignee and may eventually be a barrier to mobility / repatriation. If you do implement a deduction / home country housing norm then you should also consider whether this is at a comparable level to what the employee would have spent at home as this is often based on an urban average which may not be representative of the actual home locations for your expatriate population.
Other areas to consider are vacation leave (the amount of flights that you are giving, the class of travel, whether this is being used to go back to the home location or to travel anywhere) and exception management (should this be managed centrally to ensure global equity and minimise expense ?).
All of the above areas are ways that you can better manage the ongoing costs of your mobility programme, potentially realise some immediate savings opportunities and ensure competitiveness while at the same time keeping the package attractive to your expats and therefore encouraging international mobility.
Felicity Smith – Global Expat Policy & Strategy Manager, PepsiCo Intl