Employers are moving away from traditional, and expensive, expat compensation packages. However, designing policies to attract and motivate qualified candidates remains a challenge.

Faced with the continuing need for cost containment, multinational organisations have been increasingly using different international assignment options, rather than the standard 'out-and-back' scenario.

Designing appropriate 'alternative' assignment policies is a challenge

These comprise: the localisation of expatriates already on assignment, the transfer of employees for a fixed-duration international assignment on local terms and conditions from the outset, and the permanent transfer of employees internationally.

While these alternatives are still not heavily used in terms of the number of employees involved, many companies have used them at some point.

Although these three options share some common features, they pose rather different challenges.

For example, where an expatriate has been on a conventional assignment package and is then going to be localised, the key issues revolve around the transition process. Should any 'expatriate' pay elements be retained? Are they necessary? For those pay elements being removed, should elimination happen in one step or be phased in gradually?

When an expatriate goes abroad on local terms and conditions from the outset of the assignment but is expected to repatriate to the home location, the company needs to decide what elements of the package should continue to be linked to the home base to facilitate repatriation.

The permanent transfer of an employee to the host location is rather a blend of the other two: the company still needs to consider whether a local pay package can be offered at the start of the assignment or whether some non-local elements are needed to attract the employee. However, since the employee is expected to stay in the assignment location indefinitely, there is no need to consider the impact of a potential repatriation.

The particular home and assignment locations are crucial in deciding whether any of these three options are practicable.

For example, the range of options available when the home country is the Philippines and the host country is the United States is quite different from what is available if the locations are reversed.

Localisation

The rationale behind localising an expatriate is first and foremost linked to cost control. However, the time spent by the individual on assignment follows as a close second.

Many policies provide that expatriate status should be reviewed after a predetermined time on assignment, most typically five or six years.

Do employers today have formal policies for these evolving situations?

According to the '2004 Survey of Localization Policies and Practices' conducted by ORC Worldwide, of those organisations that localise expatriates, only 41.4 percent have implemented a formal policy, while one third have no policy at all. Even when a policy exists, only one quarter of the respondents follow it strictly. Negotiation is a common element in localisation, particularly if the company has an informal policy (or guidelines) and only a handful of localised employees.

When deciding whether to develop a policy, it is important to consider the following issues:

• Is the volume of localised assignees large enough to justify an official policy?
• If there is a policy, how can it be applied consistently?
• If case-by-case flexibility is allowed, how can a company avoid inequities?
• When negotiating terms, how can a company avoid 'cherry-picking' between home and host conditions?

In light of these issues, a company can take proactive action, assuming the number of localised employees will increase over time. Companies should define a formal process to handle localisation, or at least have general guidelines.

In addition, the importance of communication and the need to avoid misinterpretation should be recognised—for example, providing advance notice to any individuals who are likely to be affected so that they will understand what is happening and why, not forgetting the legal issues that may arise for the employee and the family with regard to immigration, work permits and local labour laws.

Addressing compensation elements

An important component of policy decisions involves the 'trigger', or driving force, in localisation. In other words, did the employee request to stay in the assignment location or did the company initiate the change in status? The answer will affect the employee's remuneration, which, as an assignee, involves cash compensation, as well as expatriate-related allowances, such as cost-of-living and housing, education.

For each element of the expatriate pay package, informed decisions are necessary, forcing the employer to choose from a number of options: eliminate the element immediately, offer a 'buy out' of some form, phase the element out over a period, or allow it to continue indefinitely.

In summary, when dealing with cash compensation, the employer should consider the following steps to reach a fair and competitive salary level:

• Define the local market salary and bonus, if any.
• Decide whether there is – or should be – a premium over the local market for the individual's international experience.
• Compare the amount with the employee’s current net pay.
• Perform a net-to-net or net-to-gross calculation.
• Decide if local compensation is feasible. If so, decide whether to implement that compensation at once or in steps. If not, determine whether additional measures are necessary, such as buying out certain elements or freezing base pay.

When dealing with expatriate-related allowances and differentials, common practice includes the following:

• About one third of companies immediately eliminate, with no additional payments, any foreign service premium that the individual has been receiving – after all, not only has the employee become familiar with the local culture during the assignment, but in some cases, the employee has also requested the opportunity to remain in the host location. (Few companies gradually phase out the premium. Many more never provide such premiums in the first place.)
   
• Of those who pay hardship premiums for difficult and dangerous conditions, a number of companies eliminate them immediately, with no additional payments.
   
• Other elements that are often eliminated immediately include a cost-of-living allowance, home leave, medical coverage (with transfer to a local plan) and vacation/holiday (with a switch to the local policy).

Education allowances present a more sensitive issue. Several factors come into play regarding this policy (for example, whether language and cultural difficulties might prevent an expatriate's children from obtaining an adequate local education and whether local facilities offer an appropriate curriculum).

Pensions and social security present a more complex issue due to home–host regulations, which may override company policy. Slightly more than half transfer the individual from a company plan to a local plan, while only a small percentage retain the individual in the home-country plan. For social security, two thirds transfer the employee into the local plan, with again only a small percentage retaining the employee in the home-country plan, where possible.

Housing in both the home and host locations is another factor that must be considered when localising expatriates. According to my firm's survey, for foreign housing, although 40.5 percent of companies pay moving costs and 35.1 percent provide search/purchase assistance, 39.8 percent provide no help at all and, for those that pay a host-country housing allowance, one third immediately eliminate it, with no additional payment; 28.2 percent phase it out; and only 2.7 percent offer a lump-sum buyout.

When it comes to the family residence back home, many employers assist the employee in some way – selling the residence, managing or paying for home rental, and/or providing information or resources concerning tax implications (such as for US capital gains).

Regarding tax treatment, of those employers providing tax equalisation, nearly half immediately terminate it, while just over one third phase it out.

Again, if the employee is going to live and work as a local, the employer expects the individual to handle family tax matters without the company's intervention when it comes to higher or lower tax liability.

The trend is reversed when it comes to tax return preparation, whereby only 16 percent eliminate it at once and slightly more than half phase it out.

Fixed-term local transfers

Fixed-term local transfers frequently involve a move to headquarters (especially the United States), specific home–host combinations (such as Canada to the USA), and moves from a less-developed country to an industrialised country.

They are often restricted to industries and companies where the career benefits of any assignment are high (such as for junior/trainee or high-potential assignees) or those with high variable pay (for instance consulting).

For one third of companies the transfer is generally requested by the employee, with length of assignment being behind the transfer for a similar number of companies. For slightly more than half of companies, cost control is the driving factor behind fixed-term local transfers, with less than half choosing this type of transfer for reasons of equity with local employees.

As fixed-term local transfers are not yet common practice, employers are generally not likely to have a policy in place. In terms of pay, nearly all employers pay a local salary, with half providing additional allowances.

Permanent transfers

Permanent transfers are often initiated by the employee for the same family- or career-related reasons given for localisation. Equally well, however, they can be the result of the company's long-term need for the individual's particular skill in the assignment location.

Slightly less than half of companies opt for permanent transfers for cost control reasons – a smaller percentage than those companies that localise – with only one third doing so for equity reasons.

In some cases, management makes a decision to relocate the job and/or the office itself. Other employers particularly use this scenario to permanently transfer employees to headquarter positions. Similar to localisation, however, permanently transferring an employee to a less-developed country, with a lower wage structure, can prove difficult.

Salary issues for permanent transfers are simpler than for localisation. Nearly all companies pay a local salary, with less than one quarter providing additional allowances.

The right mix

With cost control remaining a key issue for multinational organisations, the different scenarios discussed here offer practical solutions for specific conditions and certain locations.

When deciding whether to implement any of these options, companies should consider not only whether it makes any sense for both the company and the individual, but also whether it is worth the time and effort involved.

Contrary to some opinions, using such alternative assignments is not administratively easier and often involves negotiation – even with development of a formal policy. As more organisations experiment with different scenarios to meet the growing complexity of their global operations, employers may find flexibility works best for these evolving situations.
 
April 2005

Geoffrey W Latta is executive vice president of ORC Worldwide's international compensation practice

Reproduced in excerpt form with permission of the copyright owners from
Benefits & Compensation International magazine, Volume 34, Number 7, March 2005.
(www.benecompintl.com) 

 © Pension Publications Limited, London, England.

Subject: Expatriate compensation, benefits