The variety of expatriate assignment types has accelerated over the past few years, and each requires a specific approach to compensation and cost planning to make the investment worthwhile.

Today's expatriate assignments are as varied as the reasons for sending employees abroad. Specialised kinds of assignments have taken root next to the traditional out-and-back, three-year expatriate assignment: Short term assignments, virtual assignees, Euro-commuters, permanent cross border moves and "globally mobile careers", sometimes referred to as serial assignments.

Each type of assignment brings with it costs - both up front and hidden - to both the assignee and the company. Each requires a specific approach to compensation and cost planning in order to realise both assignment success and the hoped-for cost savings relative to traditional assignments.

The traditional Cost of Living Allowance Index is a good tool – for the traditional expatriate assignment. It is probably not applicable, though, for other types of assignments.

The classic COL Allowance assumes that the employee will contribute their entire home spending power toward purchasing in the host location. However, today's short term assignee is typically not in a position to do so, destroying the underlying principle of the COL Allowance. A short term assignee may have chosen that type of work arrangement specifically to allow a spouse to continue working or children to continue their education in the home country.

If this is the case, the assignee has almost a full palate of household costs – auto insurance, telephone bills, even the weekly shopping go on as normal. Instead of requiring only a "top up" allowance to compensate for the difference in costs between home and host, the assignee more likely will need something closer to a Per Diem, which provides the entire budget for living expenses in addition to the full salary.

This can lead to cases where the company pays full living expenses in a location that otherwise would have carried with it a negative index. Companies thus find themselves confronted with the need to sacrifice additional cost for the flexibility of attracting the right person to the right post.

Moreover, the traditional COL Index considers an entire range of goods and services – including items much more suited to a long term stay such as clothing purchases, internet subscription fees or the hiring of babysitters.

Rather than researching the cost of a location on such a broad basis, a Per Diem allows the targeted specificity to reflect the costs a short term assignee encounters at the right levels of usage – meals, taxis, emergency personal care items and so forth.

However, the demand for accuracy and consideration of individualised circumstances has driven an increased flexibility in data reporting. Per Diems can be constituted to reflect meals consumed and prepared at home, rather than exclusively in restaurants. Entire categories of expenditure can be modified – or excluded entirely – from the calculation to give a more accurate picture of the true costs an assignee will face. And, thanks to technology, this customisation can be done by the end user on-line. Gone are the days of accepting an expensive figure from the Ministry of Finance.

Lastly, a COL Index is typically driven by a single home country. As more employees become globally mobile, many of Europe’s leading companies are experimenting with "Frequent Flyer" packages. Driven by an international salary scale and average "home" country prices, the packages are built to recognise the fact that, for some employees, your truly cannot go home again.

What cost savings?

In many instances, the stated objective of using a non-traditional assignment is cost savings. It is widely assumed that employing a non-traditional assignee will be cheaper than an assignee resident full time locally. Depending on the structure of the package, though, this may not always be the case.

In addition to higher transportation costs – often charged at full-fare - the transitory nature of Euro-commuter assignments means paying a premium when it the time comes to find accommodation, as well. Because an assignment could end at a moment's notice, corporations typically hire fully-serviced, self-catering accommodation to house Euro-commuters, rather than risk paying extra fees for early termination of a standard lease.

A typical fully furnished one-bedroom apartment available for a one-year lease in Kensington, for example, might cost GBP 1 750 per month. The rent for a flexible, serviced self-catering accommodation in the same neighbourhood though is typically GBP 2 500. This represents almost 45 percent premium paid (an extra EUR 1 000 net) per month for the added flexibility of a commuter assignment.

On the other end of the spectrum is a permanent cross border move compensated on a 'host country plus' type arrangement. On top of the local salary, the company may offer some housing assistance and educational help, even on a limited basis, for international schools for children.

Household goods moving assistance and destination services, as well as visa and work permit costs are just likely to be paid for this type of move, just as they would be for a more traditional assignment. If the employee negotiates language training and tax preparation help for the first year or two, cost savings over those of a traditional assignment are minimal. Consider, then, that if the employee is moving to a high-salary country like the United Kingdom, Switzerland or Germany, company costs may actually increase.

Issues of corporate governance

While the traditional expatriate assignment is perceived as too expensive, the policies and procedures surrounding it are, at the very least, typically well understood and well documented. As a result, there are typically well-defined corporate governance measures which control the costs of these assignments. HR managers have confidence in cost projections and assignees have confidence that company policies will treat them fairly during the course of the international rotation.

Too often, non-traditional assignments are compensated with "special deals," as no concrete policies exist yet for new types of assignees. As assignees and line management gain more power in the process, extras tend to be negotiated into the package – often with little or no thought to tax consequences or total cost impact.

Deals which look to save money in the initial preparatory phases often come with a tax surprise in 18 months time. Negotiated extras such as housing assistance or tuition reimbursement are not only taxable, but are often taxable at a higher rate if not structured properly from the very beginning. The "under the radar" method, in which many non-traditional agreements are being negotiated, can lead to cost shocks later in the assignment timeline.

The biggest disappointment for the employee may come at the end of their career. An entire generation of 'serial assignees' is coming to realize that, in addition to international experience, their career has left them with something else – a fractured pension history. Advance planning for career moves is essential to avoid disappointment and potentially expensive settlements of pension payouts at the end of a long and successful career.

 Building towards success

As companies employ more and more non-traditional assignees, it becomes increasingly important to define policies to plan and coordinate each type of transfer. Elements of pay must be planned so they make sense to the assignee as time inevitably changes the nature of the assignment. How many assignees have set out on an extended business trip, only to have that morph into a short term assignment, which in turn turned into a three-year posting, which in turn ended in localisation?

With thoughtful policy design and the application of the right compensation techniques for the right types of assignments, the non-traditional assignment can become a trusted and successful tool for international business.

July 2004

John Pfeiffer is the Managing Director of AIRINC Europe (www.air-inc.com).