By Olivier Meier and Margaux Marques, Mercer
The balance sheet approach remains the most common approach to manage international assignees and has proved to be a very flexible solution to accommodate many different assignment scenarios. However, the growing diversity of the assignee workforce, segmentation of assignees, and the imperative to contain costs have lead many companies to look for an alternative to the traditional long-term expatriate assignments on a home-based (balance sheet) approach. This alternative can take two forms: replacing the long term assignments with permanent moves and switching the compensation approaches from a home-based to a host-based/localization approach. In many cases, a full localization is difficult to achieve and a local plus solution will be used.
Preliminary Questions about Permanent Moves and Local Plus
What Do We Mean by “Permanent” Moves?
Assignees rarely choose to spend the rest of their lives in the host location. Rather, in this context the concept of a “permanent” move could mean two things:
- The duration of the assignment is not defined. There is neither a planned repatriation nor the expectation that the employee will go on more international assignment in the short or medium term.
- The absence of a link with the home country. Unlike for long-term assignments with a fixed duration, there is no comparison with the home country and no attempt to equalize the purchasing power or the benefit package between the home and the host location.
What are the Objectives of the Switch to Permanent Moves on Local Plus Approach?
The first objective is to go as local as possible but take into account objective barriers to full localization.
In an ideal world, companies would fully localize expatriates or replace them with local employees. In reality, achieving a full localization can be difficult due to the specific challenges of each host location. When attempting to balance the drive to localize and the imperative of employee retention, a more reasonable objective might be to go as local as possible given local circumstances in the host location. In other words, the terms and conditions should be local but barriers to integrating the employee in the host location could require the provision of a specific benefit or the payment of allowances.
The second objective is for the company to avoid on-going liabilities (that is, payment of the “plus” and related benefits) whenever possible.
Allowances and benefits included in a traditional expatriate package represent a huge expense for companies. The cost of the assignment package can be an issue when sending employees on a fixed term assignment; it could become an even greater problem when relocating employees permanently. Whenever possible, companies want to avoid the obligation to provide housing or schooling allowances for the next 5 or 10 years. Having the option in the policy to stop or phase out the benefits provided to the relocated employee is important.
The third objective is to reconcile global principles with local flexibility. Unlike for traditional long-term assignments, it might be difficult for companies to have a detailed policy that addresses all the possible issues in every single location when dealing with employees relocated permanently on a local plus package. The barriers to mobility, the requirements driving the need for a “plus” and its exact definition will vary greatly depending on the destination. This leads a growing number of companies to introduce a degree of flexibility in their policies. The flexibility is not about allowing room for negotiation on the principles and the approach used but rather to separate the core provision of the policy and its driving principles – the minimum that has to be provided to the employee as part of duty of care and to allow mobility – and what should be adapted to match local requirements. This could mean having two distinct parts in the policy (core and geography-specific).
When asked what the main drivers for the use of local plus, the most common answers are:
- Cost reduction. Switching to a local-plus approach can lead to savings but only for specific types of moves between similar countries. In other scenarios – for example, a move to high-paying countries such as Dubai, Singapore, or Switzerland – may not lead to significant savings. Furthermore, putting the employee on a high host-pay structure in a location with low or no taxes could make future moves difficult. Cost savings can therefore be a driver only for selected moves or on a case-by-case basis but should not be viewed as the only driver behind the adoption of a local plus new policy.
- Competitiveness. Competitiveness can be interpreted in two ways. There may be a need to provide a competitive salary for an employee moving to a high-paying location, or it could mean that companies cannot afford to provide packages more costly than the ones provided by competitors. As companies try to contain assignment costs, segmenting assignment policies and using less costly packages for selected assignee groups becomes a necessity.
- Pay philosophy. This is perhaps the most important reason for the use of local plus. Moving from a home-based approach to a local-plus approach is driven by the need to end the gap between highly paid expatriates and locals. In many cases, the success of the policy lies in the alignment of the mobility policy and the company-specific business objectives rather than purely on cost and competitive issues, because few companies have packages that are totally misaligned with most common practices.
The use of the local plus approach is limited by significant barriers:
- Inequities between countries.
Historically, one of the key reasons behind the frequent use of the home-based approach was to motivate employees to move to low-paying countries and to avoid overcompensating employees going to high-paying countries. Assignees receiving host-based packages often turn, later in their career, into costly employees with hugely inflated base salaries. (The salaries go up assignment after assignment but rarely, if ever, go down.) Providing a “plus” benefit package rather than increasing the base salary alleviates some of these problems but doesn’t fully eliminate the fact that some countries are more attractive than others for overall cost, pay, or tax reasons. Permanent moves on local plus are often taking place between financial hubs like Singapore or Dubai with high salaries and low taxes. However, due to rising salaries for highly skilled employees in emerging markets, companies are tempted to provide local or local plus packages for a greater number of moves.
- Benefits issues.
Companies have a duty of care and need to provide a minimum of coverage in terms of health, pension, and other benefits. In some case, the benefits provided to local employees are not meeting international standards or are not available to foreigners. Security issues can also drive the need for specific benefits and force employee to live in secure housing. These limitations mean that a local-plus package can become very expensive or not even sufficient for some moves, especially to difficult hardship locations.
- Legal issues.
Legal issues can present a significant barrier against the full localization of the employees. The use of quotas or visas restrictions can prevent companies from fully localizing and permanently relocating employees in some locations. In other cases, legal or contractual issues can prevent the company from breaking the link between the home and the host location or at least make such a change too costly.
Setting the Base Salary
How does one set the base salary to be used as part of the local plus package?
In theory this question should be easy to answer and the employee base salary should be fully aligned with salaries in the host country. In reality, few employees accept a pay cut and in many cases the starting point of the discussion will be the current salary of the employee in the home country. The objective will be to determine the equivalent salary in the host location taking into account purchasing power, tax, and local salary ranges. This will help assess if there a gap and will inform the decision about the need for a plus in the package.
Furthermore, when talking about local salary what does “local” mean?
Should it be the real local market for local nationals? In some locations, the market is segmented and there are different pay structures for locals, local employees with international experience (e.g. “returnees” who have grown up and studied abroad and are returning to home country), and foreigners hired locally. The specific skillsets and international experience of the returnees and locally hired foreigners sometimes means that they can expect a higher salary than pure locals without international experience.
In some locations, such as the UAE, local nationals may have a higher salary than foreigners and may also receive a local national allowance. Again, the local salary for locals is not always the same as the local salary for foreigners.
Setting the “Plus”
There are three types of allowances and benefits that could be included in the plus:
- Allowances and benefits designed to meet the minimum requirements or duty of care and to avoid exposing the company to liabilities (e.g. tax filing assistance and health insurance).
- Allowances and benefits designed to remove barriers to mobility – e.g. housing and education – that need not be provided systematically but could be used to address objective issues (the employee cannot send the children to the local schools)
- One-time relocation support: this type of support is common to many types of assignments, permanent or long-term, and is designed to facilitate the move and speed up the integration in the host location.
It is important to establish the rationale behind the plus. There is logic behind the balance sheet approach: equalizing the purchasing power of the employee between the home and the host locations – no gain, no loss. This logic helps addressing situations when there is no clear answer. Should the company pay for a specific item not explicitly mentioned in the policy? The right answer stems from the logic and the guiding principles of the policy. In a local plus policy the core principles are different – there is no equalization between the home and the host but having a robust logic is essential. The logic is built around the localization objective and the fact that items are provided as part of the plus only when their absence would objectively make the move and the integration of the employee in the host location difficult or even impossible.
The allowances included in the plus are not always at the same level as in home-based packages. For instance, housing allowances in local plus packages tend to be a contribution to the housing cost rather than fully covering them.
Whenever possible, the plus should not be permanent and should be phased out over one to three years or provided as a one-time fixed amount. Some allowances are more difficult to phase out than others – it is difficult to quickly stop the education allowance as children are not likely to change school quickly once they in the international school system. Anticipation of potential issues and discussing them prior to the assignment is important.
A Word of Caution: What Could Go Wrong?
Companies considering implementing permanent moves on a local plus approach should pay attention to the following issues:
- The local plus approach is introduced for the wrong reasons: the overall philosophy and consistency of the approach is more important that an attempt to cut costs.
- The plus is perceived as negotiable and/or the number of exceptions grow: flexibility in the policy doesn’t mean that every assignee can get an ad-hoc deal. There should be clear principles and rules in place, and these principles should be clearly communicated.
- The plus becomes permanent, making the local plus package more costly over the long term than anticipated.
- Base salary becomes inflated: always strive to align the base salary with the host salary structure and avoid changing the base salary or integrating cash allowances in the base salary.
- The specificities of each host country could threaten the consistency of the local plus policy: some locations (hardship locations but also high paying countries such as Switzerland and Dubai) could be difficult to manage.
- Alignment with talent management and communication challenges: strong resistance from assignees due to negative perception of the local plus package. Avoid branding the local plus as a low-cost package and focus on the career objectives.
Find out more about local plus and permanent moves and solutions to set local plus packages.
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