The decision to send an employee on an international assignment in a cost-conscious environment is fraught with challenges for human resources. However, whether the assignment is to last three years or three months, with or without accompanying family members – and taking into account all other diverse factors – the overriding challenge of "how much will this cost?" remains the same. Consider the financial reality: a typical long-term assignment can often cost an organisation between two and three times the individual's base salary.
As a liaison between expatriates and the rest of the company, HR must balance two sometimes conflicting aims: achievement of corporate goals versus implementation of reasonable and competitive pay packages. Closely analysing and monitoring both necessary and discretionary expenditures involved in the assignment can help HR simultaneously satisfy top management and expatriate needs. In addition, reconciling estimated costs against actual expenditures allows the company to create a realistic budget for the years ahead and improve global staffing strategy.
This article will focus on the cost-projection process, the elements involved and the advantages to the company.
Having the facts is better than having a 'gut feeling'
The decision process for initiating an international assignment involves complex factors for expatriate managers and administrators to work through, including:
- Policy issues
- The individual's professional development goals
- The needs of the business unit in the host location
- Evaluation of the proposed assignment's financial impact
If the company is entering a new market, replacing an existing expatriate with another (or considering other alternatives), or addressing a specific business need in the host location only serves to complicate an already complex task.
So, where to begin? The company's existing expatriate policy typically defines the parameters of a particular assignment. Let's assume that the goal requires the assignment to last only three months, the pay components to be considered will fall under the company's short-term assignment policy. In this case, an example might be a lower foreign service premium than would be expected for a long-term assignment, or perhaps no hardship allowance. The short-term policy may not allow for accompanying family members, so it might restrict the opportunity to candidates who are willing to leave their families in the home country for the duration of the posting.
As management assesses the viability of an assignment and the qualifications of potential candidates, the most prevalent questions and concerns often come down to the same issue: how much will it cost? To address these concerns, proactive expatriate managers would conduct a cost projection to determine the most accurate picture of the assignment's financial impact. The word "accurate" is critical, as employers sometimes base rough estimates of what an assignment may cost on a "gut feeling" or a certain percentage over and above what it would cost to transfer the expatriate's predecessor – rather than on solid, reliable and defensible data.
Gathering data in an organised fashion
The basic logic behind the structure of a cost projection is to provide a breakdown of the various types of expenses that are incurred during the life span of the international assignment. It takes into consideration all relocation and repatriation (or reassignment) costs, ongoing allowances and recurring compensation elements. Most important, a proper cost projection provides an assessment of any incremental tax costs resulting from the assignment.
To their credit, many companies have policies in place that determine the particular compensation components to include as well as the parameters governing them. Organisations without existing policies can either make an assessment of what they would like to include or may turn to an outside source for assistance when the requisite information is not available in house. The data necessary for a comprehensive cost projection usually includes:
Dependants. Identifying dependants and their type (spouse, child, parent, grandparent, sibling, other) allows HR to factor in tax deductions and/or exemptions to the calculations.
- Compensation and benefits. The company either pays these items directly to the assignee or on behalf of the assignee:
- Base salary, which, in many countries, includes less visible and often statutory elements
- Any home and host-country incentives (including stock options) for which the expatriate is eligible
- Additional costs if the expatriate transfers to a host-country medical (or supplemental), retirement or other benefit plan
- Company pension costs and contributions
- Relocation-related costs. These items can be significant and cover all incidentals, such as the cost of property management and oversight, realtor and legal fees for home sale, rental contract cancellation, home finding/destination services assistance, house hunting, issuance of visa and work permits, relocation allowance, furniture and appliances, shipment and/or storage of family items, relocation airfare, home/host temporary living, loss on car sale, car lease cancellation, cross-cultural training and language lessons.
- Expatriate allowances. Allowances and perquisites represent payments, such as a signing bonus or mobility premium, spousal and family assistance, home leave trips, education allowance for dependants, goods and services allowance to cover higher costs abroad, host-housing assistance, utility allowance, hardship allowance, danger pay, R&R trips in select locations, club membership, emergency trips, and car/transportation allowance. Some of these items are payable in a lump sum, while others might continue throughout the assignment.
- Outside services. This category includes any company contracts with an outside vendor for tax preparation, consulting services and security/evacuation assistance in emergencies.
- Tax. The cost projection also factors in income tax, social security tax, and medical insurance tax for both home and host countries.
Regarding the last item, it is advantageous to determine any cost-saving opportunities where tax obligations – home, host, or both – can be lowered. For example, since fiscal years vary by country, a company can schedule an assignment and/or alter the timing of bonuses or allowances to take advantage of tax savings. It is also beneficial to identify situations where it makes sense to change the nature of payments from cash to noncash benefits (e.g. company-paid housing or cars), and it is crucial to ensure compliance with residency rules that determine whether an expatriate is responsible for taxes to the home, host, or both countries.
Once all relevant costs have been gathered and adjusted for anticipated fluctuations, the cost-projection process includes a current-year gross up, whereby the money a company pays to cover extra taxes is reimbursed to the employee and grossed up as taxable income. In this case, the host net tax is taxable compensation to the assignee.
Going a step further, HR can consider the impact of different scenarios. When a company is redesigning an international pay policy or focusing on select high-cost provisions, it is helpful to compare the cost of policy alternatives and conduct what-if scenarios. (See box, "The 'what if?' factor".)
The bottom line is the bottom line
Cost estimates are fairly simple to understand, making them an ideal communication tool. In addition, if a cost estimate for a potential assignment requires authorisation by high levels in the organisation, managers will think twice about making promises while being mindful of costs. Time spent going over cost estimates can strengthen the understanding and trust between HR (the "policy keeper") and decision makers. Overall, implementing a regular process of costing out assignments before contracts are signed can assist HR in gaining a reputation for being a true strategic partner in managing and steering the international assignment program toward success.
With such a comprehensive analysis of data and the subsequent reports engendered by the process, HR has access to bottom-line numbers that are necessary for sound decision making. Accurately projecting the various costs for an expatriation and repatriation (or, perhaps, reassignment) that includes on-assignment, pre-assignment and post-assignment expenditures, can help HR do the following:
Trim unnecessary costs from the international package without damaging employee morale or motivation due to unfavourable perceptions
- Make informed selection decisions when a number of qualified candidates are available for transfer
- Determine whether a local employee (rather than an expatriate) might be better suited to the position, based on job responsibilities, requisite experience and skills, assignment-location conditions, local tax and social security rules, and so forth – or perhaps consider use of short-term or commuter assignments in place of traditional expatriate assignments
- Spotlight and raise for discussion the cost of legitimate policy exceptions with upper management
- Convey the full cost of an assignment to the host office
- Complement a policy and tax briefing with expatriates and their spouses
- Compare initial estimates at the end of the year with what is actually spent to fine tune the amount spent on taxes, the types of assignments offered and policy effectiveness
- Obtain a clearer picture of the return on overseas investment
With accurate data in hand, HR can offer senior management feasible options to control the high cost of expatriate assignments. Even better, HR will not implement the company's cost-containment efforts at the expense of its strategic goals or the need to fulfil staffing needs at a particular assignment location.
The 'what-if?' factor
- Assume, for example, that a decision has been made to reduce foreign service premiums from 15% to 10% – or even 0%. What is the financial impact? With an in-depth cost projection, HR can determine potential savings should the new policy be implemented immediately or over a period of time, or it can include a grandfathering provision for certain employees. Cost projections also allow a framework from which payment methods may be reworked to trim costs or review a side-by-side comparison of different types of packages. Consider these hypothetical situations:
- A company starting up a business in China realised that it could achieve the same goals at a lower cost by setting its operations in a smaller city instead of in Hong Kong. Its typical expatriate was a seasoned manager with a spouse and grown children. With the proximity of international schools not an issue, the company could take advantage of significantly lower housing and cost-of-living expenses in the smaller city.
Another company with operations in Latin America compared the costs of a full five-year expatriate package with one in which the employee was kept on all home-country compensation and travelled home every two or three months until a local-national employee could be trained as a successor.