Effective Short-term Assignment Per Diem Calculations Short-term assignments is a growing – and growingly complicated – category within international mobility, with the number of short-term assignees increasing at over half of multinational companies over the last two years, according to Mercer’s 2012 and 2010 Worldwide Surveys of International Assignment Policies and Practices. An increasing number of assignments means higher costs, and it is more important than ever to ensure that the short-term allowances you provide to your employees are calculated accurately and consistently. Most multinational employers choose to use short-term per diem allowances rather than an expense-report-based reimbursement system for short-term assignees for consistency and budget control. But how should you approach per diem calculations to ensure your allowances are cost-effective, fair and consistent? What is a short-term assignment? First of all, it is important to be clear with what constitutes a short-term assignment. Employers may be differentiate based on family status, nationality, salary levels or other factors when determining the daily living allowance for these assignees. However, typically, a short-term assignee at a multinational company is on an assignment of 3 to 12 months, is unaccompanied by family members, is housed in a company-provided furnished apartment, with a self-catering facility (i.e. kitchen), receives transportation assistance from the company, and remains on home-country payroll and benefits. What matters in determining short-term per diems? What should you watch for when determining daily allowance recommendations for this type of assignees? The key to effectively managing per diems is to ensure that you are getting data based on correct assumptions. The data should be flexible, accurate, and tailored toward short-term assignees at companies like yours. The accuracy of the data that goes into the calculations is, of course, primary. That does not only mean that the various costs that make up the per diem should reflect current spending levels of assignees in a particular location. But the data should also be based on the spending of other business employees on short-term assignments. That means the calculations are made with appropriate assumptions, such as that the employees are staying in lodgings with self-catering facilities rather than in hotel dwellings where they would spend significantly more on eating out. It is also important that the recommendations are transparent and flexible. Being able to pinpoint the costs of various elements of the per diem will not only help you manage budget and expectations, but will also let you adjust the allowance based on specific circumstances. You may want to adjust the market basket and/or compensate short-term assignees differently depending on their salary level, the purpose of their assignment or other factors. Mercer’s short-term per diem calculator presents our clients with three price levels and allows to customize per diem elements, so that they can apply the recommendation that fits their company’s budget and spending assumptions. Isn’t free public data the easiest and cheapest source of recommendations? When searching for per diem recommendations, you may find free public data available online, often published by government agencies. But this data may not meet the objectives of your short-term assignment policy or budget for a number of reasons. Here are some differences between the governmental approach, this one of the United States Department of State, and that of Mercer, which is experienced in providing data specifically for short-term assignees from multinational companies: Mercer US Department of State Assumes employees are living in apartments/hotels with kitchen facilities for meal preparation Prices are updated twice a year and exchange rates are updated weekly Prices reflect outlets used frequently by expatriates in each location The number of meals out varies by the three levels offered by Mercer and can be customized to include as many or as few as a company deems essential. It is based on typical costs at dining facilities frequented by expatriates. Data includes expenses based on statistical research of consumption on short-term assignments and includes items in categories of personal care, recreation, public transportation and over-the-counter medicine. Assumes employees are living in hotels without kitchen facilities and eat all meals out Prices for hotels and meals are updated every two years (unless major changes require an interim update) Prices reflect the hotels and meals most frequently used by typical government travelers The meal portion is based on the average costs of three daily meals at dining establishments typically used by federal employees in that location. The “incidentals” portion is calculated as the cost of meals plus 10% of the combined lodging and meal costs, to cover incidental travel expenses What do these differences in data sources and per diem calculations mean in terms of daily allowances? Let’s look at some of the most common short-term assignment locations worldwide and compare Mercer’s recommended per diems with those of the US Department of State: Per diem allowances: Mercer vs. US Department of State (DoS) – Data other than % in USD; all data as of 15 October 2012 Unaccompanied assignee, price levels (all in USD) Per diem allowances: Mercer vs. US Department of State (DoS) – Data other than % in USD; all data as of 15 October 2012 Unaccompanied assignee, price levels (all in USD) Location Mercer Low Mercer Medium Mercer High US Dept. of State (DoS) Difference between DoS and Mercer High Central London 64 80 99 180 + 82% Tokyo 102 121 145 245 + 69% Dubai 64 80 96 143 + 49% Beijing 57 68 80 119 + 49% Singapore 71 88 108 145 + 34% Hong Kong 70 86 104 139 + 34% Paris 73 93 117 155 + 32% Seoul 73 88 106 120 + 13% Shanghai 59 70 83 93 + 12% As you can see, the differences in assumptions and approach yield significantly higher daily per diem recommendations from the US Department of State data. Using these recommendations would cause an employer with short-term assignees to waste hundreds to thousands of dollars per assignee per month, even if you compare to the “High” price level in Mercer’s range. So much for cost-effectiveness! As multinationals increase their reliance on short-term assignees to reach their business goals, they should also increase their vigilance in ensuring that those assignees are provided living expenses based on realistic assumptions. Use of accurate and flexible per diem assumptions will not only be fair to assignees but will benefit employers’ bottom lines.