By Anne Rossier-Renaud, Mercer
Introduction
Local Plus packages are becoming ever more prevalent among multinational companies: a recent Mercer study showed that 62% of European businesses expect an increase in the number international employees on a Local Plus package and the Local Plus approach is also on the rise among US and Asian companies (2016 Local Plus and Location-specific Policies and Practices Survey.) A useful hybrid of expat compensation options, the local plus approach bridges the gap between the expensive home balance sheet approach and local packages.
This article discusses the key characteristics of successful Local Plus policies and some of the implementation challenges.
The Business Case for Local Plus
Local Plus packages are typically offered to international assignees and comprise locally delivered pay and/or benefits in addition to some items that are not usually available to local staff. The option is used most often when localising expats, for permanent transfers and locally hired foreign nationals, but there is no “one size fits all” model to follow – package components vary by both employer and type of move, and host-country conditions can make it difficult for organisations to apply one policy globally.
Key Drivers
Unsurprisingly, cost reduction is the principal motivation behind most companies’ adoption of the Local Plus approach, as moving expatriate workers off the home balance sheet should theoretically result in savings. In some cases, however, Local Plus packages can result in higher costs than a traditional home-based approach. It could be the case for moves to countries such as Switzerland or Singapore where local salaries are high by international standards.
Local Plus can improve companies’ market competitiveness in certain cases, and also offers a way of achieving pay equality among peers in multinationals with large expat populations.
Simpler administration is the last of the “big four” drivers: decentralising the management of expat packages can not only be cost-effective but also foster expertise across all bases of operation.
Components of Local Plus Packages
Base Salary
Definitions of “local” in this context can vary, but there are three main concepts: pure local; inflated local for foreigners, which is common in locations such as China; and local for returnees. This latter category includes employees who have studied or worked abroad, and might have higher salary expectations due to their international experience.
To determine the most appropriate structure for employees, it is important to perform a net-to-gross calculation or “impact statement” that recognises tax differences, purchasing power differentials, and housing cost differences between the home and host locations.
At Mercer, the calculation is done in a number of stages, the first of which is to take the potential assignee’s existing gross home salary and make all relevant deductions in order to establish the home net income. A foreign exchange rate is then applied and assignment location costs added to achieve an equivalent assignment location gross salary. This figure can be compared with current local-market salary information in order to assess which local package (if any) is the best fit. In some cases, individuals will map neatly onto local salary structures, but in others, adjustments will be necessary. If the home salary is significantly higher than local levels, employees may have their pay frozen until it falls within the standard salary range; in less extreme cases, the salary may be gradually phased down to local market level.
The ‘Plus’ Allowances/Benefits
Allowances and benefits – in other words, the “plus” components of this option – constitute a helpful middle ground between expats’ home countries and their host location; they remove barriers to mobility and assist assignees when they cannot access (or are not entitled to) specific benefits in their new base. They also play a key role when remuneration would not be competitive without additional allowances (such as in the United Arab Emirates), or where base pay is not attractive.
Again, “plus” components vary widely between companies and locations, but commonly include assistance with items such as tax, housing, relocation services, medical benefits, school fees, and home leave (AIA). Housing and education are particularly thorny issues in some locations, especially in the Gulf where costs are rocketing. Companies may decide to offer assistance with both accommodation costs and education fees as part of the Local Plus package as an incentive but tend to stop short of covering the entire cost. For example, for housing, they may offer 75% of the local cost, and for schooling a fixed contribution per child in keeping with his or her level or age.
In most cases, one-time payments are made to assist with relocation-related issues either on departure or repatriation and with immigration in order to facilitate the move and enable assignees to hit the ground running.
Eventually, of course, companies will want to withdraw the “plus” components and transition assignees onto a true local package. Housing and education allowances may be gradually reduced over time and eventually employees are expected to bear all expenses themselves. That is the theory, at least, but in reality the exact level of phasing out is very much contingent on location. In China, for example, international school fees are in the region of $25,000 per year per child, and as a language barrier is likely to play a role for some time, support may still be offered beyond the phase-out cutoff point.
Designing a Local Plus Policy
Although each company will have its own goals and drivers to consider when formulating a Local Plus policy, there are a number of helpful ground rules to bear in mind:
- Successful Local Plus policies are consistent globally but retain some local flexibility. They are also as local as possible – the “plus” components should be limited in quantity and in time.
- Before investing time and money in developing a policy, consider your company’s background, history, and key stakeholders’ expectations: Local Plus is not appropriate for every business.
- Clearly define your pay philosophy and ensure that all relevant people have bought into it.
- Focus on how and why the policy will be rolled out; effective coordination between head office or home HR teams and local offices is absolutely essential.
- Communicate the policy positively to a variety of audiences. For HR and line managers, emphasise its vital role in transitioning employees to a more sustainable local package in the long term; for assignees, careful explanation of how these packages are formulated, and what they really mean for families’ standard of living, should go some way to assuaging doubts and concerns. In both cases, actively tackling erroneous perceptions of Local Plus as a “cut-price” option should improve take-up.
- Manage exceptions and local application rigorously, especially if the policy includes a degree of flexibility. Annual reviews and the guidance of a steering committee will be helpful.
Despite the many positive benefits of the Local Plus approach, there are a number of common pitfalls associated with it. Principal – and most expensive – among these hazards is that employees may see the package offered to them as a jumping-off point for negotiation. If discussions drag on, base salary could well become overinflated in order to close a deal or the number of exceptions rise regarding the “plus” components. In both cases, the knock-on effect will be increased cost to the business – the precise opposite of what your organisation was hoping to achieve.
Although one coherent global policy is the ideal, the requirements of individual host countries may prevent that. This may be particularly common in new destinations for your business in emerging markets, so a degree of flexibility within the main policy framework will be vital.
Finally, relative home/host parity could prove to be a stumbling block for multinationals operating in location combinations where there are wide disparities between home and local net income. For example, although assignees moving from the UK to Hong Kong should find that salaries are pretty much in alignment, the local salary for those transferring from the US to the Philippines will need to be increased significantly if employees are to avoid a precipitous drop in net income. By contrast, although there may be no shortage of candidates for a move from India to Switzerland, there are likely to be repatriation difficulties when these assignees face the prospect of losing the high salary they have been enjoying during their assignment.
Anne Rossier-Renaud is a Senior Consultant in Mercer's Global Mobility business. She provides thought leadership into the development and enhancement of mobility products, methodologies, and technology.
Find out more about Local Approaches Find out more about Local approaches: https://mobilityexchange.mercer.com/local-plus-location-specific-surveys
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