By Olivier Meier and Narcisa Chelaru, Mercer
Containing costs is a perennial concern for management, and international assignees are commonly perceived as expensive. Downturns in economic cycles and corporate reorganizations regularly prompt top management to request overall cost reductions, a limit on the number of traditional assignees, or cuts in expatriation packages. However, a sound cost-containment strategy needs to go beyond tactical cost cutting and slashing compensation packages. Here are practical steps to help you reframe the debate and identify cost-saving opportunities.
Clarifying the Debate about Cost
Make Sure You Have All the Facts Right: Cost Projections
and Assignment Tracking
Recent research has shown that although just over two-thirds of companies perform detailed cost
projections, a worrying number of multinationals are still relying on rough calculations only
or don’t include tax and social security costs in their estimates. Conversely, according to the same survey, 57% of companies
still don’t track actual expenditure against forecasts. Reconciling estimated
costs against actual expenditures allows the company to create a realistic
budget for the years ahead and improve mobile talent strategies.
Cost analyses should not just be based on current assignment
patterns. They also need to integrate potential future moves (hypothetical
scenarios including for new locations where the company doesn’t have
expatriates yet) as well as assignments happening under the radar (ones not
Value: the Missing Part of the Equation
The difficulty in quantifying the value of assignments when trying to justify highly visible direct costs is one of
the greatest challenges for mobility managers. Before trying to cut cost, managers should ask themselves if
the problem is really about cost or the limited perceived value of the assignments?
Before sending employees on assignments, a thorough preliminary discussion
needs to take place to understand what the company is trying to achieve and how the benefit of the assignment for the business will be measured. This is easier said than done, and in practice, too many assignments are initiated without clearly defined Key Performance Indicators (KPIs) in place.
Cost Misrepresentation: Fighting
Discussions about mobility cost often reflects a degree of
subjectivity. How stakeholders perceive the value of assignments influences
their cost sensitivity.
Biases might result from history. Previous managers have probably tried various mobility approaches and policies, some successful, others not. Although these managers are long gone, the perception of mobility within the company still reflects their policy experiments. It might lead internal stakeholders to assume that talent mobility is a very costly exercise or that some types of expatriate packages are unaffordable for the organization.
Biases can be reinforced by the way costs are represented. Whether they result from lack of understanding of statistics or are the fruits of innocent communication errors, they could trigger suspicions and reinforce management’s cost aversion.
Here are some simple real-life
examples that create unnecessary headaches for HR teams:
- Mixing median, average, and mode. This question of basic
statistics becomes relevant when displaying simple average costs for a very
diverse population of assignees, which oversimplifies the view of the costs and
can mislead decision makers.
- Displaying cost increases as a percentage. “A 100% increase” is a
message likely to panic management if the actual amount is not mentioned. In this example, the doubling of a low amount could still be well within budget, not the dramatic expense the percentage implies.
- Focusing the communication on one item in the expatriate package. Say that an allowance is going up significantly. The important question is whether it is
offset by a decrease in other items in the package? What is the overall
value of what’s being offered?
- “Compared to a local…” This comparison may or may not be relevant. Although sometimes there is an unjustified difference between
the compensation of expatriates and locals, in other cases assignees are
vital to the business, and local pay structures are inadequate.
The fact that some of the global mobility communication might be handled by third party providers that are not aware of the messages that HR would like to convey to employees and management increases risks of misrepresentations. No matter the operating model and the degree of outsourcing, communication about cost and about policies in general needs
to be tightly controlled by HR.
Sharing the Burden of Mobility
Sometimes, the issue is not the cost itself but
to where it is assigned. Not all affiliates or business units can afford the extra expense of having expatriates. The problem is exacerbated in locations with low salary structures and weak currencies. The burden is not equal, and it is important to understand what one is asking the business unit to bear.
The first question to ask is who should bear this cost? The
most common answer is the unit that is benefiting the most from the assignment. In the case of moves designed to grow the market in the host locations and fix a problem that is affecting the affiliates, the answer should, in theory, be the host locations. Similarly, for developmental moves, it is conceivable to assign part or all of the costs to the sending business unit because ultimately the assignee will return to that business unit with enhanced skills and knowledge.
In practice, this question is more complex to answer. There are scenarios where a business unit is clearly benefiting from the assignments but simply cannot afford it. In such scenarios, it is conceivable to have a central budget to cover some critical moves (global nomads, high level talent) that are not affordable for business units. The answer to these questions is very much company specific and depends on the processes of each organization. Payroll and compliance issues can complicate the matter further. In any case, the cost discussion cannot ignore the question
of affordability for each business units.
Identifying Savings Opportunities
Talent Strategy and Assignee Selection
- Diversify where you look for talent. Having a limited pool of candidates drives costs up. The cost of assignees varies widely depending on their home country, current compensation package, family status, and personal expectations. It’s too late to complain about the costs once a candidate has already been selected.
- Adopt a broader definition of mobility.
Don’t be constrained by the traditional definition of mobility (which is too often synonymous with long-term assignments), and look for an alternative: assess when other types of moves such as commuters, frequent business travelers, or even virtual assignments can replace traditional expatriate assignments. Remember that mobility is as much moving jobs to people as moving people to jobs.
- Leverage voluntary mobility. Self-requested moves are becoming more common as highly skilled employees are willing to market themselves globally. More generally focusing on untapped
international talent pools in the host location
(locally-hired foreigners, returnees, and re-joiners) can limit costs by taking the relocation out of the equation.
- Foster knowledge transfer and upskilling of local employees to minimize future needs for expatriates.
- Optimize the start and end dates of the assignment. Taking the fiscal years of the home and host location into account can
reduce tax exposure.
- Find tax-efficient ways to deliver compensation and benefits. In
some cases, it makes sense to change the nature of payments from cash to
non-cash benefits (e.g. company-paid housing or cars),
- Evaluate the benefit of using Tax Equalization approaches compared to Tax Protection for long-term assignments.
- Segment talent and international assignment policies. Segmenting your policies is a good way to reconcile the cost control versus international expansion dilemma in a context of budget constraint by shifting budget from less essential moves to assignment that are critical to the business.
- Introduce flexibility (usually as a next step after policy segmentation). The focus of flexibility is on benefits or allowances that employees actually need, thus reducing those “nice to have” but underused benefits that raise the cost. policy flexibility may also prove to be a solution for the issue of having business units with different mobility budgets. Having more choice via a core/flex type policy can allow the business to opt for those benefits that are most relevant to their assignee groups and needs. Mobility’s advisory role becomes crucial in ensuring the business makes informed choices.
- Design localization policies and localize long-term expats to avoid ongoing costs.
- Define a policy on “claw backs”. An assignee who terminates an
assignment prematurely (e.g. within 6 months or the first year) should
reimburse some of the relocation costs. While such claw-back rules cannot
always be implemented in all jurisdictions, they should be considered whenever possible.
Compensation and Benefits
- Explore the possible compensation approaches (host-based
versus home-based), but bear in mind there is no single solution that would result in cost saving for all moves.
- Find cost savings in the balance sheet. While the home-based balance sheet approach is often perceived as an expensive solution for traditional expatriates, it is flexible enough to accommodate many different scenarios and be used as a base for “expat lite” packages by decreasing the allowances provided while still retaining the equalization philosophy.
- Cap allowances, e.g. cost of living, hardship, foreign service premium, education, or align some of them with amounts paid by locals in the absence of hardship conditions (e.g., aligning housing budget with housing costs for locals in non-hardship locations.)
- Make a distinction between core equalization package items (e.g. cost-of-living
allowances and tax equalization)
and flexible items that could be decreased (e.g. mobility premiums). Many
companies find they don’t need extra incentives for all types of moves.
Tracking, Monitoring, and Analysis
- Implement metrics and Key Performance Indicators. Understand and manage the drivers of assignment failure and
premature repatriations through the implementation of metrics and KPIs.
- Understand, manage, and reduce exceptions. Implement a formal process for exception approval involving top management, and establish a committee to review exceptions on a regular basis.
- Evaluate the cost and benefits of alternative operating models,
e.g. out-sourcing, co-sourcing and in-sourcing.
- Leverage technology to release HR capacity: for example, by automating some of the tracking, calculations, and reporting tasks.
- Review and optimize your vendor network and associated costs
Limiting Cost Duration
Some decisions might make sense in the short-term but create ongoing costs for the company. Common examples of this are providing benefits and allowances that will be difficult to discontinue at the end of the assignments or using compensation approaches that inflate the base salary of mobile employees. The adoption of host-based compensation approaches (including local plus) can generate savings but also sometimes results in long-term issues if employees move to high-paying locations and see their base pay increase significantly (and often permanently as a pay cut would be difficult to implement). When the duration of the assignment is not clearly defined, using one-time lump sums (“buy outs”) can sometimes be better than ongoing cost commitments for the company.
Unforeseen circumstances can dramatically affect costs. Implementing a robust risk management strategy is part of the cost-saving exercise. In practice, this means:
- Ensuring compliance to avoid fines, penalties, and legal fees.
- Planning for extreme scenarios (crises and evacuations) as well
as less dramatic but more frequent incidents that could impact the assignee and the family.
- Checking that there are no loopholes or gray areas in the
mobility policy that could generate additional liabilities for the company or prompt employees to claim additional payment (e.g. sale of home country home or of a car.)
Understanding the Impact of Cost Containment on Employee Engagement and Employer Branding
Trimming unnecessary costs from the international package without damaging employee morale or motivation due to unfavorable perceptions is a delicate exercise. Taken to the extreme or carelessly implemented, a cost-cutting exercise can damage the Employee
Value Proposition and the employer mobility branding. In other words, companies should be clear about what they promise and avoid giving the impression that by cutting cost, they are breaking their promises.
Finally, it’s important to bear in mind the costs of mismanaged talent mobility: the loss of high-potential talent, low employee productivity, and missed business opportunities. The debate around cost needs to evolve from being purely about cutting costs (reducing existing expenses) to avoiding such expenses in the future while meeting business goals (strategic planning to avoid unnecessary costs).