Practical Mobility Management: Compensation Tips for Long-Term Assignments

By Olivier Meier, Mercer

There is more to expatriate compensation than just covering relocation expenses and adding a few allowances to the base salary. When managing a mobile global workforce, mastering the complexity of the global compensation landscape means juggling multiple compensation approaches and the increasing segmentation of mobility policies. It can be a daunting task.

Here are a few pointers to help you navigate the meanders of long-term assignment compensation.

Finding the Right Compensation Approach: Moving Beyond the Home-based/Host-based Divide

We traditionally tend to contrast the expatriate home-based approach and the host based approach. The former is perceived as costly while the latter is deemed easier to manage but difficult to implement for all assignments. The debate about these approaches has raged for the past 20 years, but no clear victor has emerged. The expected demise of the traditional home-based balance sheet approach has not materialized – according to the results of the 2017 Worldwide Survey of International Assignment Policies and Practices, 67.9% of companies globally used it as a main approach to manage assignees. However, various forms of local or local plus approaches have gained popularity.

The balance sheet approach has proved a flexible approach and its logic can be applied for different scenarios. It can retain its equalization logic while including reduced allowances. For instance, the foreign service premium could be eliminated for specific moves that don’t require additional incentives and the amount paid for housing could be reduced. This would be the case for developmental moves when the incentive to relocate is driven by learning and career development opportunities. The balance sheet approach can also be a good approach for complex moves to hardship locations and highly mobile employees moving from assignments to assignments. But companies are increasingly exploring alternative compensation approaches for at least some of their moves.

Rising salaries in emerging markets have opened up new opportunities to adopt local, local plus, or hybrid approaches. Assuming that there is a clear cut between low-paying countries (emerging markets) and high-paying countries is a common mistake. Steep compensation curves in emerging markets often mean that low-level employees do receive low salaries by international standards, but top managers and highly skilled employees earn more than their American or European peers.

Another common misconception is to look for a silver bullet solution that would be applicable for all assignments. The objective of companies with complex assignment patterns that are relying on segmented mobility policies is not so much to find a unique perfect approach as to analyze the pros and cons of each approach and establish the best fit for each assignment type and assignee group.

	Home-Based Approach	Host-based Approach	Hybrid Approach	International & Regional Approaches
Options	Home-based balance sheet HQ-based or international balance sheet Home approach Home plus approach	Host approach Host/local plus approach	Best of home or host approach Net home and host comparison	One reference country pay scale Pay scale based on average of several countries Global or regional pay scales
Objectives	Assignee is neither better nor worse off as a result of an assignment. Link maintained with home country.	Assignee integrated into local structure. Salary and benefits aligned with practices in host location.	Comparison of approaches. The most appropriate one is selected.	Setting a competitive international compensation structure without direct reference to home or host pay scales.
Pros and Cons	Facilitate repatriation and successive assignments but the package provided is disconnected from host country local practices.	Parity with host country peers but the link with the home country is severed. Reintegration in home country structure could be problematic.	A flexible approach but could lead to consistency issues.	Facilitate moves for global nomads but tend to be costly, as reference salaries are often aligned with high paying markets.

The rise of returnees and locally hired foreigners is blurring the lines between expatriates and locals and complicating further the international compensation landscape.

Potential Pitfall: “Local” Doesn’t Always Mean Local

In theory, the base salary in host-based or a local plus package should be aligned with the local salary structure in the host location. In practice, assuming that this is always the case could be misleading.

In a number of emerging markets, a “local salary” paid to foreigners on local contracts can be higher than a local salary for local employees. In China for example, the market tends to be segmented between locals with no international experience, locals who have lived and studied abroad (returnees), localized foreigners, and expatriates.

Another reason why a local salary doesn’t always mean a salary aligned with local salary structure stems from the fact that assignees are not likely to accept significant pay cuts. If the compensation level in the host location is much lower than the current salary of the employee, it will be difficult to adopt a strict host approach. The base salary used in the host location might simply be the current home salary of the assignee converted in host currency with some adjustments.

Finally, salaries for highly skilled employees can be driven by international competitiveness considerations. The home and the host salary structures might be less relevant when setting the base salary for this type of experts who are in short supply. These employees might officially be on a host approach but their salaries reflect the global war for talent and the need to be competitive globally.

Yet, discussing only base salary issues is meaningless if you don’t take into account the actual purchasing power of assignees.

Maintaining Assignees’ Purchasing Power

There are two drivers behind the evolution of cost-of-living for international assignees: home/host inflation differentials and currency fluctuations. How pay is actually delivered – in home currency, host currency, or split between the home and the host currency – determine which part of the salary could be at risk (for more information, please see the article on split pay).

When relying on a home-based balance sheet approach, cost-of-living issues are addressed through the provision of cost-of-living allowances.

When using a local approach, the absence of a link to the home country doesn’t mean that assignees will not face issues linked to exchange rate and inflation differentials. Most mobile employees still expect to retire in their home country and have their savings in a preferred currency – without proper communication and planning, assignees might discover that their hard-earned savings have melted away.

Understanding the purchasing power of assignees is also useful when trying to convert their package into a local package as part of the localization process. As mentioned previously, assignees are not likely to accept a significant pay cut and understanding the purchasing power result from their current salary at home and the host location is more instructive than just reasoning in terms of gross or net salary.

Potential Pitfall: Negative Cost of Living Indices

“I don’t apply negative cost-of-living indices because it’s a bad practice” – this sentence echoes in the corridors of many mobility management conferences and seminars. The reality is more nuanced. The logic of the cost-of-living approach is to maintain the purchasing power of assignees – when prices are lower in the host location than at home, the employee could end up with an unjustified windfall; if not, cost of living deduction is applied.

Even worse,  a company’s benevolence on cost-of-living issues might not be rewarded. In cases where no negative indices are applied, assignees might have the perception that their purchasing power is going down after a period of high inflation or after going on successive assignments. In reality their purchasing power is remaining higher than in their home country.

As often occurs when dealing with mobility management issues, there is no right or wrong answer. Not all companies should systematically apply cost of living deductions – an exercise that requires skillful pedagogy. The results of Mercer’s 2017 Worldwide Survey of International Assignment Policies and Practices show a divide between American and European companies on this question. Europeans are more likely to apply negative indices – sometimes with caveats (e.g. not applying the full deduction).

One thing is clear though, management and assignees need to be clear about the impact of cost-of-living issues; depending on each company’s specific situation, this could mean applying negative indices or, if the indices are not applied, having a clear communication about the evolution of cost of living in the host locations.
Misunderstanding the logic behind package items could lead to confuse equalization allowances and mobility incentives.

Distinguishing Between Equalization Allowances and Incentives

The balance sheet approach is based on no-win/no-loss logic. In other words, employees should not lose out by going on assignment but they should also not automatically gain just because they are expatriates.

This has implications on the way allowances and benefits are implemented and communicated. A majority of allowances in the expatriate package should be viewed as tools to ensure equalization between the home and the host locations and remove barriers to mobility. Using them as incentive (i.e. a bonus or an opportunity to gain financially) could be problematic.

The cost of living allowance is the most obvious example. Receiving a high cost of living allowance is not good news; the allowance will be used to pay for higher costs in the host locations. Conversely, being told that a cost of living allowance is not necessary in the host destination should not be a cause for alarm for assignees. It could reflect the fact that prices are lower in the host location than at home and that the purchasing power of the assignee is not at risk.

Furthermore, cost of living fluctuates widely overs the years. Allowances could go down dramatically as results of currency or inflation changes, but this evolution is not lowering the assignee’s purchasing power – this is a normal adjustment to maintain the assignee’s purchasing power stable. If the cost of living allowance had initially been presented as an incentive, a decrease in it could undermine the credibility of the policy.

On the other end, an expatriate allowance (or “foreign service premium”) is designed to encourage employees to accept an assignment abroad and is an incentive and not designed to cover a specific cost. Its purpose is to reward the willingness of employees to relocate to another country. A growing number of companies use this allowance sparingly to encourage specific assignee groups. It is the first allowance to be reduced or cut when companies try to reduce costs. It could also be used as a negotiating tool to sweeten the deal, something that should not be done with an equalization allowance.

Not all allowances are what they seem though.

Potential Pitfall: Allowances and Benefits or Just Cash Amounts in Disguise?

Not all allowances and benefits are what they seem to be. In some countries, local packages include a series of allowances for housing, schooling, car, and other costs. For example in the UAE, the housing allowance provided to local nationals and foreigners on local contracts is a cash amount calculated as a percentage of the base salary. It can be disconnected from the housing market price and is increasingly viewed as part of base remuneration. In other countries, allowances and benefits are introduced mainly for tax reasons rather than to cover specific costs. Mixing expatriate allowances and benefits designed to cover specific costs and these cash allowances can be misleading.

The confusion can be increased by the temptation of paying lump sums to expatriates or let assignee cash out on benefits.

Delivering Allowances and Benefits: Lump Sums and Benefits in Kind

Several factors such as tax considerations and ease of management drive how allowances and benefits are delivered. This is the case with housing. Providing housing support as benefit in kind can sometimes reduce or eliminate the tax liability in some countries.

The preferences of company’s management and the expectation of the assignees also play a role. In a context of increasing policy segmentation and diversity of the workforce, meeting the expectations of the different groups of assignees can be difficult. Companies are trying to strike a balance between removing barriers to mobility for all employees and not going too far in terms of segmentation. From that perspective, using lump sums can be a way to address the needs of all employees while simplifying assignment management processes.

A traditional limitation of the lump sums is not disappearing though; employees are quick to forget the initial purpose of cash amounts they have received. The sums paid in cash to the expatriate might originally have been designed with a specific purpose in mind but that purpose could be quickly forgotten. After a few years, employees might even turn back to the company and complain that the difficulties they have faced have not been properly handled and their cost not properly reimbursed. Spousal support is an example of a benefit than cannot be easily delivered as a lump sum, providing practical and visible support is much more effective to facilitate the relocation of a couple than just providing a cash amount, even if that amount is significant.

Furthermore, too much flexibility and a complete absence of strict guidelines can present risks.

Potential Pitfall: Duty of Care and the Danger of Too Much Flexibility

The absence of restrictions or precise guidelines associated with allowances and lump sums could lead assignees to make wrong choices. They could put themselves at risk in hardship locations by trying to cash out on allowances instead of securing safe accommodations and transportation or they might unwittingly make decisions that will impact their future financial situation.

Companies have a duty of care and should ensure that their employees don’t put themselves at risk. Even in the absence of legal implications, failure to provide adequate support could lead to reputation damage and give a mobility program a bad name.

Clear guidelines must be in place to mitigate the unintended consequences of relying on lump sums.

Having a Holistic View of the International Assignment Package

Having your assignees argue about elements of their packages, item by item, provides a stark reminder that the individual components of the assignment package should not be discussed in isolation.

What’s the total value of the package? All too often employees are not even aware of the total cost (direct and indirect) covered by companies to facilitate their relocation. What lifestyle will be allowed by the compensation package? If the package includes incentives, what is the windfall that the employee could expect and is it in line with the company’s objectives? Dismissing these questions too easily could open the door to further negotiations and requests for exceptions.

Explaining the link between the different elements in the package help justify the total value of the package as well as show how one allowance could compensate for another one that is perceived as low by the employee. It also helps explain the real purpose of some benefits and allowances included in the package.

The value of establishing the correlation between the degree of hardship in a given location (quality of living assessment) and the need for expatriate housing is a good example. Housing is one of the most expensive items in assignment packages. Companies could be tempted to reduce it whenever possible by aligning housing allowances with accommodation costs for locals as opposed to expensive accommodation costs for expatriates based on best city areas. Such an approach is applicable only in the absence of hardship and risks in host locations.

When looking at the overall package, mobility managers should not forget other remuneration components that are not part of the expat package in a strict sense but could be impacted by assignments.

Potential Pitfall: Long-Term Incentives, the Forgotten Part of the Remuneration Package

While long-term incentives (LTI) are not part of the expatriate package itself, international assignments can have consequences on them from a tax perspective. LTI can be taxable at different points in time depending on each country’s rules (e.g. when are stock-options are granted, exercised or when the shares are actually sold). Forgetting the implication of an international move on LTI could increase an assignee’s tax liability and ultimately cost that employee a lot of money while defeated the incentive purpose of the LTI scheme. Informing employees prior to the move could on the contrary allow them to sell their shares at the appropriate time or alter their assignment departure and returning dates to avoid unnecessary tax liabilities.

Educating employees about financial choices is fast becoming a priority for companies.

Complementing Expatriate Packages: Helping Assignees Plan for the Future

An assignment may last only a few years but its intended and unintended consequences on an  employee’s finances can be long-lasting. While they are sometimes vilipended for being overpaid compared to their local peers, international assignees rarely anticipate all the financial hurdles they will to go through later in their career. International assignees are at risk of having a fractured pension history, healthcare coverage gaps, and savings issues.

These challenges are leading a growing number of companies to provide financial education, training, and advisory services to their employees. The trend is not limited to expatriates and concerns all employees.

Even though employees are ultimately responsible for the planning for their future, companies should help them make educated decisions. One of the key findings of the Mercer’s “Healthy, Wealthy and Work-Wise” 2018 report is that 79% of employees trust their current employer “to give sound advice on planning, saving, and investment for retirement.” The current employer ranks just behind partner, spouse, and family as trusted sources of guidance, and ahead of all other sources of advice.

Final Pitfall: Failing to Define a Consistent Expatriate Employee Value Proposition

The Employee Value Proposition (EVP) is the total value an employee receives from the company: compensation, benefits, career management, workplace/lifestyle, and employee pride. The EVP defines the commitment the company will make to develop the employee in exchange for the effort the employee puts in to benefit the company.

Initially developed for local employees, the concept of EVP is applicable to international assignees. This is especially the case because assignees face greater uncertainties about their remuneration and career as their local peers. They need clear reassurances from their employers.

Similar to successful businesses that differentiate their products and services to attract targeted segments of the population and retain them as long-term customers, companies with segmented mobility policies should also provide differentiated offerings – a unique EVP – to attract and retain different talent groups.

When dealing with the intricacies of expatriate allowances, it is easy to lose sight of the bigger picture. After having spent a lot of time setting competitive and consistent packages, don’t let the absence of clear value proposition undermine your efforts.

Contact the author: Olivier Meier

More on these topics:

• Exploring Alternatives: Local Plus and Permanent Moves
• Nine Mobility Resolutions for 2018
• Practical Mobility Management: What Could Go Wrong?
• Cost Containment
• Managing the Different Types of International Assignments