By Anne Rossier-Renaud, Mercer
Housing is one of the costliest items in an expatriate compensation package as well as an important factor in the satisfaction of the assignee and family, a factor that can make the difference between a successful assignment and a failed one. The challenge for companies is to set an equitable policy for housing assistance that balances affordability with enabling assignees to find lodging that is appropriate for their families, job level, and responsibilities, all within the housing market conditions of the assignment location.
This is no small challenge. The results of Mercer's 2017 Worldwide Survey of International Assignment Policies and Practices show that more than four-fifths of companies provide a housing allowance or benefit to all long-term assignees, and a further 12% provide an allowance or benefit depending on specific position levels, whether the assignee rents or owns accommodation on the home country, or on an ad-hoc basis. Although giving housing assistance to expatriates is almost universal among employers, the method differs, as do policies and, significantly, handling exceptions to those policies.
How Housing Allowances Are Calculated and Applied
When determining the housing allowance budget, a majority of companies take into account the family size and the assignee’s position or income level. Just less than a third take only the family size into consideration, and a small minority only consider the position or income level. Other options, such as paying the same fixed amount to all assignees, are even less common.
How do you calculate the housing allowance?
Source: Mercer's 2017 Worldwide Survey of International Assignment Policies and Practices
Free housing versus housing differentials
Companies are split over the question of providing free housing or paying a housing differential – in other words, calculating the housing allowance as a differential between the rent budget in the host location and a home housing norm (usually estimated as an average amount paid by employees in their home country.) The idea of a differential is a logical one in a “no win, no loss” balance sheet approach: the assignee had housing costs prior to the assignment, so there is no reason why housing would be entirely free on assignment. In practice, however, individual situations can be more complex, and some assignees might still have accommodation costs in the home country, for part of their families, during their assignments or come from home countries housing markets where finding suitable accommodation upon return may be difficult, or be in countries or on assignments types where repatriation could happen in a short time frame. Furthermore, the concept of a differential is sometimes more difficult to explain to assignees.
The application, or not, of a differential is also linked to whether the company assists the employee with his/her home-country housing. Historically, American companies have been more likely to offer assistance when employees are selling their home-country accommodation than European ones, but they are also more likely than European companies to deduct a home-housing norm. Reversely, European companies are more likely to avoid any involvement with home-country housing issues and pay for free housing rather than a differential. Some European companies prefer to have slightly lower housing budgets but avoid the complexities of calculating and communicating (and explaining) a differential.
Managing expectations and setting clear guidelines
The wording of the message itself is important: did the company promise the same lifestyle or an international lifestyle to assignees? Reflect on what images these promises can conjure in the minds of assignees and whether they are realistic in the assignment location. The same lifestyle as in their home country could mean a big house and two cars for an American assignee going to central Tokyo, or extensive domestic help for an Indian going to Europe. Either of these scenarios would be prohibitively expensive for an employer and could create discord among local employees, who could find such perks outrageous.
Check the understanding of the policy by host HR, line management, and the Destination Service Provider (DSP). If the messages that assignees and their families received in the host location is different from what they heard from the mobility team, this will create confusion or expectations that cannot be met. It’s important that a consistent message is conveyed to all stakeholders involved.
Another good practice is to issue clear guidelines to DSPs, such as number of properties that can be proposed to assignees and whether properties above the set budget can be proposed so that reported practice can be checked against guidelines. Expatriate satisfaction is an important criterion to measure a DSP’s performance, but it should be combined by an assessment of how many accommodations within the budget range have been found.
Linking accommodation guidelines with the degree of hardship
The days when expatriates where automatically entitled to live in highly expensive accommodations in the best neighborhoods are long gone. When the security or political situations in the host location are good enough, companies increasingly want their expatriates to live in apartments or houses that are as similar as possible to those of their local employees. This is a way to contain cost and demonstrate fair principles – companies don't want assignees to be treated differently from the local employees, when unnecessary.
Furthermore, organizations are introducing a greater degree of flexibility in their policies, partly to respond to the perceived preference of the new generations for more flexibility, lump sums, and self-service solutions. For housing, more flexibility in the policy may translate in the provision of lump sums or greater flexibility to the assignees in the choice of their accommodations.
However, companies have a duty of care, so too much flexibility could lead assignees either to put themselves at risk by living in less safe parts of a city to save on rent, or simply to damage the company’s reputation by implying with their choice of lodging an unwillingness of their employer to offer better housing assistance.
Using a quality of living assessment can help companies measure risk by looking at factors such as crime and the standard of housing to determine what category of accommodation can be provided and if the standard should be different than from a host-country local.
Furthermore, the fiscal aspect should not be neglected. In some countries, paying the rent to the landlord rather than providing a cash allowance to the employee incurs a lower tax burden.
Managing housing exceptions
According to Mercer’s 2017 Worldwide Survey of International Assignment Policies and Practices, the housing allowance is the package item for which the highest number of exceptions is requested and also one of the exceptions most likely to be granted.
What are the most common exception requests?
Source: Mercer's 2017 Worldwide Survey of International Assignment Policies and Practices
While a degree of flexibility might be required to manage special cases, companies can try to control exceptions by:
- Establishing a formal approval process and giving visibility to the exceptions granted. The level of seniority of those who approve exceptions seems to have a direct impact on the number of exceptions requested. Asking top management to approve exceptions and regularly reporting the exceptions granted significantly decreases the number of less justifiable exceptions.
- Leveraging segmentation and pre-defined packages. It is often better to offer a pre-defined option to an assignee requesting an exception than to negotiate an ad-hoc deal. If the company is already segmenting its policy, management could review if the assignment category/policy applied should be revisited. If you have a segmented policy, it is advisable to check if moving the employee from an assignment category to the other can solve the problem. More generally, it is better to offer pre-defined options as part of a segmented approach as opposed to make ad-hoc deals, where everything is open for discussion.
- Tracking requests for exceptions. An increase in the number of exceptions requested – especially from specific group such as critical talent and top managers – could be a sign that further policy segmentation is needed.
- Documenting all exceptions and calculating their cost. A mobility steering committee should review exceptions at least annually and make recommendations for policy changes, if warranted.
Housing allowances will remain a significant expense for companies who need to move employees abroad, but managing expectations, developing sound and segmented policies, and reducing exceptions can help to keep costs under control. And of course, it goes without saying that fair housing allowances rely on good data on a range of accommodations in your assignment destinations.