Utilities - An overlooked piece of the Cost of Living Housing Puzzle By Karen A. Cygal The cost of housing – as any expatriate manager can attest – is a key component of an international assignment package, whether short- or long-term. There are a number of different variables that affect the cost of housing as well as alternate policies that can be implemented in order to balance an expatriate’s needs with the employer’s budget. A portion of housing sometimes overlooked by employers involves utility costs – electricity/gas/oil for cooking, heat, hot water, air-conditioning and appliances; water; garbage collection; pest control; and so on. How an employer today addresses this housing component varies. Some reimburse the actual amount or prefer to reimburse an average amount, with or without deducting a utility norm. While some provide a utility allowance, others assume the utility bill to be the assignee’s responsibility. This article will take a closer look at how employers typically address the utility portion of housing from both a home and host perspective. The Starting Point: Housing Norms Although many companies provide host-location housing without an employee contribution, Mercer’s traditional Balance Sheet approach to international compensation assumes expatriates will contribute a portion of their salary towards housing costs. This so called housing "norm" accounts for housing expenditures they would have encountered had they remained in their home location: Home mortgage interest Rent Property taxes General house maintenance (e.g., painting, roofing, structural repairs) Homeowner’s insurance, including comprehensive home policies (separate policies on the contents of the dwelling are included in the Goods and Services component of an expatriate package) Utilities The norm does not include principal loan payments because they fall into the expatriate’s reserve category (savings and/or capital expenditures). Housing norms represent how much individuals are actually spending in the location on the items mentioned above. The individuals included in these statistics may be those who: Rent or own; Live in what may be considered a luxurious home for their income level; or Are more frugal with housing expenditures. In this way, the norm represents the average amount paid for housing for any individual in a particular home country (or city). Included in the housing norm is a number representing the expenditure on utilities in the home location. Mercer prepares tables – for every home country for which we provide expenditure data – that break out the amount spent on shelter and utilities by income level and family type (single or family). The shelter portion includes all of the items detailed above except for utilities. A Closer Look: Utility Norms Mercer’s utility norms include various items that differ by home location due to the inherent differences in utility usage. Certain compensation policies go hand in hand with the use of utility norms rather than application of a full housing norm. Although there are a number of explanations as to why employers would apply only the utility norm, the two most common reasons are these: The employer provides free housing at the assignment location and believes that the employee should make some type of contribution to housing by paying for utilities. The employer provides company-owned or company–leased housing in the host location and protects the expatriate against higher local utility costs by taking a utility norm and paying a differential on the utility portion. The Next Step: Host Utility Practices When determining policy, one must understand not only the home-country aspect (norms), but also the host-location perspective. Most employers typically address the issue of host-country utilities through one of the following common practices: Unlimited reimbursement – the employer pays the actual utility costs in the assignment location, without limitation. Limited reimbursement – the employer pays the actual utility costs in the assignment location, but with restrictions. Allowance – the employer provides an amount to cover the monthly rent payment, which already includes a utility allowance. Laissez-faire – the employer does not pay for any utility costs at all, deeming the matter to be the expatriate’s responsibility. Each employer, when determining expatriate policy, must consider the corporate budget, organizational culture, policy precedent and a host of other factors. To apply those policies optimally to individual assignee packages requires an appropriate use of available Mercer data. For nearly all of the assignment locations that Mercer surveys, rental-housing data are available in the form of a matrix detailing costs by: Type of housing unit (house/apartment, furnished/unfurnished, number of bedrooms), and Neighborhood price category Included in this matrix is a designated column representing average utility costs for local housing accommodations – useful for determining a utility allowance or as a guideline for limited reimbursement policies. Putting Mercer Data to Best Use Mercer’s Cost-of-Living data can help meet an organization’s specific needs by providing the ability to break out basic shelter from utility costs. Building flexibility and consistency into a company’s international assignment policy supports implementation of what all parties desire – a fair, reasonable and cost-effective expatriate package that factors in both home and host perspectives. Karen A. Cygal, the Product Manager for Tax and Economic Research, and Mercer Senior Global Mobility Consultant, is based in Hoboken.