Effective Relocation Management
Emily Tuite, Head of Communications at ECA International, looks at the opportunities for containingthe cost of assignments and highlights the dangers ofbeing too economical.
Making expatriate management cost-effective is always on the corporate agenda – but nevermore so when times are hard. Because the essence of many businesses is the expertise of its employees, international assignments continue to be necessary for the ongoing maintenance of business whatever theeconomic climate, and employee costs form a significant proportion of financial outgoings.
Many of ECA’s clients have reported that they are not planning to sever or reduce the number of existing assignments as a result of the current economic conditions, nor are they planning to scale back in the immediate future. In our recent Expatriate Salary Management Survey of multinational companies worldwide, only 18% of companies are forecasting decreases in assignment numbers over the next three years.
While most companies report that they are continuingto follow their plans for international assignments, two thirds are reporting that they are coming underpressure to reduce assignment terms and conditions.
As a result, it is of little surprise to find that over 50% of companies cite cost-containment as their biggestchallenge inmanaging assignment programmes. Aquarter of companies surveyed havemade changes to their assignment pay policy in the last three years and 30% plan to do so within the next three years. Although only 26% and 38% of those groups respectively cited cost reduction as the primary driver for these changes, other reasons cited such as the need to provide greater transparency and increased flexibility are reported byemployers to facilitate the creation of a cost-effective approach.
Measures cited by respondents as ways of reducing thecost of their international assignment programme include:
• The removal or reduction of allowances, for example:
• Changing froma standard home country based cost of living index to a cost-effective index;
• Reducing or eliminating mobility incentive allowances
• Reviewing the cost and delivery of benefits designed specifically for assignments
• Applying tax procedures more rigorously
• Introducing a localisation policy to reduce allowances after a pre-determined assignment length.
Figure 1 shows how adjusting different elements of thehome-based salary calculation methodology (whereelements of the equivalent home salary is taken and anumber of factors and allowances are applied to it tocreate the assignment salary) can result in considerablesavings to a company.
Nearly 45% of companies using the home based buildupapproach now calculate cost of living allowancesusing ‘leaner’ indices,which reflect an expectation thatthe assignee shops as cost-efficiently on assignment asat home. The diagramshows how this affects theassignment pay.
Another area where assignment packages can beslimmed down is on the payment of a mobility allowance.
A casualty of both the squeeze onassignment costs and the increased perception ofinternational assignments being requisite to further acareer inmany companies, the mobility incentive allowance – traditionally paid as an incentive for an employee to take an assignment – is waning inpopularity. Only 44% using a home-based build-upsalary quote amobility allowance as part of it,compared with 75% who were quoting it four years ago.
In particular, this allowance is sometimes excluded completely where no real incentive tomove is needed –eg between Western European locations (cited by 15%of respondents to the survey).
Location or “hardship” allowances continue to be paidby 73% of companies using the home-based paysystem. 77% of those use a system to ensure consistentand fair application of allowances which can alsoimprove efficiencies and reduce negotiations with expatriates which may result in higher costs. Housing is a key area where savings can bemade, as it makes up a considerable proportion of the assignmentpay package.
Although 70% of companies provide freelocal housing, themajority of employers exercisecontrol by specifying a ceiling to the local rent they willcover. They also encourage employee choice based onavailability of accommodation of acceptable quality bylocal standards, instead of trying to replicate too closelyhome country customs which can prove expensive. Some companiesmake deductions from the elementsof home pay designed tomaintain the assignee’s homeproperty (see figure one), as they will be fundinghousing in the host location and choose not to pay theassignee twice.
Reviewing elements of pay is just one of a variety ofmeasures companies undertake to control costs. Alternative types of assignment such as shorter term,commuting or unaccompanied assignments are part ofthe arsenal available to companies looking to reducecosts. Larger companies often havemultiple policies with varying degrees of generosity: a graduate activelyseeking international experience will not need compensating as generously as a senior manager with family who is desperately needed in another country tomanage a new project, for example.
There are other pay methodologies which can create economies – such as paying the host equivalent salary– although this depends some what on the location of the assignment. Similarly, localisation,whereby the payand benefits designed for an international assignmentare converted over time into a local national equivalent (usually if the assignment length has exceeded a specified maximum length) will usually result insavings.
Corporate savings can also bemade through taxplanning,whereby companies identify when it is more cost-effective to provide specified benefits instead ofcash and vice versa. Additionally, a tax equalisation policy, applied by three quarters of companies surveyed,protects employees fromlosing out when taxes arehigher on assignment, but also allows employers tomake savings when taxes are lower in the host county.