As the cost of living soars in many overseas locations, companies with an international presence are faced with a tough question: How to reduce costs while still having a competitive talent attraction strategy? This question forces companies to clearly define expatriate assignments. Though there is no one-size-fits-all answer, here are some cost-containment trends currently gaining traction among expatriate employees.
Since it’s easier to find skilled workers abroad than it used to be, the full expatriate package is becoming less common. Instead, companies are considering “local-plus” packages, which include a salary based on local norms, complemented with benefits such as relocation and housing assistance, medical insurance, education for children, tax assistance/preparation and home leave.
Though local-plus can save you a bundle, it’s not quite as easy as it sounds. This arrangement places the employee in a similar, but not equivalent, level with local employees. These expatriate employees typically remain on their home country social security program and do not intend to move permanently to the host location. The concept has become popular as a way for companies to bridge the gap between a full expat living assignment and a true local package that may not be attractive enough to entice the very best candidates for a position.
Also, local-plus doesn’t work in every market. It functions best in relatively high-paying countries, but in developing countries where pay is significantly lower than in the US, compensation and subsidized benefits will need to be set higher to attract workers.
The standard timeframe for expatriate assignments used to be five years, but the new norm is about three years. After having expats in-country for several years, your organization will likely have a foothold in the country and may be able to replace the expat with a qualified local worker, especially in places such as China, Hong Kong or Singapore, which have large English-speaking expatriate populations as well as local talent.
Alternatively, the end of the expat term and assignment is an ideal time to switch the expat to a local-plus package.
Property values and rents have risen to unsustainable levels in many parts of Asia. A 2014 Knight Frank wealth report listed Hong Kong as the most expensive city for luxury homes, followed by London and Singapore. After dipping the previous year, housing prices in Beijing were up 17 percent, and also rose in cities such as Guangzhou (14 percent) and Shanghai (7.3 percent).
When considering increased housing costs, combined with other assignment benefits and allowances, you might soon find your costs exceed the value of your program. To avoid this, many multinationals are putting a ceiling on housing allowances. To arrive at a reasonable cap while staying competitive, benchmark locations within your industry sector and cite your research when implementing and documenting your international relocation policies.
Before you set foot in another country, it’s crucial to project assignment cost accruals for expat employees. You should also invest in assignment management and payroll systems/processes that allow you to access the information you need at all times in the home and host locations without digging through a mound of data or paperwork. An upfront investment in reliable software will save you a lot of time and headaches when you run into compliance and tax withholding/remittance issues.
It’s also a mistake to assume that expat payrolls can be handled as simply as those for local hires. With expat payrolls, you’ll have a different set of laws to comply with, shadow payrolls to maintain in many locations, and complicated withholding and payment rules.
Finally, though it’s important to keep your costs down, you need to remember that expats are often under considerable stress, especially when they bring along family members with their own needs and demands. A well-structured and documented expat relocation policy with clear guidelines will help relieve employee uncertainty and set realistic expectations for working abroad while maintaining consistency throughout your employee expat population.
Cody Smith is director of advisory services and head of global mobility at Radius. He has Big Four experience and advises clients on a wide range of global mobility issues, including tax, international assignment planning and relocation management. He also provides assistance with global equity compensation taxation and compliance, relocation policy development and benchmarking, and international payroll reporting.