Written By: Cheryl Speilman and Gerald A. Tammaro, Ernst & Young LLP
Original Publisher: Workspan
Many international consumer products companies consider a global assignment a “must” for their key future business leaders. However, cross-border assignments often require a hefty investment.
As a rule, companies expect the cost of these activities to total three times the employee’s base salary; this figure encompasses cost-of-living differentials, housing, dependent education, tax equalization, vendor support and other expatriate premiums and allowances. While many companies have developed short-term assignment and business travel policies to more efficiently fill their staffing needs, additional measures can be taken to generate an immediate impact in the reduction of these program costs. Here are eight action items that companies can look at to decrease their cross-border employee costs.
No. 1: “blow up” existing polices. In light of the staggering unemployment figures and the increased availability of talent in marketplace, many companies are reexamining their existing expatriate and relocation policies – some are starting over from scratch rather than merely adjusting existing policies. The downturn has created a radical shift in the balance of power between employers and employees. In the current economic environment, the employer has far more leverage. In situations where companies are unable to realize a cost reduction in expatriate assignments, these programs could be cancelled altogether. This would result of the repatriation of employees to their home country where there may not be any openings. When given the choice between a more modest relocation package versus unemployment, an employee may be more apt to choose relocation. There are always going to be exceptions, but these will be primarily in the cases dealing with key personnel or top talent. (See Examples)
No. 2: develop and improve short-term assignment and business travel policies. Since the turn of the century, more and more companies are devising and implementing short–term work arrangement programs. Many organizations have developed (or are in the process of developing) short-term, business traveler and commuter-type policies to support their business needs. Clearly defining business traveler and other short-term policies can offer a competitive advantage over those companies that do not, as doing so can result in tighter controls and more insight into business travel costs.
Organizations that implement these solutions now gain a clearer picture of business travel costs as well as the incremental costs of these short term compensation packages. Perhaps the greatest benefit still is the comfort of knowing solid controls are in place to address any immigration, tax and other legal challenges associated with unmonitored short-term business travel. These benefits come in the form of reduced risk exposure from an immigration and tax perspective, as well as financial benefits derived through proper allocation of corporate chargebacks.
No. 3: reduce and localize cross-border employees. One of the most powerful tools in HR’s tool box is the ability to transform an expatriate assignment compensation package to a local or “local plus” compensation package. A “local plus” compensation package refers to a situation where an employee becomes a local on the books of the host country company, but receives certain basic entitlements that are not provided to truly domestic individuals in that country. The entitlements will vary from company to company, as well as country to country.
From a regional perspective, “local plus” is used most widely in the South America and Asia-Pacific regions where competition for talent has historically been fierce, but the cost of traditional expatriate packages are not as easily accepted by local management, as compared to other regions of the world.
No. 4: implement flexible delivery approaches. Most companies believe savings can only be achieved by taking away benefits from employees. The late 1990s saw a trend of introducing more flexible compensation approaches to ease the administrative burden on companies with large expatriate populations. Transaction costs were reduced by delivering allowances in lump sums, rather than through regular payroll or relocation vendor payments. A trend toward a more aggressive approach to lump-sum allowances is now developing. Companies are taking more of an à la cart approach by establishing the level of compensation costs that they can reasonably bear and then providing the employee with the choice as to how to allocate that compensation. For example, some employers are allowing employees to forgo their home-leave allowance and put the extra money toward their housing costs. This allows each family or individual to determine what is important to them without feeling any significant decrease in benefits. (See Examples)
Another variant on the “choice” theme is to provide line managers with a range of benefit amounts. This gives the line managers more flexibility to pay more for those who perform at higher levels, or less for those who do not. Line managers who are allocated an expatriate allowance budget can use the funds for their expatriate team members as they see fit. However, adopting this approach requires a company to entrust the line manager with the responsibility to manage the budget and watch the bottom line. As such, a potential downside develops: two expatriates can be in the same location and receive different levels of benefit.
No. 5: institute effective assignment-cost projections. The professional services industry has long been focused on the cost of cross-border employees, since associated costs tend to be passed on to their clients. Consumer products companies do not necessarily have this concern; as a result, the industry has generally shown less cost sensitivity in this regard. Cost projections typically are formulated with a “quick and dirty” approach or outsourced to a third party altogether. However, very few organizations have formal processes necessary to reconcile the projected cost to actual and far fewer have the processes required to effectively measure their return on investment.
This situation is rapidly changing. Companies are now analyzing the up-front costs very carefully and invoking assistance of third-party vendors where they previously hadn’t. Business-case approval forms are now accompanied by detailed cost projections which result in a “go” or “no go” decision. HR mobility executives are working closer with their finance organizations to assist with assignment costs monitoring and management.
No. 6: improve vendor management. It is not “business as usual” out there today. Shrinking expatriate programs are reducing economies of scale, and in some cases, increasing support costs because contractual volumes cannot be met. HR mobility executives are taking a close look at their providers and trying to consolidate services, using fewer providers in an effort to keep their volume discounts.
No. 7: adjust housing policies. Housing is typically one of the priciest components of the overall assignment cost. Companies are making policy changes to reduce the level of housing benefits provided and restructure their approach to reduce housing costs. Some companies are making immediate changes and requiring their employees to find more inexpensive housing. In most cases, this is limited to employees who occupy a residence that is more expensive than the average standard of living for that location in the country.
In addition, many companies are reexamining the areas in which their expatriates live. The expatriate communities within a town center are no longer considered the norm to establish the baseline housing cost allowance. Many companies are looking at areas outside of town centers and requiring their employees to find suitable, yet less-expensive, housing in these areas. Although this may increase their commuting time, typically it is still comparable to the commuting time employees would experience in their home countries. For example, Hong Kong has suitable housing in the territories outside of the city, but still within 1-1.5 hours from the downtown area. These areas are much less expensive, yet still within a reasonable commuting distance. (See Examples)
No 8: revisit tax planning. Global individual tax rates have been trending downward over the past several years. Avoidance of risk in expatriate programs has been the name of the game for the past several years, as tax planning wasn’t a primary concern. However, several countries including the US and Ireland have announced increasing individual tax rates in their recent budget proposals. Revisiting classic income and social tax-planning approaches can provide a reduction to employer tax reimbursement costs. There are some huge social tax savings strategies by opting out of the home country coverage, but picking up voluntary coverage in the home country while paying for coverage in the less-expensive host country system.
Conclusion
By addressing these eight action items, consumer products companies will be able to realize a considerable cost savings, but cross-border employee programs reflect just one of a number of hidden costs that might remain overlooked. While benefits and employee headcount are often seen as the low-hanging fruit, it is important to thoroughly analyze all aspects of the HR organization and consider the least disruptive options first.
Cheryl Spielman is a partner in the Human Capital practice of Ernst & Young LLP; Gerald A. Tammaro is a senior manager in the Human Capital practice of Ernst & Young LLP. The opinions expressed are those of the authors and not those of Ernst & Young LLP.
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