What organizations need to consider when leveraging a local-based approach to long-term international assignments.
By Lisa Johnson
As companies continue to expand and grow globally, so do the needs of their international assignments. The one-size-fits-all, home country balance sheet policy has been the backbone of long-term assignments for many years. However, this policy may no longer suit emerging assignment types and a local plus approach may need to be considered.
A traditional home country balance sheet based long-term assignment policy has several notable characteristics. It is based on keeping employees aligned with their home country compensation system, as it assumes that an employee will repatriate there. Financially, employees retain the same company income, benefits, and living costs as in the home location, and any additional costs are borne by the company.
Cost alone can dissuade many companies from offering assignments, despite having strong business cases or talent development reasons to support them. To address this and many of the limitations presented by a traditional policy approach, including the assumption that employees will repatriate to their home country, administrative complications, and the disparity between the assignee and his or her peers in the assignment location, companies have begun to introduce more effective alternatives. These policies can lower costs, improve parity, and simplify the administration of assignments.
The most notable difference between a local package or local plus and a traditional approach is that the compensation is host location based. Rather than the assignee’s salary and other compensation elements remaining in line with home country salary levels and being paid in home country currency, the assignee transitions to the compensation approach of the host site.
One advantage of this transition is that the assignee’s compensation is in line with both host location peers and assignees from other countries, eliminating the perception that assignees are paid better than local employees. From a cost standpoint, there may be a gain or a loss -or salary change may be neutral -depending on the home and host locations. Used in isolation, local compensation may or may not necessarily represent a cost savings.
When a company uses a local approach for temporary assignments, it has to be part of a well-communicated strategy and consistently applied. If some assignees – going to the same location -receive the local package and others the more robust traditional package, there may be challenges unless the justification for the different approaches is made clear. Employees that understand and buy into the objective of the assignment will accept the approach being used.
Payment of salary, benefits, and other compensation elements in line with host location practices is referred to as a local package. Employees do not receive any ongoing benefits during the assignment based on their status as temporary and/or foreign workers. This is why it is most commonly used for international transfers, where the relocation is considered permanent.
But there are two cases where an employee transitions to local status for a temporary assignment:
- Compensation and living conditions in the home and host locations are very similar and the assignee does not have any continuing obligations at home.
- Employees are from very low wage countries on assignment in very high wage countries.
Otherwise, a full transition to local status is rarely practical for temporary assignees. So organizations are leveraging a local plus approach, where the employee transitions to host compensation but also receives additional benefits traditionally associated with the home country.
Local Plus Policy Blueprint
The most common local plus element is host location housing assistance since many temporary assignees keep their home country housing since it’s likely they will be returning within one to three years. Most employees don’t have the financial resource to support two residences. Some homeowners may lease out their homes while on assignment -with or without company assistance with property management services -and using that rental income to offset carrying costs and pay for host location housing.
A range of policy elements that provide additional assistance to assignees include:
- Settling-in assistance. This may be offered as a standard or optional element, depending on whether the assignment location is familiar to the assignee.
- Local transportation. Assistance with transportation in the host location is most often provided in locations where a car is required but the employee is not eligible to receive a company car or where it is not safe for assignees to drive.
- Dependent education. In cases where it is not possible for accompanying dependents to attend local schools due to language barriers, companies may assist with international school tuition, either fully for the term of the assignment or on a declining basis.
- Home leave. This is commonly included in local plus, especially if the assignee is not in a position that provides for business trips to the home location or if immediate family remains in the home location.
- Emergency leave. Since this is not commonly used and is relatively low cost when needed, some companies include it as part of a local plus package even though it is not a necessity.
Many programs or policy elements associated with helping assignees prepare for assignments and relocation are similar in traditional home country balance sheet based and local plus policies. Examples of provisions that are standard in both policy types include:
- Immigration support. This element is standard, as it is in the company’s best interest to ensure compliance with immigration requirements.
- Assignment orientation. The value of reviewing the policy and practices of assignment assistance is high and the cost to deliver the orientation is low.
- Tax briefing. Often included as standard because tax compliance is critical to the company.
- Home search trip and/or temporary living. One or both may be provided.
- Shipment of household goods and/or personal effects. Inclusion of furnishings may depend on housing norm in the host location.
- Relocation allowance. While typically included, the amount for local plus policies may be less than what is provided for home country balance sheet based assignments.
In policies where the objective of local plus is to reduce the cost of the assignment, some elements that are commonplace in home country balance sheet based assignments may be addressed as optional for local plus, including intercultural and language training, spouse employment assistance, tax return preparation, and hardship allowance.
It is notable that tax equalization is not typically an element of a local plus package, though it is a foundation element of a home country balance sheet based assignment. This leaves any increase in tax liability as the assignee’s responsibility. In many cases this is manageable, but there may be cases, based on the particulars of the home and host countries involved, where the employee could be faced with a liability greater than either home or host location peers.
When Local Plus Makes Sense
Since the local plus compensation approach has its foundation in host location salaries, it does not relate at all to maintaining any sense of parity with pre- assignment purchasing power as the home country balance sheet approach does. As a result, local based assignment compensation works best when assignments are in locations with similar pay levels and cost of living. This is why local plus is popular in the Asia Pacific region, where local plus assignments between Singapore and Hong Kong -both high wage and with similar living costs -are the norm. Even within this region, it is rare to see a local plus approach for an assignment from one of these high wage/cost locations into lower wage/cost locations, including many cities in China.
Another growing trend is for developmental or entry- level assignments to utilize a local plus approach. Employees in these circumstances may be more willing to take an assignment with the lower cost host based package since they may not have home location costs and fewer attachments. This aligns with the trends seen with the early-career millennial generation assignments.
The Challenges of Local Plus
Every assignment compensation approach has drawbacks. For local plus these include:
- Disengagement from home country compensation and payroll. While this is viewed as an advantage during the assignment, it can be very difficult to reintegrate an employee into the home country compensation scheme when they haven’t been a part of it for a number of years. Communicating clear expectations and having a process in place so that the employee has a knowledgeable HR team to turn to for questions upon their return is a good basic strategy.
- Exclusion from long-term benefit plans. While on local payroll, employees on a local plus package may not be able to participate in long-term benefits plans in the home country, such as 401(k) savings plans. Some employees are keenly aware of the loss they may incur and will ask the company to compensate them for it.
- Contribution toward a have/have not culture. In companies where the home country balance sheet approach is traditional and used regularly, local plus can cause perceived disparity within the assignee population, if the non-financial benefits of the assignment are not valued. Communicating the benefit of the international opportunity to an employee’s future career development can help. European and North American companies are prone to fit into this category, which may explain why fewer companies in these regions utilize local plus for temporary assignees.
The high cost of traditional packages is driving many companies to consider alternatives, of which local plus in particular is emerging as the most popular. Another less frequent driver is the company’s desire to show more parity between local and expatriate populations as a reflection of being a global organization. There are many ways to structure a local plus package and many elements that can be included or provided as optional based on location characteristics or personal needs.
As global companies become more experienced in moving their employees to meet complex business needs, the approaches that they use are more nuanced and support a wider range of mobility scenarios. Overall, local plus can offer a more cost-effective and simpler alternative to the traditional home country balance sheet approach. Key factors to consider when making the decision to employ local plus is to be certain that it doesn’t interfere with the assignment’s objectives, that it doesn’t cost the company in less visible ways such as compliance and administrative issues, and that it suits the locations and the assignee population involved.
Lisa Johnson is global practice leader of Crown World Mobility.
