Under the balance sheet approach, expatriates should pay no more, or less, for housing while abroad than they would have paid had they stayed at home - similar to the treatment of goods and services. Inherent in this concept, as with goods and services, is the expectation that expatriates should contribute a portion of their salary - a housing norm - toward housing costs, since they typically spend a portion of income for housing while living in the home country.

The housing norm is similar in concept to "spendable income" as it relates to goods and services expenditure. Based on an assignee's salary level and family size, the housing norm represents what the expatriate would spend for costs most directly related to a residence (i.e., mortgage interest or rent; property taxes; general house maintenance; homeowners' insurance; and utilities.)

When companies equalize goods and services expenditures, they typically assume that the expatriate will continue to spend the "spendable income" portion of their salary, with the company providing a differential to cover the higher cost of goods and services in the assignment location. When equalizing housing expenditures, companies usually consider one of two different approaches to applying a housing norm:

• They will deduct the housing norm from the expatriate's salary and retain that amount, then pay the full amount of the assignee's foreign housing cost, or
• They will calculate a foreign housing allowance, deduct the housing norm, and pay the balance as a differential.

Are housing norms common practice among multinational organizations? According to ORC's 2002 Worldwide Survey of International Assignment Policies and Practices, 54 percent of the participants worldwide pay foreign housing costs but deduct a home-country offset (norm) as the expatriate's contribution (13 percent pay a housing differential). However, there is significant regional variation:

• Sixty-three percent of companies in the Americas and 72 percent of Japanese companies deduct a norm (18 percent and 1 percent, respectively, pay a differential).
• Only 35 percent of Asia-Pacific-based firms and 32 percent of Europe-Middle East companies do so (8 percent and 17 percent, respectively, pay a differential).

In addition to the regional variations in practice are different methods used for calculating an appropriate housing offset. This article will explain the rationale behind housing norms and illustrate the most common methodologies.

To Deduct, or Not to Deduct

Although the survey results show that a significant number of companies do not deduct a home housing norm (see sidebar, "Free and/or Hands-Off Housing"), the majority of organizations choose to do so, based on the following reasons:

• To be consistent with the balance sheet approach and equalization of goods and services
• To ensure that expatriates have a level of housing expenditure comparable to what they would have had at home had they remained in the home country and to facilitate repatriation

Many expatriates who own a primary residence in the home country continue to own their home during the international assignment. Assessed a norm for foreign housing while continuing to pay a mortgage back home, expatriates may very well question this double cost. The answer is simply this: Whenever possible and reasonable, employers should encourage their expatriates to rent out the family's primary residence, thereby replacing all (or a good portion) of the mortgage payment. Since a portion of that payment goes toward the family's overall equity position (i.e., their reserve or savings), the only amount actually requiring coverage (i.e., equalization) is the interest payment.

Those assignees who rent their home-country residence should consider the tax impact of this decision, which varies according to country regulations. For example, some tax laws permit inclusion of rental income losses in a home-country tax return when the rental income does not equal the mortgage payment amount. Because of the complexity and ever-changing nature of tax regulations, it is important to encourage expatriates to seek counsel from a professional tax adviser.

If the employee cannot (for legitimate reasons) rent the family home, deducting a housing norm may be inappropriate. The common approach in these situations is for the employer to waive the home-country housing norm but provide the assignee with a reasonable allowance toward foreign accommodations.

Assuming that the housing norm remains a part of the expatriate package, the following three calculation methods are the most often used: statistical derivation, fixed percent of salary, and actual expenses.

Option 1: Statistical Derivation (ORC's Methodology)

On a regular basis, ORC researches, reviews, and updates the home-country housing norms that it provides to clients, using data obtained from the particular home-country government. The data are based on families who represent typical urban and suburban dwellers who are more apt to become international assignees, as well as a weighted average of recent and long-term mortgage holders and/or renters that reflect the country's demographics. For example:

Ireland has a high level of home ownership among the population. Consequently, Irish homeowners represent a larger proportion of the sample than in, say, Switzerland, which has a higher percentage of renters.

The ORC calculation excludes principal mortgage payments, which represent, for the expatriate and family, an asset that can be sold for future gain (as, for example, stocks or bonds). On the other hand, the norm includes mortgage interest, utilities, and miscellaneous costs such as property taxes, insurance, and repairs.

Option 2: Fixed Percent of Salary

As an alternative to a statistically derived housing norm (such as ORC's), one option is to use a fixed percent of the expatriate's salary in relation to local housing costs, for example:

A Canadian firm with an expatriate from Toronto may deduct a housing norm equal to 10 percent of base salary (based on the local Toronto market). Compare that figure with a deduction of 25 percent of base salary it might make for an expatriate from Paris, where accommodations are assumed to be more costly than Toronto.

Although the simplicity of the fixed-percent method may be attractive for administrative purposes, ORC does not generally recommend it. This type of calculation may result in inequitable treatment of employees at different base salaries by representing higher costs for higher-paid employees than a statistically based norm. It may also be significantly different from the statistical derivation, depending on the home-country economy. For example, in the scenario above:

The statistically derived normal expenditure for housing for a Canadian in Toronto ranges from 42 percent of salary for a person in a lower salary range to 15 percent of salary for a higher-paid individual, according to research by the Canadian government. In this case, the statistical derivation is higher than the fixed percent (10, as referenced above) of salary.

In France, on the other hand, the normal percentage of expenditure on housing ranges from 17 percent for a person at a low salary level to 10 percent for a higher-paid individual, as per the French government's expenditure research. Here, the statistical derivation is lower than the fixed percent (25, as referenced above) of salary.

In general, the percentage of income spent on housing decreases as overall income increases.

Most organizations seem to agree that use of the fixed-percent method requires caution. According to ORC's 2002 Worldwide Survey, only 9 percent of the participants follow this method (down from 12 percent in 2000). Those that use this approach report an average 14 percent of base salary as the home housing offset.

Option 3: Actual Payments

A minority of companies - only 19 percent of the worldwide participants to ORC's 2002 Worldwide Survey - uses the expatriate's actual rental or mortgage payments to determine an appropriate housing norm. Among Japanese companies, the practice is more common (44 percent). ORC does not recommend this approach because it:

• Creates an administrative burden that requires the employer to calculate individual norms for each expatriate.
• Necessitates a potentially intrusive examination of an individual's finances.
• Requires a review of items such as maintenance and insurance, which an assignee may not consider part of the cost.
• May actually exaggerate inequities between expatriates with similar overall levels of home-country housing expenditure if the elements of that overall expenditure significantly differ. For example, assuming that repairs, utilities, and property tax are relatively equivalent, a long-term homeowner may have a low-interest mortgage and a relatively new homeowner may pay a higher rate, or vice versa.

Keeping the Calculation Relevant

Companies treat housing norms in various ways. ORC clients who receive updated housing norm data may prefer not to change an assignee's housing norm when the updated data is released and may do so, instead, in conjunction with a salary adjustment. One third of the 2002 Worldwide Survey respondents update the norms when they receive new data from ORC. Almost half do so when the expatriate's base salary changes, and 31 percent do so when family size changes.

Thirty-six percent "freeze" the housing norm, calculating the amount at the time of expatriation and holding it constant throughout the assignment - even for long-term assignments. This policy decision produces inequitable treatment between a newly arrived individual and one who has been abroad for some time. Although proponents usually argue that expatriates' housing costs do not change because they would not have moved at home, the argument does not consider changes in variable cost elements (e.g., insurance, maintenance, utilities).

Overall, regardless of how the norm is implemented, ORC generally advises companies to use a housing offset derived from a statistical analysis of expenditure on home ownership and rental costs (such as the ORC norm). This methodology ensures consistency in the way that housing-like the other elements in the balance sheet approach-is handled, thus supporting a fair and equitable assignee pay policy.

Sidebar: "Free" and/or "Hands-off" Housing

Evidence, both anecdotal and survey-based, points to increased provision of "free" housing by companies worldwide. Though the increase is by no means a landslide (two-to-four percentage points measure it from survey to survey), it has been consistent over time:

• In 1998, one quarter of ORC's Worldwide Survey participants did not deduct a home housing offset.
• Two years later, that number increased to 28 percent, followed by 30 percent of companies worldwide in 2002.

Accompanying this shift has been the appearance of what had been a rare practice: a total hands-off approach to housing, particularly in situations where the package is based on host pay. In 1998, none of the participants to ORC's Worldwide Survey indicated that they did not contribute to foreign housing costs; however, that figure rose to 1 percent two years later and 3 percent in the 2002 survey.

Curtis B. Grund is a consultant in ORC's international compensation practice area in New York City.