HR Agenda - Global HR Management

When transitioning from a short-term to a long-term expatriate assignment, consider the financial implications.

By Steven P. Nurney Mar 1, 2005
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HR Magazine, March 2005 Companies often send employees overseas for short periods—usually three months to one year—after which employees return home to their regular position and job responsibilities. These short-term assignments can be an inexpensive way to fill a vacancy abroad or allow an employee to participate in a global team project.

Traditionally, short-term assignees go abroad unaccompanied, leaving any family at home, which allows children to remain in school and spouses to continue working or pursuing other interests. Whether married or single, these employees usually allocate their pay to home-country obligations, while the company handles all assignment-related expenses.

Occasionally, however, an international assignment extends for a longer period than originally anticipated due to, for example, problems with the implementation of a new system or an operational difficulty at the worksite.

Because finding and training a qualified replacement can be costly in terms of time, effort and funds, the employer may simply decide to reconsider the goal of the short-term assignment and ask the employee (who by that point is familiar with the culture and work environment) to remain overseas, perhaps for several years.

If so, this now–long-term assignment demands careful planning to minimize the effect of any financial implications on the company’s—and the expatriate’s—bottom line.

Salary and Incentives

From compensation to goods and services to housing, many things go back on the table when transitioning an expatriate from a short-term to a long-term assignment. The one constant, though, should be base salary—so long as the employer follows the balance sheet methodology for international compensation, which maintains the individual’s lifestyle on assignment comparable to what it would be in the home country.

By linking base pay to the company’s home-country job evaluation, performance appraisal and salary administration processes, the employee’s compensation stays on par with home-country counterparts—whether it’s for a short- or long-term assignment—which facilitates the employee’s eventual repatriation. But if the assignee has been receiving a temporary position allowance for the short-term assignment, that amount is no longer necessary.

Incentives, however, may change. In addition to compensating expatriates for the often-higher costs of living abroad and the special expenses associated with an international assignment (particularly when relocating a family), some organizations attract candidates with premiums or other financial incentives. Although many global organizations have traditionally paid premiums averaging 15 percent of salary, in recent years some companies have lowered that percentage, or even eliminated the premium, to contain costs and to acknowledge that international assignments have become increasingly commonplace for employees’ individual and career development.

When transitioning an employee from a short-term to a long-term assignment, consider not only whether a premium is necessary—which may depend on the reason for the assignment as well as industry practice—but also what type of incentive works best for the expatriate and the type of assignment. (For more information, see “Premium Types”).

Employers should bear in mind that the largest expenditure for most expatriates involves purchasing goods and services.

While employers can use per diem or partial spendable income to determine an acceptable allowance for short-term assignees, employees on long-term assignments are usually required to contribute an amount equal to what they would have paid at home for goods and services.

This so-called home-country spendable income is protected by a goods and services differential that addresses increased costs, if any, in the assignment location. The goods and services differential will almost always be lower than a short-term assignment allowance or per diem.

Housing and Schools

An employee’s housing situation may change completely when he becomes a long-term assignee. For example, many short-term assignees live in a hotel or share a suite with colleagues in similar circumstances—either of which is an expensive proposition for long-term assignments. A married employee on long-term assignment is likely to bring his or her family along, requiring a larger apartment or house. In either situation, the employer should consider the following points:

  • Since employees typically spend a portion of their income for housing in their home country, it is reasonable to ask them to contribute to housing expenses during the assignment. Most companies retain a “housing norm” amount from employees on long-term assignments. Deduction of the norm generally begins after the assignment switches from short term to long term.
  • Although long-term residential rentals are usually less expensive than short-term corporate apartments, they often require lease terms of one to two years or more. Before signing the lease, ensure that the length of the assignment is reasonably certain so as not to be stuck with paying the balance of a lease on an empty apartment.
  • For many reasons, employers often discourage the sale of the employee’s home-country residence and/or the purchase of a primary residence in the host location. Both foreign home ownership and the sale of the home-country residence expose an employee to a variety of risks and costs, including the potential for a dramatic rise in home prices in the home country, which would hamper the assignee’s ability to purchase a similar home on repatriation.

    On the other hand, tax laws in some home countries such as Canada result in tax liability for people who own a residence in the home country during an assignment, and thus encourage the sale of the primary residence. Since regulations can vary by country, as well as by length of time out of the country, the employer’s in-house tax specialist or external vendor can provide the necessary information.

  • When employees retain their home-country residence, many organizations pay for the services needed for property management. If family members join the employee on the long-term assignment, education becomes an important factor. For the majority of assignments, employers contribute to the educational expenses of expatriate children—particularly if local schools are unsuitable. In this case, companies often assume some portion of the costs of local private elementary and secondary education or, as necessary, boarding school.

    To reduce these expenses, some companies deduct an “education norm” (similar in concept to the housing norm discussed above) from assignees who had been paying to send their children to private school in the home country.

Complexity of Benefits

How benefits are affected when transitioning from a short-term to a long-term assignment depends largely on the home and host countries involved.

Most companies try to retain employees in home-country benefit programs whenever legally possible, particularly for retirement, social security, deferred compensation and life insurance plans.

In some instances, however, expatriates are mandated by local law to participate in host-country programs. If expatriates are entitled to benefits under foreign law that are also provided in home-country plans, employers may be able to integrate these benefits, maintaining equity between the home and host plans and avoiding duplicate costs and benefits.

In addition, many countries have negotiated bilateral social security totalization agreements that allow expatriates to opt out of participation in a host-country plan as long as they are covered by their home country. These agreements usually have a limited duration of five years for U.S. agreements; after expiration, both the employer and employee may have to pay into the host plan. The United States currently has bilateral agreements with 20 countries, including the U.K., Canada, Chile, Austria and others. A complete list is available from the Social Security web site.

Miscellaneous benefits that may change after transition include whether to provide a car in the host country. An employer’s policy regarding company cars often depends on what the assignees received at home, what their peers in the assignment location receive and the nature of the expatriate’s job responsibilities. This policy may remain the same when transitioning an employee from short to long term, with the exception of the need for a second car for a long-term assignee’s family. Employers should consider a number of policy issues when making their final decision:

  • If the expatriate sells a car at home before relocating, some companies reimburse a forced-sale loss up to a defined amount.
  • Employers rarely ship cars abroad. However, if shipment is practical and economical, the employer usually absorbs all transfer costs without limitation.
  • If buying or leasing a second car overseas is cost-effective, the employer may establish a maximum support amount. Some employers with large numbers of expatriates in the same host location establish leasing arrangements with local car dealers.

Income Tax Concerns

When a short-term assignment becomes a long-term one, expatriates usually face more-complicated tax matters both at home and abroad, a situation that often requires consulting qualified experts in expatriate taxation. If a company had been following a laissez faire policy regarding taxes, it should consider whether this policy is still appropriate. The employee not only is likely to be subject to the company’s tax equalization policy for long-term assignees—which should ensure that the individual does not gain or lose from a tax perspective while on assignment—but she also is likely to be responsible for tax compliance in both countries.

In addition, many allowances and reimbursements that were not reportable as income to a short-term assignee may now become reportable to a long-term assignee. In many situations, these expenses may be reportable in the home and/or host country retroactive to the initial assignment start date. An employer could tax-equalize the assignee’s income or simply “gross up” all taxable reimbursements. It is not difficult to envision a scenario in which tax considerations become the most costly element of the assignment package.

Is It Worth It?

Only the employer can answer this question when transitioning an individual from a short-term to a long-term assignment. An employer’s needs may dictate that cost is irrelevant, making the decision easy.

Permanent assignments or conversion to local terms and conditions may be potential alternatives, but the viability of either of these options depends on many factors, including the cost of living and tax rules in both the home and host countries, the company culture, the employee’s long-term career goals, and the company’s potential financial rewards. Expatriate managers must carefully consider all the relevant factors—or face the potential for unnecessary higher costs.

Steven P. Nurney is senior director, client relation management, for ORC Worldwides international compensation services in New York.

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Premium Types

Many companies offer financial incentives to expatriates as part of the overall compensation package, either as a separately identified amount or combined into one general location-specific payment. The following are the premiums and incentives most frequently used by multinational organizations:

  • Expatriate or foreign service premium. This add-on to regular salary is designed to induce a candidate and his family to leave familiar working and living conditions and to continue employment in another country. This type of premium may be needed when shifting an employee from a short-term to a long-term assignment. According to the 2004 Worldwide Survey of International Assignment Policies and Practices by global consulting firm ORC Worldwide, respondents who provide incentives reported average incentives of 15 percent of pay.

  • Mobility premium. This lump-sum amount, which is an effective alternative to an ongoing payment, is commonly paid at the beginning and end of an assignment, or when the employee expresses willingness to accept transfer to another foreign assignment. If you are changing assignment lengths, a mobility premium retains its incentive value and supports flexible staffing needs better than an ongoing payment. Given to the employee upon transfer, the mobility premium provides money that can either be saved or spent and facilitates further transfers by providing a specific financial incentive to move. Respondents to ORCs 2004 Worldwide Survey who provide lump-sum incentives reported paying an average of 12 percent of net pay.

  • Hardship premium or allowance. This fixed percentage of base salary acknowledges the additional burden of living and working in situations that are unusually stressful, harsh or dangeroustypically conditions that are more difficult than those to which the expatriate is accustomed at home. Companies that do not pay a hardship premium for short-term assignments may need to add one when transitioning to a long-term assignment. According to ORCs 2004 Worldwide Survey, the maximum hardship premium paid by worldwide participants is 31 percent of pay.

  • Field allowance. This premium pays for the additional costs of traveling and working in many different locations.

  • Hazardous-duty or danger pay. This amount compensates for physical and political dangers.

  • Remote-site allowance. This allowance is used for isolated or relatively inaccessible worksites. However, foreign service and hardship premiums are normally sufficient to compensate for unusual or difficult situations. 

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