Several Factors Determine International Location Allowances

By Roy Maurer Sep 17, 2013

Calculating location allowances for globally mobile employees is an essential part of international-assignment management.

All expatriates, as well as their spouses and families, have to adjust to an unfamiliar environment when posted away from home. The expatriate family may experience distress and anxiety during an assignment, especially when living conditions in the host country differ considerably from those at home. A location allowance compensates expatriate employees for the adjustment they must make to live and work in a new location.

Two-thirds of companies use a location allowance system when calculating salary packages for their mobile employees, according to ECA International, a provider of international-assignment management solutions.

ECA’s Location Ratings report explains how an effective location allowance system takes into account many actors, including those that have different levels of impact depending on the expatriate’s country of origin.

“For example, a Hong Kong-based employee would need to make far greater an adjustment to life in Cape Town, South Africa—even though it is considered one of the world’s great cities—than they would in Osaka, Japan, because of factors such as distance from home, cultural dissimilarity and risks to personal safety,” explained Neil Ashman, ECA’s senior location ratings analyst.

More than Hardship Compensation

According to ECA, an effective location allowance system will take into account not only hardship but the level of adaptation required of a relocating assignee. Different from hardship pay or cost-of-living compensation, the location allowance is remuneration for the employee’s change of location. Differences in climate, language and culture—and other factors such as personal security, the political landscape and the availability of medical care—will have a direct effect on the ease or difficulty with which the expat and his or her family will adjust to life in their new home.

Use of Location Allowances

Location allowances are not specifically designed as an incentive to motivate employees to work abroad, but, according to ECA’s policy surveys that are typically carried out with 150-200 multinational companies, a significant minority (32 percent) use these allowances to encourage professionals to take undesirable international assignments.

According to ECA’s research, most companies (95 percent) apply location allowances for the traditional long-term assignment for which they were originally designed, but their use for short-term assignments has grown in recent years (62 percent).

The most common way to express a location allowance (used by 58 percent of responding companies) is as a percentage of the home gross salary, paid in net. Other survey respondents pay a percentage of home net salary (15 percent) or a fixed cash amount based on location (14 percent), so that the same allowance is paid regardless of seniority. Just over a fifth of companies that apply a percentage impose a ceiling on the allowance.

More than half of the organizations that apply location allowances use a banding system to define them, the survey revealed. Typically, locations are grouped into five, six or seven bands, with a recommended allowance for each band, normally ranging from 0 to 30 percent of gross salary.

ECA found that 9 percent of companies provide additional pay on top of the location allowance to compensate assignees “living in a very remote area or an area of extreme risk.”

“Companies considering paying danger money to employees who have to work in extreme locations should think carefully before doing so,” Ashman warned. “A more appropriate provision might be to ensure that suitable security measures are arranged.”

Half of companies review their location allowances every year, 29 percent review them less frequently or not at all after making the initial calculation, and 21 percent do so on an ad-hoc basis, according to the report. “Companies who never review their allowances may be overcompensating employees for living in an environment that is becoming increasingly easier to adapt to,” Ashman noted.

Because a location allowance is most commonly paid as compensation for adapting to a new environment, the need for this payment should decrease the longer the employee remains in the host location. Fifty-seven percent of respondents reported that they apply a localization policy once an assignment has extended beyond a certain time, most commonly five years.

Notably, 10 percent never fully dispense with location allowances when they localize their assignees.

Factors Vary Depending on Home Location

Location allowances are determined by a series of factors that affect living conditions, such as climate, language, culture, personal security, housing and air pollution.

ECA’s location ratings for cities worldwide differentiate between conditions that affect all employees and factors that vary according to how host-country conditions compare with those in the worker’s home nation. Factors that vary by home location include climate, culture, education, external isolation and language.

One of the most immediately apparent differences an expatriate worker might experience when arriving in a new location is the climate. “Adapting to the extreme heat and aridity of the Saudi capital, Jeddah, will be more difficult when moving from Murmansk in northern Russia, than when moving there from Dubai, for example,” Ashman said.

Similarly, adaptation will be more difficult if the languages spoken in the destination country are different from those spoken in the expat’s home country. A location allowance rating should also take into account how widely spoken a common second language in either location is, the report said.

External isolation refers to the difficulty in traveling—think locations without international flight connections, such as small islands in the Pacific.

Many factors of daily life will affect people, regardless of where they come from. Among them are air pollution, the expatriate community, goods and services, health, housing and utilities, natural hazards, personal security and sociopolitical tensions.

The air quality in Beijing or Tehran is notoriously bad, scaring some expat workers away, as recent news reports can attest. Expatriates based in the Bolivian capital, La Paz, report that breathing can be difficult because the city sits at an uncommonly high altitude.

In some locations alcoholic beverages may be completely banned by law, and other food and drinks may be unsafe to consume.

While large cities such as Paris, New York and London have a high standard of housing, in other locations, housing may be limited. The overall standard and reliability of utilities, such as the water supply, electricity and waste removal, are important to assess when determining an allowance.

Security is typically the first thing people think of when considering the difficulties of moving to a new location. Expatriates may be specifically targeted because of their perceived wealth. In certain Latin American countries, for example, it’s not uncommon for those working overseas to be kidnapped and forced to withdraw money from ATMs.

When you factor in the larger concern of countrywide instability or conflicts—including terrorism and political, ethnic and religious violence—you learn which nations are the most hazardous to do business in.

According to ECA’s most recent data, these countries include Afghanistan, Haiti, Iraq, Kenya, Nigeria, Pakistan, Somalia and Yemen.

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

Related Articles:

International Assignments: Who’s Going Where and Why?, SHRM Online Global HR, August 2013

Tokyo No Longer World’s Most Expensive City for Expats, SHRM Online Global HR, June 2013

International Assignments Expected to Increase in 2013, SHRM Online Global HR, May 2013

New York Maintains Rank as Lowest-Risk City for Business Worldwide, SHRM Online Global HR, April 2013

Be Careful When Drawing Up Expatriate Agreements, SHRM Online Global HR, March 2013

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