HR can contribute a bottom-line effect by shaving costs on expatriate programs.
44 percent of a global company’s revenues generated outside its headquarters’ home country—according to the Global Relocation Trends 2001 Survey Report—international assignments are an important, bottom-line business strategy that supports a company’s revenue stream.
Global HR professionals can contribute directly to their companies’ bottom lines by reducing outlays associated with expatriate programs. A little cost savings here and there will help your company become a leaner global competitor without sacrificing the morale of your expatriates. Indeed, the Global Relocation Trends report, sponsored by the Society for Human Resource Management (SHRM) Global Forum, GMAC Global Relocation Services and the National Foreign Trade Council (NFTC) notes—perhaps surprisingly—that “remuneration dissatisfaction” ranks lowest among the causes of assignment failure.
To be sure, expats with specific skill sets may still command high-cost packages, notes Kevin Overbey, managing director of ASINTA Global Benefits Network, an international benefits consulting group, and managing partner with the international business unit of the Seattle-based consulting and brokerage firm ClearPoint. How.ever, the next echelon of employee can come cheaper, he says. The flattened economy has helped rein in expectations, and employees coming from the beleaguered telecom and technology industries may be more willing to accept assignments without excessive incentives.
But no matter what HR does to expatriate packages, experts agree that tweaking in the middle of an assignment is not wise.
Scrutinize Line Items
One cost-saving trend that experts see is the move away from foreign service premiums, which companies have given nearly all assignees in the past and which traditionally run 10 percent to 15 percent of the employee’s base salary, says Roger Herod, senior vice president at Organization Resources Counselors Inc. (ORC) in Chicago and president-elect of the SHRM Global Forum Board of Directors. These premiums are separate from hardship premiums, which are given to compensate for dangerous or difficult locations. The latter are less likely to be scaled back. Shaving or eliminating foreign service premiums for each expatriate can add up to big cost savings.
In addition, companies are scrutinizing other allowances they provide for expats. For example, Herod suggests that HR evaluate successive years’ compensation packages knowing that expats don’t need as much for allowances as they do in the first year. “The purchasing patterns of new expats aren’t nearly as efficient as those of expats who have been on assignment for a year,” Herod explains. “Your allowances in that second year should come down as expats learn how and where to shop.”
Duplicated benefits also can add to outlays, unnecessarily. “If you’re providing an expat with a company car, and your cost of living allowance includes transportation expenses, eliminating that duplicated allowance can save $3,000 in many instances,” says Herod. “Look at what is in the ‘market basket’ of goods and services you’re using to develop your allowances” to determine other duplicated benefits that can be eliminated.
Herod says that HR could even go a step further. Since employees usually pay for transportation expenses in their home country, “some companies are asking employees to contribute to transportation costs [abroad]. You might save another $3,000 annually by asking for this contribution,” he adds.
Borrowing from another U.S.-based trend, Overbey observes that “health care plans in the United States are shifting costs to the employee or have cut costs by eliminating [or raising] expensive elements like the $10 co-pay.” He says that companies can save between 8 percent and 15 percent of their medical insurance costs for expatriates by using the same measures.
Housing is also a considerable expense in expat assignments that contains some wiggle room. Many employers take on the entire cost of the host country housing expenditure. But, where it seems fair and reasonable, some companies are asking expatriates to contribute to their housing costs overseas based on percentage of salary. “People typically spend between 12 percent to 20 percent of their salaries on housing and utilities in the United States”—percentages that can be applied abroad, notes Heidi Skatrud, vice president of international compensation and assignment services at Rochester, Wis.-based Runzheimer International, a man..age.ment consulting firm specializing in measuring living cost differences worldwide.
Companies have traditionally helped expatriates sell their homes before the assignment or arranged for third-party purchases. Today there is a trend away from this practice because most employees return to the home country. Instead, companies may provide less costly rental management for the home or provide a stipend so the employee can hire a property manager. In addition, rental income may flow to the company to offset free housing in the host country.
A simple cost-saver for employers is to pay host country housing expenses directly, says Skatrud. “In some countries, if housing allowances are paid to employees, it becomes part of their taxable income and the employer must make up the additional taxes during the equalization process,” she says. In many overseas locations, however, “housing in kind” provided by an employer isn’t taxable, so the employer saves money by paying directly.
Employees who rent in the home country are usually charged a housing fee to offset costs associated with providing and paying for housing in the host country. Some organizations use a “standard city” approach to establish and charge these housing “norms,” says Skatrud. “But housing costs vary dramatically from city to city within a country. Using this approach can result in overcharging some expatriates and undercharging others.” (See chart on page 73.) She says that if a company has expatriates coming mostly from “high cost cities,” it can save even more money by using city-specific rather than standard city norms.
Other line-item savings that HR can explore include:
- Run numbers to decide whether it’s more cost-effective to ship household goods or to store them and rent goods in the host country.
- Use the most recent data available to determine allowances, since the marketplace can change rapidly.
- Manage vendors by shopping around for plans. Also consider the experience of your expatriate population, which may or may not need extensive services as time goes on.
- Use status of forces agreements (SOFAs) where allowed. Military personnel and authorized patrons such as government contractors .
can use U.S. commissaries and exchanges under these agreements, for substantial savings to the company.
- Use technology such as videoconferencing, e-mails and intranets to cut travel expenses.
Flexibility Saves Time and Money
Going beyond line item tweaking, HR can reap cost savings for the company by keeping expat assignments flexible. For instance, the Global Relocation Trends survey indicates a trend toward shorter assignments, which typically are less expensive for the company.
“Six and 12 months are important cutoff points from an income tax point of view—which is a big factor in overhead expense,” says Bill Sheridan, senior director of global HR services at the NFTC. “Keeping an assignment under 12 months can save up to 40 percent in this area.”
Companies still incur travel and temporary housing expenses for the employee, but a shorter assignment usually means the company does not need to relocate the employee’s family as well. Of course, being away from family can cause stress to the expat, so HR must continue some travel expenses. “You have to be humane and build in enough leave for the employee and family, so make sure you run the figures,” says Brenda H. Fender, director of Employee Relocation Council’s international initiatives, in Powder Springs, Ga. “The length of the stay and size of the family could make travel costs considerable.”
Shorter moves usually eliminate a myriad of other expenses, such as education allowances for employees’ children, spousal assistance, multiple orientation packages, etc. The Global Relocation Trends survey shows that companies currently spend an average of $15,933 on relocation services. Not all will be eliminated by shorter assignments, but something like the typical $3,500 for spouse support could be.
“A sidebar benefit to shorter assignments is that they keep the employee directly connected to the original base of operations,” adds Sheridan. “This keeps the ‘out-of-sight, out-of-mind’ phenomenon in check.”
HR’s Impact on Hidden Costs
Research from the NFTC shows 40 percent of expatriates leave their companies within two years of the assignment largely because of poor career opportunities upon return. A three-year expatriate assignment for an employee with a $75,000 to $100,000 base salary costs an employer $1 million total, according to the NFTC. Companies can bear significant investment losses through expatriate attrition.
HR can directly affect its company’s return-on-investment by developing policies that address expat concerns. Career planning and repatriation programs, cultural preparation, spousal assistance and flexible assignments will curtail dissatisfaction, lost productivity, early returns and attrition.
“An expat can spend the first six months settling in if no one is there to help, and you can imagine the time lost and the frustration,” says Herod. “You only have to look at how much you’re paying that person a month to see how costly this can be.” Orientation programs and cross-cultural training help employees get up to speed and acclimate quickly at less expense.
Finally, when HR evaluates where to save money and where to invest money in expatriate programs, it helps to keep one thing in mind: “Most expats don’t take an assignment for the money—and you don’t solve employees’ relocation, family and career issues with money, either,” says Herod.
Instead, he believes and research supports that “when HR has good communications and consistency in its policies, and gives the necessary relocation support and career planning, then you don’t have to offer all the incentives.”
Carla Joinson, a contributing editor to HR Magazine, is based in Stafford, Va. She specializes in writing about business and management issues.