March 2014

hOW TO haNDLE LOcaL PLUS INEQUITIES

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Vince cordova, based in New York, is a Principal in Mercer’s Global Mobility Practice.

Ed hannibal, based in chicago, is the Partner leading Mercer’s Global Mobility Practice.

Steve Nurney, based in Norwalk, connecticut, is a Principal in Mercer’s Global Mobility Practice.

This article appeared in the January/February 2014 edition of Benefits & Compensation International (Volume 43, Number 6). Reprinted with permission.

BY VINcE cOrDOVa, ED haNNIBaL, aND STEVE NUrNEY, MErcEr

When Worlds collideMultinational employers with globally mobile workforces have been relying increasingly on tailored local Plus compensation packages for international transfers. in these packages, expatriates are not compensated so as to make them whole with what they might have earned in their home locations (the traditional Balance sheet approach). instead, they are remunerated based on norms in their host locations, plus a number of add-on allowances (often tem-porary) to make the move more fair and attractive – generally, these allowances can include tax preparation support, housing, education, and sometimes pension support.local Plus (also known as “host plus”) has been in place long enough for us to note a number of inevitable inequities among the ways expats in different host locations are treated, and we delve into those inequities below.

specifically, we take a careful look at how local Plus assignments fit into over-all mobility philosophy. Both business leaders and mobility managers need to have honest discussions about the trade-offs involved in introducing local Plus packages while maintaining home-country approaches. Two main sorts of inequities present themselves: (a) those that can result when a multination-al’s assignees come from widely varying home locations, some from lower-compensation structures than others; and (b) regional differences in local Plus practices (for example, assignments within Asia).

hOW TO haNDLE LOcaL PLUS INEQUITIES

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Below, we consider some of the challenges involved in implementing local Plus compensation practices, including in communication, equity, retention, and repatriation, particularly for expatriates sent where host-based compen-sation is higher than in their home countries.

Based on our experience in structuring and helping multinational employers administer local Plus programs around the world, we advise that the expatri-ate compensation philosophy and the organizational culture adapt to accept and accommodate the inequities in different compensation practices and rec-ommend that transparency and effective communication be paramount in the successful implementation of local Plus programs.

locAl Plus on The risediverse macroeconomic factors have increased multinational employers’ use of local Plus compensation for their expatriate workforce. continuing global-ization, the easing of the worldwide downturn, the mismatch in talent pools among countries, and a younger workforce eager to add international experi-ence earlier in their careers have all led many employers to change their mix of compensation strategies in the last few years. The traditional home Balance sheet approach still dominates for typical assignments of limited duration, but our surveys indicate that mobility patterns have changed with the increase in the number of locally hired foreigners, one-way indefinite international trans-fers, and other types of assignments, making it no longer the default approach. our 2013 survey of alternative international assignment policies indicates that 42% of employers already have a policy for local Plus assign-ments, and another 23% are developing one – so almost two out of three employers are addressing this form of expatriate compensation.1

some regional differences exist, which we will address in more detail below. While 39% of employers worldwide already use local Plus compensation, the percentage in the Americas is only 29%, but rising to 49% among employers based in the Asia-Pacific region. (Part of this difference may be due to the united states’ tax policy of taxing its citizens’ income wherever it is earned in the world, while other countries do not.) We also see variations among industry segments, with more than 40% of employers headquartered in the Americas in technology, financial and professional services, and engineering and construction making use of it, with less use among energy and manufacturing companies.

Which expatriate employees are usually put on a local Plus package? The most common types are permanent transfers (four in ten employers surveyed), expa-triates being localized (one in three employers), and locally hired foreigners (three in ten employers).2 And why is this? Most employers, across regions, cite a desire to control the costs of their mobility programs, along with the goal of maintaining market competitiveness and a pay philosophy that emphasizes local equity. less important goals include taking advantage of lower host-loca-tion taxes and decentralizing expatriate management.

1 Mercer’s 2013 Alternative International Assignments Policies and Practices Survey.

2 Ibid.

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WhAT ABouT The equiTies of locAl Plus?here’s where things get interesting – and, sometimes, contentious. While the Balance sheet approach (the historical default) is great at maintaining equity among employees vis-à-vis the home location, it can cause friction at host locations when expatriates’ compensation is noticeably higher than that of local employees in similar positions. conversely, localizing employees (that is, putting them on the same compensation schemes as in host countries, with no extra allowances) obviously maintains equity between expatriates and locals, but it may not provide enough incentive for high-potential employees or senior managers to take positions away from home. local Plus can some-times split the difference on some measures of equity:

Balance Sheet Local Plus Local

Equity vs. home location

Equity vs. locals

Equity among foreign nationals N/A

Ease of administration

Global consistency

Applicability to all locations

Typical cost of package

Ease of repatriating/seconding

Higher Varies Moderate Lower

What local Plus brings to the mix is a higher sense of equity among foreign nationals working in the host location, along with ease of administration. however, the challenges employers must face head-on include the lack of global consistency and the difficulty in repatriating or seconding expatriates put into the field on local Plus packages.

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locAl Plus And overAll MoBiliTy PhilosoPhydepending on a multinational employer’s size and how long the company has employed expatriates, its global mobility program can operate as an isolated outpost within the hr function, as an integrated part of a robust talent man-agement function, or somewhere in between those extremes. ideally, of course, global mobility is considered as an extension of an employer’s talent management strategy, deploying employees to host countries pursuant to a consistent program that matches people to positions based not only on talent but also on value to the business.

Many employers have found that classifying their employees using this four-box model3 helps them sort out who should go on what type of assignment:

3. Talent DevelopmentTarget Employees: • High-poten�al employees

Business Purpose:• Strengthen leadership pipeline• Interna�onal learning and

development

Low Business Value High

1. StrategicTarget Employees: • Senior leaders & business cri�cal

Business Purpose :• Strengthen leadership pipeline• Fill mission cri�cal roles• Deliver specific, strategic business

results

4. Employee Ini�ated Target Employees: • Career-building volunteers• Employee-ini�ated move

Business Purpose :• Personal development • Fill an interna�onal vacancy

2. Skills TransferTarget Employees: • Key professionals, technical experts

Business Purpose :•Meet a business need• Provide specialized knowledge to fill

local gap

High

Talent Value

Low

Using this model makes it simpler to consider which candidates should get full home Balance Sheet treatment, which should be localized immediately, and which qualify for some intermediate treatment, including Local Plus.

3 adapted from Global Mobility: The New Business Imperative, Mercer 2012.

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sorting expatriate candidates into these four boxes allows global mobility managers to apply assignment policies consistently, thereby minimizing unequal treatment. here is how we sort out which policies might apply based on where a candidate fits in this schema:

Expat Expat Light Local Plus Local Short-term

Dura�on 1–5 years 1–5 years Indefinite Indefinite 1–12 months

Comp and Payroll Home Home Host Host Home

Benefits Medical/Re�rement Home Home Host Host Home

Repatria�on Plan Yes Yes No No Yes

Posi�on in Four-Box Model 1 2, 3 1, 2, 3 2, 3, 4 1, 2, 3

1. Strategic 2. Skills Transfer 3. Talent Development 4. Employee Ini ated

The virtue of local Plus is that it can be used in three out of the four quadrants, and adapted for use whether a move is considered strategic, a skill transfer, or talent development. however, it is these adaptations that can lead to potential inequities in how expatriates in one country are treated compared with those in another country. consider these seven important benefits (allowances) that an employer might want to ration based on assignment type:

Misc Relo allowance

COLA X X Per Diem

Host Housing X

Home Leave X X

Tax Equaliza�on X X

Tax Prep Assistance ≤ 2 yrs ≤ 2 yrs

Dependent Educa�on X

Core benefit Discre�onary benefit (Flex) X Not applicableCore but scalable

X

Expat Expat Light Local Plus Local Short-term

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for senior, strategic moves, it may still be a sensible policy for the employer to provide all the benefits shown under the expat heading, from relocation to transportation in the host location, as “core” benefits. conversely, truly local-ized expatriates might get only a scaled-down relocation allowance and tax assistance for up to two years. Just to the left of fully local treatment is where local Plus appears. in this case, the only allowance the employer makes above a straight localization is for discretionary housing assistance in the host coun-try. other employers might make up a different menu of benefits and allowances, but this sort of matrix can prove invaluable to home-based deci-sion makers, local business leaders, and the global mobility team charged with crafting specific packages for each expatriate candidate.

BuT noT All hoMe-To-hosT Moves Are equAlobviously, moving a senior software engineer from dallas, Texas, to Manila is different from moving a senior software engineer from Manila to dallas. Although the two cities are comparable in population, their cost of living and quality of living vary significantly. it would be a challenge to devise a host-based package for the American expatriate that would be attractive enough for a senior professional to accept.

conversely, putting a filipino engineer on a host-based compensation pack- age with dallas as the base might mean a doubling or tripling of base salary. depending on the expected length of stay, it might make more sense to give larger housing and schooling allowances for the dallas-bound expatriate from the Philippines rather than to bump the salary up to the local level.

When differences in net income are low between home and host locations, it is easier both to construct local Plus packages and to induce talented employ-ees in the home location to accept those packages in the host location. however, employers need to proceed with caution when the disparity in home and host incomes is significant.

in a move from the united states to the Philippines, the expatriation candidate is not likely to want to accept a dramatic reduction in pay – but keeping that employee on his/her home-country compensation base will result in signifi-cant inequity at the host location, which can prove challenging to manage. in the case of a move from a low home-net-income environment to a high host-net-income environment, as with a move from india to switzerland, the employer might pay more for a local Plus package than for a traditional home Balance sheet package. further, the employer should expect to encounter sig-nificant repatriation problems after the assignment ends, as the expatriate may again resist a major pay cut just to return home.

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inTrA-regionAl ProBleMs: The AsiAn exAMPleAmong global regions, Asia is the one that has seen the highest uptake in the use of local Plus compensation packages for assignees. yet Asia presents some interesting challenges for employers designing local Plus packages, and those challenges vary depending on whether the movement is to (or from) higher- or lower-compensation locations.

several high-compensation Asian locations, particularly hong Kong and singapore, have traditionally attracted expatriates from developed markets. so, when transferring expatriates to these locations, a local Plus approach may bring with it some incentives to help address cost for these expatriates (for example, housing allowances) along with some intrinsic benefits, such as being able to take advantage of lower tax rates when compared with other home-country expatriates on a home-based, tax-equalized Balance sheet approach.

for expatriates moving to developed Asian locations from emerging markets, especially from lower-compensation countries within the region, the offer of increased compensation on top of a local salary may not be necessary, because employers may perceive that the increase in overall pay is sufficient to attract and retain those employees. As employees move to these more cosmopolitan locations, employers may perceive that the assignees will also be enjoying an improvement in quality of living, which may create an additional incentive they value intrinsically – an additional incentive to accept an assignment.

conversely, where expatriates are moving into emerging Asian markets, the lower compensation level paid to local nationals and the perceived reduction in quality of living compared with the home location may create significant, even insurmountable, barriers for alocal Plus approach for employees from developed markets. for assignees coming from lower-compensation markets, the plus elements on top of host compensation may be perceived as more meaningful, but may also be harder to determine and to manage equitably.

These factors and others, such as dissimilar economic treatment for expatri-ates/non-nationals by governments in some locations (for example, housing market differences and restrictions in singapore and china), have resulted in employers’ devising a number of hybrid approaches in Asia that mix elements of local Plus and the traditional Balance sheet approach and that vary greatly by host location. This creates additional challenges in trying to develop locally competitive and regionally consistent practices for expatriate compensation outside a traditional Balance sheet approach in these markets. obviously, it also complicates overall administration of assignment policies worldwide.

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hoW iMPorTAnT is equiTy?Whether putting a higher percentage (or number) of expatriates on a local Plus compensation program makes sense for an employer depends on how important equity is as a key driver of the employer’s overall talent manage-ment and expatriation strategies. Where the employer’s headquarters are based can be a factor, as more employers based in europe than in the Americas currently use local plus as one of their alternative forms of interna-tional assignments.

To an extent, the issue may turn on which end of the telescope one looks through. if “equity” means keeping a talented employee whole when moving him/her from a relatively high net-income home country to a relatively low net-income country, then local Plus may not be the right strategy, and the employer may want to look at some other remuneration approach, including the expat Balance sheet form, to a headquarters-based program, to an “inter-national scale” that relies on some regional formulas for equity, to the newer “expat light” programs (more allowances than local Plus but far fewer than in the “expat plus” scenario). however, if “equity” means that the employer maintains some sort of level playing field at each host location, regardless of where expatriates have moved from to get there, then local Plus may make much more sense. Additionally, if “equity” means keeping costs under control so as to maximize short-term returns to share-holders, this imposes its own constraints on how “rich” an employer’s overall expatriation packages can be.

The important thing is transparency. After aerating this issue fully with senior managers at headquarters and with business managers in the major host locations affected, the employer may just need to articulate its strategy and recognize that there is no such thing as “universal” equity. What is fair to an individual may result in disparities in some host locations, while trying to mini-mize those local disparities will inevitably result in some perceived inequity by some expatriates. Whether those perceived inequities are enough to discour-age the right talent from traveling to host locations where their expertise is urgently needed makes this a complex calculus indeed. however, it is better to struggle openly with equity issues than to engage in ad hoc decisions on individual compensation packages that result in bad morale, failed assign-ments, and missed business opportunities.

coMMunicATe To MAnAge exPecTATionshowever a multinational employer’s expatriation strategy evolves – and par-ticularly if an employer will be relying more on local Plus compensation going forward – the employer’s hr team, global mobility managers, headquarters-based senior managers, and local business managers all need to be singing from the same songbook when they explain assignment policies both to can-didates and to existing expatriates.

if employers adopt (or change) their strategies for classifying candidates based on a four-box model, they need to be clear about how that sorting is done and what candidates can expect based on that classification. global mobility managers need to be told which benefits and allowances are “core” ones that should be included automatically, which ones are flexible (and with-

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in what ranges), and which ones are not given to candidates in specific categories. care should be taken when naming categories and crafting poli-cies so that even lower-level assignees have a sense that their careers matter and that they are being sent to share their expertise.

unless it is clear at the outset of an assignment that the goal is ultimately to localize the assignee, employers should consider repatriation issues early and often. We are continually surprised at the number of employers who fail to plan for repatriation – and who consequently lose all the benefit of what their expatriates learned while in their host locations. if they don’t have a career path that leads back home, they are likely to be recruited away while in their host locations.

noW WhAT?even though many employers are moving back into growth mode after a time of recession, managing costs will continue to be a primary corporate impera-tive – especially for employers who are competing for talent on a global stage. And the cost of a traditional expatriate package for a senior manager in a high-end location can be three or four times that manager’s compensation at home. so multinational employers need to consider alternative international assignment programs, including local Plus, to rationalize their overall human capital costs.

local Plus is becoming an increasingly important tool in the global mobility manager’s toolkit for structuring reasonable compensation – but, depending on the home-host combination, it can result in perceived inequity either to the can-didate being asked to move or on the ground at the host location. recognizing this built-in potential for inequity, articulating the reasons for the overall assign-ment strategy, and explaining it clearly to both expatriates and local business leaders can go a long way to defusing tension and bolstering the success of for-eign assignments, whether they are developmental or strategic.

for further information, please contact your local Mercer office or visit our website at:imercer.com/mobility

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