More resources in the Global Mobility Knowledge Center

Getting a grip on mobility costs

By Christa Zihlmann

Global mobility is getting increasingly expensive. On average, the differential between the typical remuneration of someone based at home and an expat has grown from between 1.5 times and four times ten years ago, to between 1.5 times and six times today. This, in itself, is costly enough – and businesses have justified the expense by the difficulty they have in finding suitable candidates for international assignments.

But more worrying is the fact that many organisations are throwing money away on their international mobility programmes because they have little idea of how much they really are costing them, the number of expats they employ, nor the kind of packages those expats are on.

It's not surprising, therefore, that one of the prime concerns of respondents to Mercer's most recent International Assignment Survey (2010), which canvassed the views of 260 companies, representing 65,000 expatriates, across the world between September and December last year, was that current conditions are too costly.

The recession has forced organisations to scrutinise all aspects of their costs, including paying long-overdue attention to their international policies and guidelines, many of which were framed for a much simpler world where costs were relatively transparent and controllable. Some 36 per cent of respondents to the survey had reviewed their international assignment policy over the previous 24 months, 41 per cent were in the process of reviewing it, and 14 per cent were planning to review it. The exercise is revealing surprising results – and saving them considerable sums of money into the bargain, as the case study on the French energy company below highlights.

Why have international mobility costs risen?

The rapid growth and globalisation of business over the past few years has considerably increased the complexity and expense of sending people on international assignments.

Not so long ago, companies typically had national policies, expatriating people almost exclusively from their home country to different destinations. They have had to adapt such policies to a global workforce, leading them to expatriate upwards of 30 different nationalities. For example, one large multinational counts nearly 70 different nationalities among its expatriates.

What's more, while an expatriate would usually carry out an assignment and then return home, these days individuals frequently move from subsidiary to subsidiary, necessitating, among other things, expensive international pension and health plans.

In addition, a number of new and very expensive destinations have developed. Companies expatriating employees to 'hardship locations' such as Russia, India and Nigeria, for example, have to pay high housing and schooling costs in addition to 'hardship premiums'.

One of the silver linings to the recent global financial crisis and recession is that the candidate pool for international assignments has slightly deepened, with some candidates eager to move to countries or regions less affected by the crisis than their own.

But armed with thorough knowledge of who they have working for them, where, and how much they cost, companies can reap financial savings that were theirs for the taking years ago.

How to get more bang from your international relocation policy buck

Cut the number of expats.
Do you really need to send an expat to a particular destination, or could you instead either find someone locally or move someone from a subsidiary where costs are not as high as they are in your home country? For example, it is expensive to send someone from the UK to Azerbaijan, because of its high 'hardship' factor, but sending someone from Turkey, which has a similar hardship profile, would be far less expensive because base salaries in Turkey are likely to be lower than in the home country, and all allowances are linked to salary.
Reduce, or eliminate, exceptions.
Benchmarking studies Mercer has conducted show that around 65 per cent of companies regularly make 'exceptions' to their existing policy – that is, they offer more than their guidelines recommend, usually because of the difficulty of attracting people to particular destinations and jobs. Making exceptions can typically add between 25 per cent and 50 per cent to an individual's package, so making no exceptions would reap considerable savings in itself.
Make assignments part of career development.
Expatriates aren't motivated by money alone, and companies find that forging closer links between international assignments and career paths and management can reduce costs.
Segment your global mobility policy.
Many international companies are doing this, rather than sticking with the one-size-fits-all approach. This might accommodate more voluntary moves – so for example, you could design a package for the experience-hungry younger generation that is far less costly than the packages you offer to key strategic people with particular skills. People nearing the end of their career are also sometimes willing to take lower packages.
Take advantage of falling housing prices.
In places like Dubai, London, Singapore and Moscow, the financial crisis has triggered house price falls of between 50 and 60 per cent, offering the potential to renegotiate rents with landlords.
Borrow from elsewhere.
Look at how other regions manage their expatriates. In places such as Africa and the Middle East, for example, companies tend to pay 'normal' packages, and then award a 'success package' once an assignment is completed. Some policies stipulate that if the assignment is not completed, the expat has to pay back part of the relocation expenses, even though this is more of a threat than actual practice.
Get a grip on tax issues. Some companies have lost money through not clearly specifying what is included in their 'tax equalisation' policy, which guarantees an expat that they will never pay more tax while on assignment than they do at home. But such policies have often been loosely implemented, and included elements such as a partner's income, or exercised stock options.
Reduce the number of perpetual expatriates.
The maximum length of a typical expat assignment is five years, but many companies have had people working abroad for ten, 15, or even 20 years, on very high salaries. While transferring people onto the local salary is usually impossible, you could phase out some of the less necessary allowances – or indeed, replace the expatriate with a local. Our recent survey shows companies are increasingly favouring short-term over long-term assignments, with the use of locally-hired expatriates also rising.

Nevertheless, despite the need to reduce costs, expatriation is still very important for international companies. They need people working abroad. The trick to getting more bang from their international mobility buck is to be clearer about how many expats they really need, what sort of individuals they need, and to pay much closer attention to how they prepare those individuals for their assignments, and how they reward them. They may well end up with fewer expats, but on more attractive packages.

2010 International Assignment Survey – what has really changed?

Cost of living allowance has fallen to more 'realistic' levels in many regions and industry sectors.
Housing allowances have become less generous.
Hardship allowances remain largely intact, particularly in the Middle East and Africa.
European companies are increasingly sending the children of their international assignees to home instead of international schools.
Home leave is being taken largely via economy class.
Short-term assignments are growing more quickly than longer-term ones, as has the number of locally-hired expatriates.

CASE STUDY

A European energy company asked Mercer to undertake a market benchmarking study to see if it was paying its expats fairly and competitively. Mercer suggested that it looked at the total costs of is global mobility programme, which featured 20 major city combinations. The exercise revealed some surprising findings.

The four most expensive city combinations (four times more costly than the other city combinations) covered 60 per cent of the expatriate population – something the company had been completely oblivious to.
Forty-five expats had been on the full expat package for over 15 years – again, the company had not fully realised this due to their decentralised HR services
The global policy was being interpreted very differently in the different regions, leading to very different outcomes. They were all using the 'balance sheet' approach – that is, one based on home city salary, with allowances – hardship, cost of living, housing and so on – built on. But, for example, in Asia, the company was taking the local salary as the starting point, whereas in the Middle East, housing, schooling and travel allowances were all included in the local salary, so the company was, in effect, paying such allowances twice.
The company didn't even know how many expats it had – it believed the number was somewhere between 1000 and 1500, but the actual number was 1500.

Armed with this knowledge, the company was able to cut its costs considerably.

They phased out the packages of the 'eternal expats'.
They looked to use more local hires in the very expensive total cost destinations.
They organised training and a handbook to standardise compensation approaches across the different regions

About the author

Christa Zihlmann is a principal in Mercer's Global Mobility business unit based in Geneva. She can be contacted at +41 22 869 3054 or christa.zihlmann@mercer.com.