Segmentation: Divide to Conquer

By Olivier Meier

The global economy is still fragile, emerging unevenly from the recent serious recession. Employers are still keen to control costs, but fearful that they will miss opportunities if they don't support foreign operations by staffing them with enough expatriates. How can employers optimise their expatriation programme while minding costs? Segmentation.

Segmenting your assignees by type of assignee, and type of assignment can help you see differences that may deserve different expatriation packages. Preparing a matrix of expatriation packages and their elements, matched to the assignees and assignments you have segmented, can help trim the cost of some packages and concentrate your efforts on key assignments. Changing your expatriation programme accordingly can take some time, but it can also result in a leaner, more optimised expatriation programme.

Why one size doesn't fit all any more

Back in the early 1990s, multinational corporations saw themselves as needing simply to choose between expats and locals. They expected that, where they initially used expats, they could eventually replace them with locals, reducing the complexity and cost of assignments. Ten years later, the number of expats had grown, but the one-size-fits-all approach to expatriate remuneration was already being challenged. Traditional assignments were being supplemented with shorter assignments, local hiring, more junior assignees and an increase in "global nomads" – assignees who moved from assignment to assignment without coming "home."

In 2011, expats are still a fact of business life – indeed, even more so, as globalisation continues apace and developing and emerging markets increasingly host and despatch international assignees. Short-term, project-based and commuter assignments have proliferated, and moves are increasingly employee-initiated or used for developmental purposes. This ferment has created a multitude of different situations that challenge monolithic policies. Cost is an issue, but management and HR teams could use their requirement for a more global cadre of employees, at manageable cost, as an opportunity to become more strategic and to set up well-defined assignee and assignment categories that are also integrated with the organisation's reward and talent management strategies. This strategic approach also allows companies to reduce the number of policy exceptions requested and granted – a major cause of spiralling costs.

Tailoring expatriation packages more snugly to the type of assignee and assignment requires that you first segment your assignees and assignments by type. The best mobility policies are based on a matrix of different criteria. We outline examples of the principal ones below.

Step 1: Segmenting by type of assignee

Assignees work outside their home countries for a wide variety of reasons. Segmenting them by type may reveal opportunities to deploy your limited human capital budget more strategically.

Strategic moves. You need to move some people – principally top-level executives crucial to success in a new territory and employees with vital skills – regardless cost. These strategic employees often have an expensive lifestyle and high expectations, so you need to provide a comprehensive package with benefits and allowances that are well differentiated from those of traditional expatriates. Because these expatriates are the most likely to negotiate ad hoc deals and trigger exceptions to the common policy, you may want to consider creating a well-defined category for them and provide them with a comprehensive expatriate package to reduce the number of individual negotiations.

Global nomads. Global nomads move from one host location to another without returning "home." Constantly on the move, these employees lose the link to their home location. They may be sent by their company, they may be marketing themselves globally, or they may be a local hire (a German recruited in Shanghai, for example, or a Brit in Dubai) or a returnee (a Chinese/American hired by a company wanting to set up an operation in China). What unites them as a group, however, is that they do multiple assignments, the link to their home country – and even the definition of "home" – is unclear, they have an international lifestyle, their base pay reflects their previous assignment and doesn't always follow a clear home or host pattern, and they have specific, complex pension, healthcare and work permit concerns.

Developmental moves. These are moves made to give an international experience to trainees, very junior employees or future leaders. Because these people are usually motivated by the learning and career development opportunities involved in an assignment, you can limit or share the cost with them, providing an "expat light" type of package. But in such cases you do need to manage their expectations.

Intra-regional moves. Intra-regional moves are proliferating as companies seek to rely on local talent and contain costs. For such assignees, you can often justify local or local-plus packages rather than the traditional balance sheet approach, particularly if the individuals themselves have cultural, pension or tax-related reasons to move.

Opportunistic moves. These moves are requested by employees (of any level) themselves. Such moves are not business-critical, so employees will bear most of the cost and the company doesn't provide the ongoing support that it would for a traditional assignment.

Another factor to take into account is age: different generations have different expectations. Younger employees tend to be single and more mobile (and therefore, less expensive to move) than older employees with families.

Whatever criteria you use, segmentation must be objective. For example, many employees consider themselves to be more "highly strategic" (or international) than they are – and the only way to establish that is by working closely with talent management teams. Mobility, talent management and reward have historically been managed in silos, but employers have started to adopt a more integrated approach over the past two or three years, improving the success of their mobility strategies as a result. Mobility teams should rely on talent management teams to determine which people in the organisation should populate their different segments and to ensure that developmental moves are part of a well-defined development programme.

Step 2: Segmenting by type of assignment

Differentiating among assignments by type can reveal other opportunities to tailor specific compensation elements more carefully to individual needs.

Short-term assignments are growing faster than traditional long-term assignments, because they are seen as more flexible, easier to manage and (sometimes) cheaper. They typically last between six months and a year, and are undertaken without families. Packages typically include daily allowances or a cost-of living-allowance, full housing costs, sometimes a mobility premium or hardship allowance and home leave. But only 40% of respondents to Mercer's 2010 international assignment survey agreed that it is easier to motivate employees to go on short-term than long-term assignments, because they still split families. Moreover, only 50% thought short-term assignments were easier to manage because of the difficulties of tracking and managing short-term assignees.
Commuter assignments. Definitions vary between companies. Some commuter assignments are Monday to Friday; others comprise two days in one location, two days in another; yet others are one week on, one week off, and so on. But they are increasingly popular because they are less disruptive to family life than other assignment types, and their success is being more carefully tracked. Commuter assignments typically last up to two years, except when they are initiated by employees, when they may continue indefinitely. Arrangements differ: while accommodation is usually fully covered, assignees will receive either a daily allowance or reimbursement of costs as per the company travel policy. While only 25% of companies pay a mobility premium to commuters, around half provide a hardship allowance.
Using locals. Localisation (remunerating assigned employees as though they were local employees in the host country) is increasing, and relies on different approaches depending on locale.

Using a decision tree can help you determine the best approach in each country: flexibility rather than rigid rules are critical to success. And how you localise is critical: elements such as housing and education are sensitive matters that can evoke strong opinions from assigned employees. Forward planning is essential.

Step 3: Introducing flexibility into expatriate packages.

Companies are increasingly introducing different type of packages for the different categories depending on the nature of the assignee and the assignment. A great deal of flexibility is possible by mixing different approaches or even by tweaking the traditional balance sheet approach. For example, a Swiss expat may cost over EUR 500,000 doing the same job in Shanghai as a local earning just EUR 42,000, but there is a vast range of remuneration package options between those two extremes. It is even possible to differentiate between different types of "locals" – for instance, local could mean local Shanghai, a foreigner hired in China, an expat from Hong Kong or an expat from the West.

You can significantly improve your management's ability to make informed decisions about expatriation by presenting a matrix of different options for each role. You can also generate more interesting and productive discussions of the specific expectations for each role than when working out a package for someone who has already been selected for a role.

Step 4: Implementing the segmented policy components

Before acting on the results of your segmentation analysis, you must consider your company's unique culture, its history, and employee attitudes. While benchmarking can be extremely valuable, you shouldn't simply try to replicate what others are doing. Nor should you underestimate the challenges to overcome, the time required, or the importance of bringing key stakeholders through the process with you.

Don't try to do too much too fast. Prioritise the change areas and phase implementation. Depending on your corporate culture, it can take four to five months to define the concepts and prepare the policy, another six months to start to implement it, and another 18 months for it to be fully operational. So when you embark on a segmentation strategy, manage people's expectations by making it clear that it won't happen straight away.

You shouldn't combine the development of a new segmented policy with a massive outsourcing exercise either: you need to retain control of the policy and how it is communicated.

You can help to ensure the success of the new policy by aligning segmentation with talent management and gaining support from the talent management team. Seeking approval of the key principles from top management early in the process is also critical, as their endorsement helps to secure the buy-in of the rest of the organisation and encourages good governance.

It is also important to establish advisory committees involving home and host HR, top-level expats and management. Establishing a clear transition process is helpful too, whereby the new policy applies to new expats and you buy out those expats who resist change. You also need a steering committee to manage the policy, track exceptions and settle contentious issues. The danger of segmentation is that, although you gain approval for the principle, after one or two years you may start having "negotiations" – or too many exceptions – and the policy starts to fall apart. Strong governance guards against this danger.

Remember that job roles can be segmented whatever the industry. In the oil and gas sector, for example, you have to do something different for rig managers – the top 200 or so in the organisation who command a global market rate of pay for their skills – because they must move from project to project based on where the rig will be positioned. These people are, effectively, global nomads, and need higher benefits than those that standard policies deliver.

Similarly, in the hotel industry, you can and should differentiate between those who manage the most luxurious hotels in the world and command a global market rate of pay for their skills, and those who manage a budget chain.

Conquering after dividing

Adopting a segmentation approach to expatriate compensation does not mean that you won't still have strategic players who need relatively expensive, customised, balance-sheet-dependent approaches. But, within a carefully considered global mobility segmentation policy, you can still handle those special employees without increasing your overall mobility costs.