Mercer Expat Best

www.mercer.fr

GoodMove2011 Managing the Costs and Financial Risks of an Expatriate Assignment

30 May 2011

John Hall, Paris

1 Mercer

GoodMove2011 Compensation & Benefits -- Agenda

Introduction

Mobility structures from a C&B perspective

Compensation package

Benefits Package

Repatriation and Localization

Introduction to Expatriation Management

3 Mercer

current mobility management practices – growing complexities

Different types of assignment

Different home and

host combinations

Impact of culture, management

perspective

Economic realities –

dual incomes

Legal and other considerations

Worldwide countries

Time zones

Nationalities and languages

Government system

Growing number of employees

transfers from/ to different

countries

How to compensate those

employees

How to guarantee equity

How to repatriate them back to

their home country, e.g. India or

China

What motivates them

Family issues

4 Mercer

The Key Trends

More assignees • Emerging v developed

countries

• Tolerance of pay

differences Greater variety of

assignment lengths

and types: Short-term,

Commuter, Rotational

More diversity

amongst assignees • Male/female

• Range of nationalities

Concerns about talent

management,

recruitment and

retention

Focus on

Return on investment

Increasing resistance

to mobility due to: • Dual-career concerns

• Work-life balance

• Family issues

Greater range of

destinations including

some with significant

security and hardship

issues

Focus on Cost

Management

5 Mercer

How has the number of international assignees evolved over the past 2 years?

0

10

20

30

40

50

60

70

80

90

Locally

hired

exp

atria

tes

STA

LTA

Com

mute

rs

Rot

atio

nal A

ssig

nmen

ts

Con

trac

t em

ploye

es

Glo

balis

ts/c

aree

r ex

patria

tes

Increased Stable Decreased

Source: Mercer’s 2010 International Assignment Survey

6 Mercer

Number of expatriates by industry How has the number of expatriates evolved in the past 2 years?

%

0

10

20

30

40

50

60

70

Increased

Stable

Decreased


7 Mercer

What are the concerns of company's management regarding their current mobility program? Industry-specific overview

0

10

20

30

40

50

60

70

80

90

Che

mic

al/P

harm

a/Hea

lthca

re

Con

sum

er

Ene

rgy/

Eng

inee

ring

Fina

ncia

l

Indu

stry IT

Pro

fess

iona

l se

rvic

es

Shi

ppin

g/Airl

ines

Current conditions are too costly Finding suitable candidates for assignments

Inability to use gained experience upon repatriation Current conditions may not be attractive enough

%


8 Mercer

Complexity of designing the right expatriate compensation model

First Overseas

Operation

Few Overseas

Operations

Growing International

Maturity

Worldwide

Integration

Nationalities of

Expatriates

Expatriate

Compensation Model

9 Mercer

How expatriation has evolved Business drives the changes

Phase 1 Phase 2 Phase 3 Phase 4

First overseas operations

Few overseas operations

Growing international maturity

Worldwide integration and planning

Nationality of Expatriates

All from the parent company

Majority from parent company, a few TCNs

Parent company nationals increasingly replaced by TCNs

Global talent sourcing and less emphasis on nationality

International Policy

Individual negotiation

One policy for parent co. nationals and different policy for others

Policy tested by changing organizational needs

Centralized policies

Same policies for all regardless of nationality

Compensation

Home salary plus or Host salary plus

Same – with growing inconsistencies

Differentiation by purpose, duration and nationality.

Compensation policy that supports assignment patterns

10 Mercer

Management’s view of expatriation has evolved and so have the numbers

Phase 1 Phase 2 Phase 3 Phase 4

First overseas operations

Few overseas operations

Growing international maturity

Worldwide integration and planning

Management’s view

Find someone we can trust to get the job done.

Something we need to do to grow internationally.

How to use the international experience, bring expertise back to headquarters.

Cost concerns

Alternatives

Programs to develop global talent

Global talent sourcing

Redefinition of expatriation – where is the value to the firm

Numbers

Insignificant Insignificant Less than 1% 1%-3% of staff (and 3 to 6% of total employment costs)

11 Mercer

Defining Mobility

11

12 Mercer

Reward and Talent Design Segmentation

1. Business Leadership TALENT LINKAGE

REWARD DESIGN

Changes/Recommendations

2. Filling Critical Skill Gap TALENT LINKAGE

REWARD DESIGN


Capabilities/Skill Requirements: clearly defined and validated

Primary talent linkage: successor development expectations

Talent indicator: meet talent criteria (meets/exceeds performance, high potential)

Development support: Cultural advisor, plan for developing others, personal development plan, cultural awareness training

Home based salary & benefits

Highest level of rewards benefits


Talent linkage: optional, mentor recommended

Talent indicator: meet minimum criteria (meets performance goals)

Development support: cultural awareness training recommended


Moderate level of rewards benefits

Cultural development/ assignment readiness assessment

Spousal/Family Allowance

Misc. Relo Allowance

Lang/Cultural Training

Guidance for self-directed development options



Lang/Cultural Training

Link to talent management (talent review, performance management, development & succession planning)

Synchronize with staffing/workforce planning

Career planning, next move and repatriation planning and tracking

Mobility Premium Cash Award

Host Housing ~ ‘expensive’ level housing accommodation budget

Efficient Purchaser Index (EPI)

Hardship Allowance (where appropriate)

Rest and Relaxation (where appropriate)


Repatriation planning

Host Housing ~ ‘moderate’ level housing accommodation budget



Rest and Relaxation (where appropriate

PA

CK

AG

E

ON

E-T

IME

O

NG

OIN

G

13 Mercer

Reward and Talent Design Segmentation

3. Leadership Dev. (High Potentials) TALENT LINKAGE

REWARD DESIGN


4. Emerging Talent (High Potentials) TALENT LINKAGE

REWARD DESIGN



Primary talent linkage: successor development expectations

Talent indicator: meet talent criteria (meets/exceeds performance, high potential)

Development support: internal advisor/mentor, plan for developing others, personal development plan, cultural awareness training

Home Based salary & benefits

Moderate level of rewards benefits


Talent linkage: optional, mentor recommended

Talent indicator: meet minimum criteria (meets performance goals)

Development support: optional, cultural awareness training recommended


Minimum level of rewards benefits

Assessment (setting development priorities and supporting steps)



Language/Cultural

Guidance for self-directed development options

Misc. Relo Allowance (less than levels 1-3)

Cultural as necessary

Link to talent management (talent review, performance management, development & succession planning)

Synchronize with staffing/ workforce planning

Career planning, next move and repatriation planning and tracking

Host Housing ~ ‘moderate’ level housing accommodation budget



Rest and Relaxation (where appropriate)


Repatriation planning

Host Housing ~ ‘less expensive’ level housing accommodation budget

International or Mean to Mean G&S index

PA

CK

AG

E

ON

E-T

IME

O

NG

OIN

G

14 Mercer

International assignment program goals

Ranked in level of importance to company:

1. Supporting the company’s business objectives while ensuring policies can be easily adapted to changing business positions

2. Ensuring assignees are kept whole and treated fairly and equally

3. Controlling overall program costs and ensuring a return on investment

4. Attracting and retaining assignees by maintaining competitiveness compared to other companies

Source: Mercer 2010/2011 Worldwide Survey of International Assignment Policies and Practices

Expatriate compensation approaches

16 Mercer

Expatriate Compensation Approaches

Home-based balance sheet

Host-based approach

Host approach

Hybrid / best of home & host

HQ-based balance sheet

Host / local plus approach

International and regional structures

Home-based approach

Home approach

17 Mercer

Host Country Approach Salary aligned with local salaries in the host country

Home Salary Host based salary

(pure local)

18 Mercer

Host Country Approach How do compensation levels compare globally?

IPE 54 Regressed Median in EUR

0

10'000

20'000

30'000

40'000

50'000

60'000

70'000

80'000

90'000

Vietn

am

Indo

nesia

Bulga

riaIn

dia

Ukr

aine

Philip

pine

s

Thaila

nd

Malay

sia

Chin

a (B

eijin

g)

Mex

ico

Russ

ia

Kor

ea

Taiwan

Por

tuga

l

Singa

pore

Swed

en

Hong

Kong

Bra

zil

Franc

e

Sou

th A

frica

Unite

d Kingd

omUSA

Cana

daUAE

Ger

man

y

Aus

tralia

Japa

n

Norw

ay

19 Mercer

Host country approach

Simple to administer

Ensure adequate pay as local peers

Market driven at job level

Attractive in high salary country level

Responsive to change

No links anymore with the home pay and benefits

Only appropriate in major locations

Barriers to mobility or repatriation

Not equitable or consistent internationally

Local pay and benefits might not be competitive

Advantages

Disadvantages

20 Mercer

Variation of the host approach: Host/Local Plus Approach

Home Salary Host based salary

(pure local)

additional premiums

& allowances

(“local plus”

package)

Housing costs?

Education

costs?

Other

allowances?

21 Mercer

Host country versus local plus approach Example*

Local Plus Compensation Calculation (PC 54)

London, GB to Johannesburg, ZA

Family Status: Married couple with 2 children

Local Compensation Level (ZAR) (GBP)

South Africa Annual Gross Base Salary 596'802 51'477

South Africa Annual Net Base Salary 426'914 36'823

Plus Additional Allowances

Housing Benefit 231'619 19'978

Education Allowance 120'400 10'385

Total Net Compensation in Johannesburg 778'933 67'187

22 Mercer

Local plus approach

Employees are more willing to move on local plus

package in high pay countries or for intra-regional

moves.

Lower cost and lower process requirements

Take the advantage of local tax and cultural aspects,

typically no need for tax equalization

Flexibility for local business purposes

Advantages

23 Mercer

Local plus approach

Difficulties to transfer the employee to some low

paying countries

Can sometimes be expensive without encouraging

mobility

Risk of confusion between expat status/package and

local terms

Disadvantages

24 Mercer

Home Country or Balance Sheet Approach

Quality-of-living

Education cost

Mobility

premiums

Savings and other

expenses

Spendable income

Housing

Savings and other

expenses

Spendable income

COLA

Housing

Housing Allowance

Other Expatriate premiums &

allowances

Net home salary

Net salary in host country

Housing

allowance

Cost-of-

living

allowance

25 Mercer

Host destination: Johannesburg, South Africa* Expat packages with different home countries – PC 51, single

PC 51 Competitive packages

€ 0

€ 10'000

€ 20'000

€ 30'000

€ 40'000

€ 50'000

€ 60'000

€ 70'000

€ 80'000

€ 90'000

Russia UK Netherlands Canada Australia

Net home salary COLA Mobility Premium Hardship Allowance Settling-in Allowance Housing Allowance

26 Mercer

PC 58 Competitive packages

€ 0

€ 20'000

€ 40'000

€ 60'000

€ 80'000

€ 100'000

€ 120'000

€ 140'000

Russia Netherlands UK Canada Australia

Net home salary COLA Mobility Premium Hardship Allowance Settling-in Allowance Housing Allowance

Host destination: Johannesburg, South Africa* Expat packages with different home countries – PC 58, single

27 Mercer

Home country / balance sheet approach

All assignees from same country treated consistently

regardless of the host location

Consistency with home country colleagues

Facilitates repatriation or reassignment

International transfers made simple

Difficult to adapt to local circumstances

Difference nationalities at different pay levels for the same job

Expatriate Compensation packages usually inconsistent with

host local levels

Advantages

Disadvantages

28 Mercer

Home country / balance sheet approach Example 1*

Expatriate Compensation Calculation - London, GB to Johannesburg, ZA

Annual Gross Base Salary: GBP 53'992

Equivalent Job Local South Africa Net Compensation Level GBP 36'823 (ZAR 426'914)

Family Status: Married couple with 2 children

Expatriate Allowances Minimum (GBP) Maximum (GBP Impact on Mobility

Cost of Living Allowance -3'600 0 High

Housing Benefit 17'048 36'227 High

Hardship Allowance 6'749 9'449 Medium

Mobility Premium 0 8'100 Low

Home Leave 3'387 10'160 Low

Spouse Support 0 4'234 Medium

Settling-in Allowance 0 9'000 Low

Education Allowance 12'981 12'981 High

Total Net Value of Allowance 36'565 90'151

Net Base Salary 39'917 39'917

Total Net Compensation in Johannesburg 76'482 130'068

Ratio 1.92 3.26

29 Mercer

Expatriate compensations approaches comparison Example transfer in Johannesburg, South Africa

Net Annual Compensation Levels in Johannesburg

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

Max Expat Min Expat Local Plus Local Plus

In ZAR

30 Mercer

-

10'000

20'000

30'000

40'000

50'000

60'000

J F I B L R Q H N M E D A G C O K P

Companies

Eu

ros

COLA Hypo Housing Other Utilities Mobility Relocation

Home country / balance sheet - example 2 Total net allowances, Frankfurt – Paris / Base salary € 100’000 , married + 2

31 Mercer

Home country / balance sheet approach Variations

Balance sheet based on the actual home country salary of

the employee

The HQ’s country is used as base / reference for all

calculations and all employees

Historical reasons: majority of expatriates come from the HQ

country

Used as “virtual home” for employees for global nomads or

employees from developing countries

Home-based

HQ-based

For moves from high paying countries

Home-based / no balance sheet

32 Mercer

Never below local market rate

Never below home living standard

Review annually

Maintain home reference salary for pension etc.

Hybrid approach, “Best of” solution

Perception of “host pay”

Lead to inconsistency

Administrative burden

Disadvantages

Advantages

33 Mercer

Expatriate compensations approaches comparison Example transfer in Shanghai, China

Net Annual Compensation Levels in Johannesburg

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

Max Expat Min Expat Local Plus Local Plus

In ZAR

34 Mercer

International compensation structure

Competitive international compensation structure based on competitive worldwide pay scale such as USA, UK, Switzerland, Germany, France, Singapore, Hong Kong

Is built on a net base salary adjusted by COLA and grossed up according to local taxes

International structure is consistent, generous, easy to administer and equitable for all career expatriates and recognizes the performance and skill of the employees

The company can source talents from all countries and guarantee attraction and retention of their career expatriates

The international structure is very expensive and few companies will then use this approach

Difficult to repatriate at the end of the career of the international assignee

35 Mercer

Compensation approaches: typical practices

0

10

20

30

40

50

60

70

Worldwide EMEA

Home based

HQ based

Host based

Higher of home or host

Home plus

Host plus

Other

N/A


36 Mercer

Daily allowances Short-term assignments only (up to 1 year) / Commuters

Additional costs paid

by the company

Home Salary Home Salary

Daily allowance

“Per Diem”

Accommodation

Transportation

Food

Laundry

Telephone

Entertainment

Personal Care

(differentiation

between short-

term and

commuters)

37 Mercer

Address business needs

Business solution for specific tasks and projects of

limited duration

Remain on home-country compensation and benefits

programmes

Simple to administer (daily allowance + hotel/furnished

accommodation costs)

Short term assignments

Disadvantages

Advantages

Tax constraints

Family issues

Extension duration risks lead to higher costs

38 Mercer

Alternative and flexibility for family needs (i.e. schooling)

Allow spouse career continuity

Employee returns to home country on a regular basis

Business solution for specific tasks and projects of

limited duration

Popular in Europe and North America

Commuters

Tax constraints

Notion of residency can be questionable

Limitation in duration due to benefits programmes

Disadvantages

Advantages

Expatriate Benefit approaches

40 Mercer

Approaches to providing benefit programs

Home country

Host country

International plan

Regional plan

Retirement

42 Mercer

Home country

Issues

Administration difficulties

Expensive/not always possible

- host legislation

- home program inflexible

Tax issues

- tax deductibility

- imputed tax charges

Becomes less tenable the longer the

assignment

- link to home country weakens

- exchange rate fluctuations

- inconsistent with host colleagues

- alignment with social security

Why?

In line with employee expectations

Usually consistent with compensation

package

Reinforce temporary nature of

assignment

Avoidance of fragmentation

Maintains equity with home country

peers

Alignment with home country social

security

Often anticipated by double tax

treaties

43 Mercer

Host country

Issues

Difference in expectations

- type and level of benefits

- barrier to international mobility?

Past service considerations for

DB plans

Host country eligibility

Benefit fragmentation

Coverage discrepancies for risk

benefits

Why?

Equity between expatriates and

locals

Benefits appropriate for host

country

Local employer costs in line with

domestic burden

Local tax relief – corporate and

personal

44 Mercer

International Plans

Issues

Expensive

- Smaller groups

- Administratively complex

- Limited qualified providers

Tax consequences

Compliance with local laws

Security of benefits

Why?

Addresses specific employee

group in question

Flexibility in design and benefit

levels

Can have broader application

(Key Local Nationals)

Can provide for gaps in both

occupational and social security

programs

45 Mercer

International pension plan considerations

Considerations Advantages Disadvantages

Defined Benefit Benefit at retirement is predictable

Longer term employees typically receive higher benefits

Less employee risk, exceptions may include currency risk or security risk if unfunded

Can be difficult to communicate causing employees to not understand value of the benefits – can be mitigated through design alternatives

Short serving members typically lose out

Cost of retirement provision can be highly variable particularly for small populations

Complex administration

Defined Contribution Easy to understand/communicate

Easier to administer/greater flexibility

Employee investment risk

Costs of pension provision are more predictable

Final benefits are difficult to estimate/predict making retirement planning more difficult for an employee

Employee may view investment risk as a disadvantage

Accounting complications for an unfunded plan – the total employees’ fund is potentially required to be disclosed as a pension liability

Hybrid Dependent on design chosen Dependent on design chosen

Other Considerations

Funded vs. Unfunded Volatility of cash flow can be significantly reduced if a retirement plan is funded

Security of an employee’s benefit is increased if the benefit is adequately funded through independent financing

Risk Benefits Suitable insurance cover cannot be obtained in some locations

Life/AD&D/ and medical coverage complications

What other individuals could benefit from an enhanced IPP with additional risk benefits?

46 Mercer

Regional plans

Why?

Covering employees in a region

Flexibility in design between

countries

Tax effective – must be treated

as a local plan for tax purposes

Potential savings in investment

and administration

Broader application than for

mobile employees

Issues

Expensive to establish

Limited design choices

Additional regulatory

requirements

47 Mercer

Main challenges

48 Mercer

Retirement benefits Approaches by category of employee

Traditional expatriates

Long-term expatriates

Global nomads

49 Mercer

Retirement Benefits International Retirement Plans – Eligibility Criteria

Variety of criteria indicates flexibility of international plans

Medical

51 Mercer

Medical Benefits Geographical challenges

Regional issues with provision of expat medical cover

Regulation

Cost

Access to medical facilities

Q: Which locations pose the greatest challenge in provision of medical cover?

52 Mercer

Medical Benefits Provision of cover across categories

98% of companies provide private medical benefits to expatriates

66% provided international or tailored cover

45% of short term expats are on international plans

33% use business travel plan to cover all short term assignees

53 Mercer

Medical Benefits Local Social Security & Legislation

82% do not take into account local social security or legislation

– potential exposure if non-compliant

– opportunity to save premium costs

18% adopt integrated approach:

Life, AD&D and Disability

55 Mercer

Death Benefits

Majority of expatriates remain in home country arrangements

Provision via full insurance contracts

91% provide lump sum death payment

– US companies average is salary x2

– rest of the world average is salary x4

85% of companies reported issues with:

– Duplication between international and host country provision

– Lack of providers in the market

– Increased costs related to war/terrorism and taxation

56 Mercer

Long Term Disability (LTD)

75% of participants provide LTD benefits

20% operate multiple plans

Most common approach is percentage of salary

Repatriation & Localization

58 Mercer

Approach to Fill

Position

Question-naire

Purpose of

Assignment

Question-naire

Segmentation

model with

policy

parameters

Assignment

role profile:

purpose,

deliverables

and fit

(characteris-

tics)

Cultural and

emotional

readiness

assessment

High-level cost

estimate

Personal

information

form

(completed by

candidate)

Career case

examples

(generic)

Manager gives

high-level

overview of

assignment

agreement to

assignee

Talent

deployment

gives detailed

overview to

assignee

Monthly

dashboard

satisfaction

surveys

Mandatory

cultural training

SharePoint site

for networking

& building

community;

Houses

e-learning &

assignee

information

Improved

vendor

management

Improved

payroll process

Annual

assignee

career

discussion

Repatriation

role profile

Career

experience

overview

Business HR/

mentor

discussion

guide for

planning next

move

Assignee

discussion

guide for

planning next

move

Business HR

repatriation

guide

Process

overview for

business HR to

match

returnees to

business needs

Cost model tool

with policy

parameters

Assignee

repatriation

agreement

Talent

deployment

gives detailed

overview to

assignee

Assignee

experience

survey

Assignee and

family guide for

return planning

Measure ROI

on total

assignment

investment

Assess

if

position

is good

fit for an

assignm

ent

Assess

attribute

s

required

to be

success

ful in

assignm

ent

Obtain

high

level

cost

estimate

and

approva

l to

move

forward

Identify

preferre

d

candida

te site

visit

Assign

ment

agreem

ent

finalized

Launch

and

deliver

assign

ment

Initiate

repatriat

ion

process

Matchin

g

assigne

e to

busines

s needs

Repatria

tion

cost

projecti

ons

confirm

ed

Repatria

tion

agreem

ent

finalized

Returne

e &

family

readine

ss and

preparat

ion

On

Assignment Pre-Assignment Repatriation

Talent Mobility Process and Tools

59 Mercer

Repatriation

Is the turnover of repatriated employees higher in the two years

following return from their assignment than for comparable

employees who have not been on assignment ?

2010 2008

Yes 21% 28%

No 43% 72%

Unknown – company does not track 36% N/A

60 Mercer

Localizations

Does your company have a localization policy ?

2010 2008

Yes, a formal policy 24% 22%

Yes, an informal policy 17% 18%

No, but company has localized employees on

an ad hoc basis

22% 20%

Company does not have a localization policy or

has never localized employees

38% 41%

61 Mercer

Localizations

Are the terms of the localization policy strictly followed ?

2010 2008

Yes 24% 13%

No 76% 81%

62 Mercer

Repatriation and Localization

Should be anticipated from the beginning of the assignment

Repatriation Focus on return on investment

Cultural re-integration challenges

First year is critical for retention

Localization Finding “right” ongoing compensation

Phasing out allowances

Minimal ongoing support (immigration)

Appendix 1: Assessing Expatriate Allowances & Premiums

Understand the Methodology and Principle: Goods and Services / Cost of living allowance

65 Mercer

Overview of the Cost of Living Approaches

Home country based on home country spending patterns, i.e.

different basket of goods for each nationality

Host country based on local spending patterns, i.e. consumer

price index, local inflation

International approach based on typical spending patterns representative

of all expatriates

Determine the basket and weighting

66 Mercer

National Statistical Spending Pattern Analysis Spending patterns per income level Singapore

4 Person Household

Monthly Income Range SGD All 4'000 - 4'999 5'000 - 5'999 6'000 - 6'999 7'000 - 9'999

FOOD 15.1% 17.8% 15.1% 15.6% 11.9%

ALCOHOL & TOBACCO 2.3% 2.6% 2.3% 2.4% 1.8%

DOMESTIC SUPPLIES 1.6% 1.4% 1.7% 1.7% 1.5%

PERSONAL CARE 5.4% 5.4% 5.3% 5.3% 5.5%

CLOTHING & FOOTWEAR 6.3% 6.3% 6.5% 6.9% 5.3%

DOMESTIC SERVICES 3.6% 3.0% 3.3% 3.9% 4.3%

UTILITIES 9.2% 9.6% 9.4% 9.0% 8.9%

FOOD AWAY FROM HOME 19.7% 21.0% 21.2% 19.7% 16.9%

TRANSPORTATION 31.7% 26.3% 30.5% 30.4% 39.4%

SPORTS & LEISURE 5.3% 6.5% 4.8% 5.2% 4.5%

TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%

67 Mercer

Spendable as a function of income and family size UK Example

GBP 19,153

GBP 20,759

GBP 23,612

Income Level GBP 35,000 GBP 40,000 GBP 50,000

54.7%

51.9%

47.2%

Home Spendable

Note: Home spendable rises absolutely with income, but declines as a

percentage as income rises.

GBP 35,000 GBP 40,000 GBP 50,000

68 Mercer

National Statistical Spending Pattern Analysis Comparison of spending patterns

Categories Europe USA Australia Singapore Japan S.Korea

Mercer

International

Weights

Total Food Category 26.9 21.5 29.1 37.7 39.2 40.9 26.3

Food at Home 19.6 11.4 21.1 17.1 25.7 27.9 16.8

Food Away From Home 7.3 10.2 8.0 20.6 13.5 13.1 9.5

Alcohol and tobacco 4.6 2.7 7.0 2.8 3.6 1.8 3.9

Domestic Supplies 5.7 8.0 6.3 1.7 4.0 3.6 7.4

Personal Care 7.4 6.5 5.3 5.5 4.8 5.9 7.5

Clothing and Footwear 10.1 10.9 9.2 6.4 13.3 13.5 11.4

Domestic Services 1.7 3.1 0.9 3.1 0.4 2.0 2.6

Utilities 8.5 9.2 7.3 9.9 10.8 10.5 9.6

Transportation 23.5 27.1 23.9 27.6 13.4 15.9 19.0

Sports and Leisure 11.5 11.0 11.0 5.4 10.5 6.1 12.2

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

69 Mercer

National Statistical Spending Pattern Analysis Comparison of spending patterns

Category UK Category Weight %

Meat, fish, dairy 6.20

Groceries 5.30

Fruits & vegetables 3.30

Tobacco & Alcohol 7.30

Personal care 3.50

Furnishings 17.50

Clothing 10.20

Medical 1.80

Recreation 17.20

Private transport 13.25

Public transport 4.40

Domestic service 1.20

Food away 8.90

Total Index 100.00

69

70 Mercer

Basic assumptions

Composition of the basket

- Representative items of what we consume

- Items consumed at home and abroad

- Items which are easy to compare - Brands

- Availability of items world-wide

Basket weighting pattern (Home national vs.

International)

Choice of neighborhoods - shopping / living /

Retail outlets

Price researcher (independent vs. expatriates)

Timing

71 Mercer

Guarantee a sufficient purchasing power Which portion of the salary to apply the Goods and Services/Cost of Living index?

Annual Gross Base Salary

- Hypothetical personal income tax

- Hypothetical social security contributions

= Annual Net Base Income

- Housing (Home Housing Norm)

- Reserve/Savings

= Annual Net Total Spendable Income

- Insurances

- Education

- Luxury Items, Vacation & Hobbies

- Daily goods and services:

Food at Home, Food Away from Home, Alcohol & Tobacco,

Household Supplies, Personal Care, Clothing & Footwear, Domestic

Services, Utilities (optional), Transportation (optional), Recreation &

Sports & Leisure

72 Mercer

How to apply the cost of living index Example

Annual Gross Base Salary: GBP 46,000

- Hypothetical personal income tax

- Hypothetical social security contributions

= Annual Net Base Income: GBP 35,203

- Housing (Home Housing Norm)

- Reserve/Savings

= Annual Net Total Spendable Income: GBP 19,084

Cost-of-living Index = 120

COLA = 19,084 x 0.2 = 3,817

Adjusted net salary = GBP 22,901

73 Mercer

What do companies do if cost of living is lower in the assignment location? Do companies apply Negative COLA?

0

10

20

30

40

50

60

Company

takes no

action

Negative

index

applied

Deduction

from other

allowances

Case by

case

N/A

Worldwide

EMEA


74 Mercer

Do you apply negative COLA? Impact of the Negative Goods&Services/Cost of Living Allowance

Case example :

An UK employee is transferred to Johannesburg, South Africa

G&S/COL Index London 100 to Johannesburg 64 for 1 GBP = 14.419443 ZAR.

Apply negative COLA OR Do not apply negative

- 36% decrease COL Index 100

Johannesburg is cheaper No decrease, the employee has a

than London. Windfall of 36%, in other words,

You need less to buy an excess of what is require to

the same basket of maintain the home purchasing

goods and services power.

in Johannesburg.

75 Mercer

Impact of the Negative Cost of Living Allowance: Advantages vs. Disadvantages

London Johannesburg

76 Mercer

Negative cost-of-living index: Bad practice or logical solution?

Multiple assignments London 1st assignment

Johannesburg

2nd assignment

Barcelona

COL Index 100 85 98

Paid by company 100 100 100

Gain / Loss 0 15 2

Employee's perception … 15 -13

Understand the Methodology and Principle: Housing allowance

78 Mercer

How expensive is a two-bedroom unfurnished apartment in a very good

area in these cities?

Shanghai

Luanda

Paris

London

Tokyo

Moscow

Singapore

Accra

Johannesburg

Housing cost Examples

79 Mercer

Housing cost – Two-bedroom unfurnished apartment in a very good area Your Perception

Cities Monthly Rent in USD

Accra

Johannesburg

Shanghai

Singapore

Paris

Moscow

London

Tokyo

Luanda

80 Mercer

Host Location Housing

What drives foreign housing expenditure ?

Expatriate expectations

Local markets

Other expatriates

Company budget

Peer lifestyles

Practice among other companies

Location of schools

Availability

Employee safety and security

81 Mercer

Host location expatriate housing costs

Expatriate housing rental costs data broken-down by:

Apartment or house size

Furnished or unfurnished

Preferred neighborhoods

Number of bedrooms

Income level

Additional Information

Market conditions, availability, additional costs, lease information, security, parking, schools

82 Mercer

Host location expatriate housing costs Example Sao Paulo

Trend: Rents have been

increasing over the past

months due to the rising

demand. There is a good choice

of accommodation available but

smaller ones with one bedroom

are rare.

Charges: Garage/parking space

is usually included in the above

rents. Utility costs and building

charges calles condominio are

not included in above rents.

Annual tax called IPTU charged

according to the size and

localization of the apartment/

house is included in the above

rents.

Standard Lease Terms:

Normally a contract of 30

months (negotiable) is signed

which can be broken legally if

the tenant is transferred before

end of contract. One to three

months refundable deposit

usually required.

Comments: Alto Boavista is

close to the International

School. The International

Chapel School is located in

Chacara Flora.

83 Mercer

Housing Allowance Policy

The housing allowance is either:

The full host expatriate accommodation costs

The difference between hypothetical home

housing norms and the expatriate accommodation

costs. The employee will contribute towards

housing costs.

84 Mercer

Housing Policy

0

10

20

30

40

50

60

Pays housing

costs but

deductas a norm

Free assignment

housing

Housing

differential

No contribution

Worldwide

EMEA


85 Mercer

Home housing norms data Example 2010 UK Base salary GBP 60’000 – Married with 2 children

The home

housing norm

amount varies

by:

Salary level

Family size (to

a limited degree)

The home

housing

norm is

updated

annually per

country.

86 Mercer

Home housing norms data Example 2010 UK Base salary GBP 53’992 – Married with 2 children

87 Mercer

Housing allowance differentials calculation Example

Base salary GBP 53’992 UK to Johannesburg, South Africa

Married with 2 children

1 ZAR = 0.086255 GBP

GBP ZAR

Income level 53'992 625'958

Family Status Married + 2 Married + 2

Annual Home Housing Norm 7'926 91'890

Annual Host Expatriate Accommodation 24'973 289'524

Housing Differential 17'047 197'634

88 Mercer

Host location expatriate housing costs by income level / family size Example 2010 UK Base salary GBP 53’992 UK to Johannesburg Married with 2 children

Understand the Methodology and Principle: Hardship allowance (quality-of-living / location allowance)

90 Mercer

What level of hardship would you give to these locations and why?

Moscow

Dubai

Bogota

Tokyo

Tunis

Sao Paulo

Beijing

Lagos

What is hardship? Perception

91 Mercer

What is hardship? Your Perception

Cities Ranking from highest to

lowest Allowance as % of gross

Moscow

Luanda

Beijing

Tunis

Sao Paulo

Lagos

Sao Paulo

Johannesburg

Accra

92 Mercer

Hardship Allowance

Definition

When you relocate employees from one country to another you need

clear and objective information that establishes the quality of living

standard

Monthly payment to compensate for significant deterioration in living

conditions

Paid net of tax as a percentage of annual gross base salary

Objective

To recognise and compensate for difficult living conditions

To encourage transfers to difficult locations

Typical Practice

Hardship allowance define per host locations or Hardship allowance

defined per home/host combination locations

From 0% to 50% - may be higher for extreme hardship locations

Trends

Increasing interest in nationality specific allowances

May be combined with Foreign Service Premium and covered under

Location Allowance

93 Mercer

Hardship Allowance

Hardship Allowance Factors should be:

Neutral & consistent

Objective, and not subjective

No national consideration or perspective

Avoid any cultural and national comparison

Pertinent for an expatriate (single and/or with family)

Quality of living/hardship surveys, definitions & selection of

criteria are elaborated with the collaboration of:

Professionals within Mercer around the world

Multinationals companies

International organisations

Statistics & specialised analysis

Various governments institutions

Various experts

94 Mercer

Calculating the Hardship Allowance

Pure host approach

Fixed allowance for each country without taking into account the home

country of the assignee

Consistent approach: all expatriates receive the same allowance

regardless of their origin

Works best if majority of employee come from developed countries and

go to developing countries

Issues with regional moves / high cost

Home/host combination

Comparison between the living conditions in the home and the host

locations

Assignees from different countries can potentially receive different

allowances

Works best with diverse expatriate populations, complex assignment

patterns including an umber of regional moves

95 Mercer

Related to Hardship compensation?

Danger Pay

Remote Location Premium

Pioneer Premium

“Completion Bonus”

Rest and Recreation Leave

Security measures

Understand the Methodology and Principle: Mobility Premium and Other Incentives

97 Mercer

Foreign service or mobility premium

Cash incentive provided for the inconvenience of being uprooted

Sometimes also referred to as an Incentive Premium, Foreign

Service Premium or Disturbance Premium

Paid annually or as a lump sum net of tax

Paid as a percentage of annual gross base salary (5 – 15%)

For some companies, combined with the hardship allowance

& covered under Location Allowance

98 Mercer

Assignment-related Incentive Payments

0

5

10

15

20

25

30

35

40

45

Foreign Service

Premium

(ongoing

payment)

Mobility

Premium (lump

sum)

Amount based

on level, family

size, location

Performance

related

Other No incentive

payments

Worldwide

EMEA


99 Mercer

Foreign service or mobility premium

Market Practice and Trends

Reduce or remove or cap premium payments

Lower premium for intra-regional assignments

No payment for developmental assignments

Reduce premium after period of time on assignment

A move towards one time premium payment

100 Mercer

Other expatriate allowances

Moving allowance

Relocation / settling-in

allowance

Car allowance / benefit based on

host country policy

Education allowance based on

international schools

Appendix 2: 2010 Survey of Policies and Practices

102 Mercer

2010 Worldwide Survey or International Assignments Policies & Practices

Over 1,000 participating companies and organizations; 892 in

2008 survey

480 Companies with “main headquarters” in the Americas; 467 in

2008 survey

In many areas programs being managed to be leaner / more

efficient

Some exceptions; housing norm, home property management,

home sale.

More significant variances over the 2008 – 2010 two year interval

than previous two year intervals

103 Mercer

What aspects of your expatriate program are you considering reviewing or changing ?

Top Three

2010 2008

Overall Cost Effectiveness

Global Policy Development Short Term Policy

Development

Short Term Policy

Development

Overall Competitiveness

104 Mercer

Company Profile – Expatriate Programs

Which functions does your company currently outsourced ?

2010 2008

All functions 27% 32%

Cultural orientation 66% 71%

Spousal career assistance 32% 29%

International Compensation Administration 12% 16%

105 Mercer


Over the last two years, which of the following has your company

implemented ?

2010 2008

Decreased use of expatriates 26% 21%

Reduced incentives 16% 10%

Reduced vendor fees 12% 7%

Heavier reliance on localizing expatriates 24% 20%

Increased use of cost effective COLA 22% 14%

Changed tax policy 14% 12%

None of the above 37% 48%

106 Mercer


Which of the following statements best describes the number of

expatriates assigned in recent years ?

2010 2008

Increasing use of expatriates 47% 52%

Decreasing use of expatriates 29% 25%

No marked changes in the number of

expatriates

24% 23%

107 Mercer


Which countries are you sending expatriates to ?

2010 2008

China 60% 59%

India 17% 22%

United Arab Emirates 18% 13%

Brazil 17% 9%

USA 43% 54%

Canada 12% 17%

108 Mercer


Which countries are you sending expatriates out from ?

2010 2008

China 11% 23%

India 18% 22%

United Arab Emirates 4% 6%

Brazil 10% 10%

USA 84% 79%

Canada 22% 24%

109 Mercer


Approximately what percentage of your company’s expatriate

population fall into the following age bands

2010 2008

35 or Younger 28% 36%

36 or Older 72% 64%

110 Mercer

Selection and Development

Is Human Resources actively involved in the selection of

candidates for assignments ?

2010 2008

Yes, always 32% 30%

Yes, on a case by case basis 41% 38%

No 27% 32%

How well is selection of candidates handled in your company ?

Very well 11% 9%

Well 34% 42%

Somewhat well 47% 42%

Not very well 8% 7%

111 Mercer

Orientation Programs

Does your company make use of an orientation program ?

2010 2008

Yes, conducted by outside consultants 33% 37%

Yes, conducted by company personnel 40% 40%

Yes through contact with employees who

know the assignment country

16% 14%

Yes, through written materials provided

for the employee study

16% 14%

Yes, through on line or electronic

materials provided from employee study

13% 11%

Yes, when assignment country presents

difficulties

6% 6%

No 25% 25%

112 Mercer

Family Matters

How does your company define “spouse” ?

2010 2008

Wife or husband 28% 30%

Wife, husband and long term, live partner

of the opposite sex

7% 6%

Wife, husband and long term, live partner

of the same or opposite sex

47% 42%

Company does not define spouse 18% 21%

113 Mercer

Family Matters

Does your company have a dual career / spousal assistance

policy ?

2010 2008

Yes 48% 43%

No, but planning to develop one 5% 6%

No 47% 51%

114 Mercer

Family Matters

What is the average payment made to address spousal assistance ?

2010 2008

One-time lump sum cash payment / allowance 19% 23%

Average amount $3,704 $4,727

One-time reimbursement of receipts to a max 35% 34%


Annual payment or allowance 7% 8%


Annual reimbursement of receipts to a max 17% 11%


115 Mercer

Assignment Compensation

What best describes your companies policy regarding assignment

related incentive payments ?

2010 2008

Ongoing payment throughout assignment 28% 34%

Expatriate receives a lump sum amount 21% 9%

Expatriate receives an amount based on job

grade, family size of host location

7% 3%

Payment based on expatriate performance 2% 2%

Other, that the above 5% 5%

No assignment related incentive payment 49% 48%

116 Mercer


Caps on payments

2010 2008

Assignment Premium – Average Salary Cap $173,412 $155,609

Assignment Premium – Flat Amount $16,063 $13,832

Hardship Allowance – Average Salary Cap $177,418 $166,387

Hardship Allowance – Flat Amount $25,797 $26,703

Goods and Services Diff – Average Salary Cap $192,797 $195,740

117 Mercer


How does your company determine a hardship allowance ?

2010 2008

Independent data provider 74% 69%

Government data 26% 28%

Management determination 9% 9%

118 Mercer

Assignment Compensation – Housing

Does your company provide assistance to an employee who sells his

or her home prior to moving to the assignment location ?

2010 2008

Direct purchase of employee home 2% 2%

Third party purchase of home 12% 15%

Reimburse selling costs – no limit 9% 10%

Reimburse selling cost – up to a limit 16% 20%

Case by case basis 18% 17%

No assistance 54% 47%

Other than the above 3% 4%

119 Mercer


Does your company provide assistance to an employee who retains

his or her home while on assignment ?

2010 2008

Manages rental of employee’s house 6% 10%

Pays property management fee 39% 48%

Pays rent is house becomes vacant 3% 5%

Pays some or all of the maintenance cost 13% 16%

Provides referrals to relocation companies 13% 6%

Case by case basis 4% 14%

No assistance with retained home 40% 31%


120 Mercer


Which of the following best describes your company’s foreign

housing policy ?

2010 2008

Company pays housing costs but deducts a

home country offset as the employee’s

contribution*

45% 50%

Company pays housing costs but does not

deduct a home country (free assignment

housing)

38% 33%

Company pay a housing differential 12% 14%

Company make no contribution to foreign

housing costs

6% 3%

* Was 60% in 2004

121 Mercer


How does your company compensate for foreign housing utilities

costs?

2010 2008

Pays actual without limitation 29% 33%

Pays actual up to a limit 19% 18%

Pays a separate allowance for utilities 12% 13%

Include allowance in G&S allowance 10% 11%

Include allowance in monthly rent payments 13% 14%

Does not pay for utilities 16% 12%

122 Mercer

Relocation – Home Country Automobile

Does your company assist with the disposal or a car prior to

assignment ? – Sale of Car

2010 2008

Yes, pays difference between sale price and

market value

11% 14%

Yes, pays the difference between the sale and

market value up to a limit

36% 40%

Yes, pays a flat amount 9% 9%

Does not provide assistance 44% 37%

123 Mercer

Relocation – Home Country Automobile

Does your company assist with the disposal or a car prior to

assignment ? – Leased Car

2010 2008

Reimburses lease cancellation fees with no limit 13% 19%

Reimburses lease cancellation fees up to a limit 24% 22%

Reimburses lease cancellation fees up to what

would have been reimbursed as a loss on sale

12% 14%

Provides a loan for lease buy out 1% 1%

Does not provide assistance 43% 36%


124 Mercer

Relocation – Shipping

Which of the following best describes your company’s policy about

shipping an expatriate’s household furnishing ?

2010 2008

Pays all actual and reasonable shipping costs 37% 38%

Company pays shipping costs up to a specified

weight

18% 24%


volume limit

37% 33%


amount

4% 2%

Company does not pay shipping cost 4% 3%

125 Mercer

Exceptions

Among the following policy elements for which of the following

categories do you grant exceptions ?

2010 2008

Cost of living allowances 11% 15%

Host housing allowances 46% 52%

Home housing norms 17% 20%

Temporary living 44% 49%

Transportation allowance 9% 13%

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