30 May 2011

GoodMove2011 Managing the Costs and Financial Risks of an Expatriate Assignment

John Hall, Paris

www.mercer.fr

GoodMove2011 Compensation & Benefits -- Agenda

Introduction
Mobility structures from a C&B perspective Compensation package Benefits Package Repatriation and Localization

Mercer

Introduction to Expatriation Management

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

Mercer

The Key Trends

More assignees
Emerging v developed countries Tolerance of pay differences

More diversity amongst assignees

Male/female Range of nationalities

Greater variety of assignment lengths and types: Short-term,

Commuter, Rotational

Greater range of destinations including some with significant security and hardship issues

Focus on Cost Management

Increasing resistance to mobility due to:

Dual-career concerns Work-life balance Family issues

Focus on Return on investment

Concerns about talent management, recruitment and retention

Mercer

How has the number of international assignees evolved over the past 2 years?
90 80 70 60 50 40 30 20 10 0
ST A m ut er s LT m en ria t ee m pl oy at ria t ca re er e xp es es A ts s ct e on tr a G lo ba l is ts /

pa t

ex

om

re d

hi

tio n

ly

al

As s R ot a

ig n

Lo

ca l

Increased
Source: Mercers 2010 International Assignment Survey
Mercer

Stable

Decreased

Number of expatriates by industry How has the number of expatriates evolved in the past 2 years?
% 70 60 50 40 30 20 10 0 Increased Stable Decreased

Source: Mercers 2010 International Assignment Survey

Mercer 6

What are the concerns of company's management regarding their current mobility program? Industry-specific overview
90 % 80 70 60 50 40 30 20 10 0
du st ry er se rv ic es IT na nc ia l ca re ee rin su m a/ He al th Co n In irl in Sh ip p in g/ A es g in

ng

Fi

er gy /E

m ic al /P ha rm

Ch e

Current conditions are too costly Inability to use gained experience upon repatriation
Source: Mercers 2010 International Assignment Survey
Mercer

Finding suitable candidates for assignments Current conditions may not be attractive enough

Pr of es si on

En

al

Complexity of designing the right expatriate compensation model

Nationalities of Expatriates

Worldwide Integration
Growing International Maturity

Few Overseas Operations

First Overseas Operation
Mercer

Expatriate Compensation Model

8

How expatriation has evolved Business drives the changes

Phase 1
First overseas operations

Phase 2
Few overseas operations

Phase 3
Growing international maturity

Phase 4
Worldwide integration and planning

Nationality of Expatriates
All from the parent company Majority from parent Parent company Global talent sourcing company, a few nationals increasingly and less emphasis on TCNs replaced by TCNs nationality Centralized policies Same policies for all regardless of nationality

International Policy
Individual negotiation One policy for parent co. nationals and different policy for others Policy tested by changing organizational needs

Compensation
Home salary plus Same with or Host salary plus growing inconsistencies Differentiation by Compensation policy purpose, duration and that supports nationality. assignment patterns

Mercer

Managements view of expatriation has evolved and so have the numbers

Phase 1
First overseas operations

Phase 2
Few overseas operations

Phase 3
Growing international maturity

Phase 4
Worldwide integration and planning

Managements view
Find someone we Something we Cost concerns can trust to get the need to do to grow Alternatives job done. internationally. Programs to How to use the develop global international talent experience, bring expertise back to headquarters. 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)

Mercer

10

Defining Mobility

Mercer

11 11

Reward and Talent Design Segmentation

1. Business Leadership TALENT LINKAGE
Capabilities/Skill Requirements:

REWARD DESIGN Changes/Recommendations

Home based salary & benefits Highest level of rewards benefits

2. Filling Critical Skill Gap TALENT LINKAGE

Capabilities/Skill

REWARD DESIGN Changes/Recommendations

Home based salary & benefits Moderate level of rewards benefits

ONE-TIME

PACKAGE

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

Requirements: clearly defined and validated Talent linkage: optional, mentor recommended Talent indicator: meet minimum criteria (meets performance goals) Development support: cultural awareness training recommended

Cultural development/

Spousal/Family Allowance Misc. Relo Allowance Lang/Cultural Training Mobility Premium Cash Award Host Housing ~ expensive level

Guidance for self-directed

Spousal/Family Allowance Misc. Relo Allowance Lang/Cultural Training

assignment readiness assessment

Link to talent management

development options

Synchronize with

Host Housing ~ moderate level

(talent review, performance management, development & succession planning) Synchronize with staffing/workforce planning Career planning, next move and repatriation planning and tracking

housing accommodation budget

Efficient Purchaser Index (EPI)

staffing/workforce planning Repatriation planning

ONGOING

Hardship Allowance (where

appropriate)
Rest and Relaxation (where

housing accommodation budget Efficient Purchaser Index (EPI) Hardship Allowance (where appropriate) Rest and Relaxation (where appropriate

appropriate)

Mercer

12

Reward and Talent Design Segmentation

3. Leadership Dev. (High Potentials) TALENT LINKAGE
Capabilities/Skill Requirements:

REWARD DESIGN
Changes/Recommendations
Home Based salary & benefits Moderate level of rewards benefits

4. Emerging Talent (High Potentials) TALENT LINKAGE

Capabilities/Skill

REWARD DESIGN
Changes/Recommendations
Home based salary & benefits Minimum level of rewards benefits

clearly defined and validated 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

Requirements: clearly defined and validated Talent linkage: optional, mentor recommended Talent indicator: meet minimum criteria (meets performance goals) Development support: optional, cultural awareness training recommended

ONE-TIME

PACKAGE

Assessment (setting

Spousal/Family Allowance Misc. Relo Allowance Language/Cultural

Guidance for self-directed

development priorities and supporting steps)

development options

Misc. Relo Allowance (less than

levels 1-3) Cultural as necessary

Synchronize with Host Housing ~ less expensive

Link to talent management

Host Housing ~ moderate level

(talent review, performance management, development & succession planning) Synchronize with staffing/ workforce planning Career planning, next move and repatriation planning and tracking

housing accommodation budget Efficient Purchaser Index (EPI) Hardship Allowance (where appropriate) Rest and Relaxation (where appropriate)

ONGOING

staffing/workforce planning Repatriation planning

level housing accommodation budget International or Mean to Mean G&S index

Mercer

13

International assignment program goals

Ranked in level of importance to company: 1. Supporting the companys 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

Mercer

14

Expatriate compensation approaches

Expatriate Compensation Approaches

Home-based approach Home-based balance sheet HQ-based balance sheet Home approach Host-based approach

Host approach
Host / local plus approach Hybrid / best of home & host International and regional structures
Mercer 16

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

Home Salary

Host based salary (pure local)

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17

10'000

20'000

30'000

40'000

50'000

60'000

70'000

80'000

90'000

Mercer

Vi
0 IPE 54 Regressed Median in EUR

Host Country Approach How do compensation levels compare globally?

et In n am do ne Bu sia lg ar ia In Uk dia Ph ra ilip in e pi n Th es ai la Ch Ma n d in lay a (B sia ei jin M g) ex ic Ru o ss ia Ko re Ta a iw Po a n r Si tug ng a l ap Sw ore Ho ed ng en Ko ng Br az So Fra il Un ut nc ite h A e d f Ki rica ng do m US Ca A na da U G AE er m Au any st ra lia Ja p No an rw ay
18

Host country approach

Advantages
Simple to administer Ensure adequate pay as local peers Market driven at job level Attractive in high salary country level Responsive to change

Disadvantages
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

Mercer 19

Variation of the host approach: Host/Local Plus Approach

additional premiums Housing costs? & allowances Education (local plus costs? package) Other allowances? Home Salary Host based salary (pure local)

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20

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 South Africa Annual Gross Base Salary South Africa Annual Net Base Salary (ZAR) 596'802 426'914 (GBP) 51'477 36'823

Plus Additional Allowances Housing Benefit Education Allowance Total Net Compensation in Johannesburg 231'619 120'400 778'933 19'978 10'385 67'187

Mercer

21

Local plus approach

Advantages

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

Mercer

22

Local plus approach

Disadvantages

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

Mercer

23

Home Country or Balance Sheet Approach

Net salary in host country

Other Expatriate premiums & allowances Quality-of-living Education cost Mobility premiums

Net home salary

Housing Allowance Housing

Housing allowance
Cost-ofliving allowance

Housing COLA Spendable income Spendable income

Savings and other expenses

Mercer

Savings and other expenses

24

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

PC 51 Competitive packages

90'000 80'000 70'000 60'000 50'000 40'000 30'000 20'000 10'000 0 Russia
Net home salary COLA

UK
Mobility Premium

Netherlands
Hardship Allowance

Canada
Settling-in Allowance

Australia
Housing Allowance

Mercer

25

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

PC 58 Competitive packages

140'000 120'000 100'000 80'000 60'000 40'000 20'000 0 Russia

Net home salary COLA

Netherlands
Mobility Premium

UK
Hardship Allowance

Canada
Settling-in Allowance

Australia
Housing Allowance

Mercer

26

Home country / balance sheet approach

Advantages
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

Disadvantages
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

Mercer

27

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 Cost of Living Allowance Housing Benefit Hardship Allowance Mobility Premium Home Leave Spouse Support Settling-in Allowance Education Allowance Total Net Value of Allowance Net Base Salary Total Net Compensation in Johannesburg Ratio

Minimum (GBP) -3'600 17'048 6'749 0 3'387 0 0 12'981 36'565 39'917 76'482 1.92

Maximum (GBP 0 36'227 9'449 8'100 10'160 4'234 9'000 12'981 90'151 39'917 130'068 3.26

Impact on Mobility High High Medium Low Low Medium Low High

Mercer

28

Expatriate compensations approaches comparison Example transfer in Johannesburg, South Africa

In ZAR

1 600 000 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 200 000 0 Max Expat Min Expat Local Plus Local Plus

Net Annual Compensation Levels in Johannesburg

Mercer

29

Home country / balance sheet - example 2 Total net allowances, Frankfurt Paris / Base salary 100000 , married + 2

60'000

50'000

40'000
Euros

30'000

20'000

10'000

L
COLA

N
Other

M
Utilities

D
Mobility

Companies

Hypo Housing

Relocation

Mercer

30

Home country / balance sheet approach Variations

Home-based
Balance sheet based on the actual home country salary of the employee

HQ-based
The HQs 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 / no balance sheet

For moves from high paying countries

31

Mercer

Hybrid approach, Best of solution

Advantages

Never below local market rate Never below home living standard Review annually Maintain home reference salary for pension etc.

Disadvantages

Perception of host pay

Lead to inconsistency
Administrative burden

Mercer

32

Expatriate compensations approaches comparison Example transfer in Shanghai, China

In ZAR

1 600 000 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 200 000 0 Max Expat Min Expat Local Plus Local Plus

Net Annual Compensation Levels in Johannesburg

Mercer

33

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

Mercer

34

Compensation approaches: typical practices

70 60 50 40 30 20 10 0 Worldwide EMEA
Source: Mercer 2010/2011 Worldwide Survey of International Assignment Policies and Practices
Mercer 35

Home based HQ based Host based Higher of home or host Home plus Host plus Other N/A

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

Accommodation Transportation Food Laundry Telephone Entertainment Personal Care (differentiation between shortterm and commuters)

Additional costs paid by the company

Daily allowance Per Diem

Home Salary

Home Salary

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36

Short term assignments

Advantages
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)

Disadvantages

Tax constraints

Mercer

Family issues
Extension duration risks lead to higher costs
37

Commuters

Advantages
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

Disadvantages

Tax constraints
Notion of residency can be questionable Limitation in duration due to benefits programmes

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Expatriate Benefit approaches

Approaches to providing benefit programs

Home country

Host country

International plan

Regional plan

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40

Retirement

Home country Why?

In line with employee expectations

Issues
Administration difficulties

Usually consistent with compensation package

Reinforce temporary nature of assignment Avoidance of fragmentation Maintains equity with home country peers

Expensive/not always possible

- host legislation - home program inflexible

Tax issues
- tax deductibility - imputed tax charges

Alignment with home country social security

Often anticipated by double tax treaties

Becomes less tenable the longer the assignment

- link to home country weakens - exchange rate fluctuations - inconsistent with host colleagues - alignment with social security

Mercer

42

Host country

Why?
Equity between expatriates and locals

Issues
Difference in expectations
- type and level of benefits

Benefits appropriate for host country

Local employer costs in line with domestic burden Local tax relief corporate and personal

- barrier to international mobility?

Past service considerations for DB plans

Host country eligibility

Benefit fragmentation Coverage discrepancies for risk benefits

Mercer

43

International Plans

Why?
Addresses specific employee group in question

Issues
Expensive
- Smaller groups

Flexibility in design and benefit levels

Can have broader application (Key Local Nationals) Can provide for gaps in both occupational and social security programs

- Administratively complex
- Limited qualified providers

Tax consequences

Compliance with local laws

Security of benefits

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International pension plan considerations

Considerations
Defined Benefit

Advantages
Benefit at retirement is predictable Longer term employees typically

Disadvantages
Can be difficult to communicate causing employees

receive higher benefits Less employee risk, exceptions may include currency risk or security risk if unfunded Defined Contribution
Easy to understand/communicate Easier to administer/greater flexibility Employee investment risk Costs of pension provision are more

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

Final benefits are difficult to estimate/predict making

predictable

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
Dependent on design chosen

Hybrid
Other Considerations

Dependent on design chosen

Funded vs. Unfunded

Volatility of cash flow can be significantly reduced if a retirement plan is funded Security of an employees 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?

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45

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

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Main challenges

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Retirement benefits
Approaches by category of employee Traditional expatriates

Long-term expatriates

Global nomads

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48

Retirement Benefits

International Retirement Plans Eligibility Criteria

Variety of criteria indicates flexibility of international plans

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49

Medical

Medical Benefits
Geographical challenges
Q: Which locations pose the greatest challenge in provision of medical cover?

Regional issues with provision of expat medical cover

Regulation Cost

Access to medical facilities

Mercer 51

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

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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:

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Life, AD&D and Disability

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

Mercer

55

Long Term Disability (LTD)

75% of participants provide LTD benefits 20% operate multiple plans Most common approach is percentage of salary

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56

Repatriation & Localization

Talent Mobility Process and Tools

Pre-Assignment
Assess if position is good fit for an assignm ent Assess attribute s required to be success ful in assignm Purposeent of
Assignment Question-naire

Approach to Fill
Position Question-naire

Obtain high level cost estimate and approva l to move High-level cost forward
estimate

On Assignment
Identify preferre d candida te site visit Assign ment agreem ent finalized Launch and deliver assign ment
Monthly

Repatriation
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
Assignee

Initiate repatriat ion process

Personal
information form (completed by candidate)

Manager gives
high-level overview of assignment agreement to assignee

Repatriation
role profile

Process
overview for business HR to match returnees to business needs

Cost model tool

with policy parameters

Assignee
repatriation agreement

Segmentation
model with policy parameters

dashboard satisfaction surveys

Mandatory

Career
experience overview

experience survey
Assignee and

Talent
deployment gives detailed overview to assignee

Career case
examples (generic)

Talent
deployment gives detailed overview to assignee

cultural training
SharePoint site

Business HR/
mentor discussion guide for planning next move

family guide for return planning

Measure ROI

Assignment
role profile: purpose, deliverables and fit (characteristics)

for networking & building community; Houses e-learning & assignee information
Improved

on total assignment investment

Assignee
discussion guide for planning next move

Cultural and
emotional readiness assessment

vendor management
Improved

Business HR
repatriation guide

payroll process
Annual

assignee career discussion

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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
Yes No Unknown company does not track 21% 43% 36%

2008
28% 72% N/A

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Localizations Does your company have a localization policy ? 2010 Yes, a formal policy Yes, an informal policy No, but company has localized employees on an ad hoc basis Company does not have a localization policy or has never localized employees 24% 17% 22% 38% 2008 22% 18% 20% 41%

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Localizations Are the terms of the localization policy strictly followed ? 2010 Yes No 24% 76% 2008 13% 81%

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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)

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Appendix 1: Assessing Expatriate Allowances & Premiums

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

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

Mercer

65

National Statistical Spending Pattern Analysis Spending patterns per income level Singapore

4 Person Household Monthly Income Range SGD FOOD ALCOHOL & TOBACCO DOMESTIC SUPPLIES PERSONAL CARE All 15.1% 2.3% 1.6% 5.4% 6.3% 3.6% 9.2% 19.7% 31.7% 5.3% 100.0% 4'000 - 4'999 17.8% 2.6% 1.4% 5.4% 6.3% 3.0% 9.6% 21.0% 26.3% 6.5% 100.0% 5'000 - 5'999 15.1% 2.3% 1.7% 5.3% 6.5% 3.3% 9.4% 21.2% 30.5% 4.8% 100.0% 6'000 - 6'999 15.6% 2.4% 1.7% 5.3% 6.9% 3.9% 9.0% 19.7% 30.4% 5.2% 100.0% 7'000 - 9'999 11.9% 1.8% 1.5% 5.5% 5.3% 4.3% 8.9% 16.9% 39.4% 4.5% 100.0%

CLOTHING & FOOTWEAR

DOMESTIC SERVICES UTILITIES FOOD AWAY FROM HOME TRANSPORTATION SPORTS & LEISURE TOTAL

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66

Spendable as a function of income and family size UK Example

GBP 23,612

54.7%
GBP 20,759 GBP 19,153 51.9%

47.2%

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

Home Spendable
GBP 35,000 GBP 40,000 GBP 50,000

Note: Home spendable rises absolutely with income, but declines as a percentage as income rises.
Mercer 67

National Statistical Spending Pattern Analysis Comparison of spending patterns

Mercer Categories Europe USA Australia Singapore Japan S.Korea International Weights Total Food Category Food at Home Food Away From Home Alcohol and tobacco Domestic Supplies 26.9 19.6 21.5 11.4 29.1 21.1 37.7 17.1 39.2 25.7 40.9 27.9 26.3 16.8

7.3
4.6 5.7 7.4 10.1

10.2
2.7 8.0 6.5 10.9

8.0
7.0 6.3 5.3 9.2

20.6
2.8 1.7 5.5 6.4

13.5
3.6 4.0 4.8 13.3

13.1
1.8 3.6 5.9 13.5

9.5
3.9 7.4 7.5 11.4

Personal Care
Clothing and Footwear

Domestic Services
Utilities Transportation Sports and Leisure Total

1.7
8.5 23.5 11.5 100.0

3.1
9.2 27.1 11.0 100.0

0.9
7.3 23.9 11.0 100.0

3.1
9.9 27.6 5.4 100.0

0.4
10.8 13.4 10.5 100.0

2.0
10.5 15.9 6.1 100.0

2.6
9.6 19.0 12.2 100.0

Mercer

68

National Statistical Spending Pattern Analysis Comparison of spending patterns

Category
Meat, fish, dairy

UK Category Weight %
6.20

Groceries
Fruits & vegetables Tobacco & Alcohol Personal care

5.30
3.30 7.30 3.50

Furnishings
Clothing Medical Recreation Private transport Public transport Domestic service Food away

17.50
10.20 1.80 17.20 13.25 4.40 1.20 8.90

Total Index
Mercer

100.00
69 69

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
70

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
Mercer 71

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

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72

What do companies do if cost of living is lower in the assignment location? Do companies apply Negative COLA?
60

50

40

30 Worldwide EMEA 20

10

0 Company takes no action Negative index applied Deduction from other allowances Case by case N/A

Source: Mercer 2010/2011 Worldwide Survey of International Assignment Policies and Practices
Mercer 73

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 - 36% decrease Johannesburg is cheaper than London. You need less to buy the same basket of goods and services in Johannesburg. OR Do not apply negative COL Index 100 No decrease, the employee has a Windfall of 36%, in other words, an excess of what is require to maintain the home purchasing power.

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

London

Johannesburg

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75

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
Gain / Loss Employee's perception

100
0

100
15 15

100
2 -13

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76

Understand the Methodology and Principle: Housing allowance

Housing cost Examples 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

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78

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

Cities Accra Johannesburg Shanghai Singapore Paris Moscow

Monthly Rent in USD

London
Tokyo Luanda

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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

Mercer

80

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

Mercer

81

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.
Mercer 82

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.

Mercer

83

Housing Policy
60 50 40 30 20 10 0
Pays housing Free assignment costs but housing deductas a norm Housing differential No contribution

Worldwide EMEA

Source: Mercer 2010/2011 Worldwide Survey of International Assignment Policies and Practices
Mercer 84

Home housing norms data Example 2010 UK Base salary GBP 60000 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.

Mercer

85

Home housing norms data Example 2010 UK Base salary GBP 53992 Married with 2 children

Mercer

86

Housing allowance differentials calculation Example Base salary GBP 53992 UK to Johannesburg, South Africa Married with 2 children 1 ZAR = 0.086255 GBP
GBP Income level Family Status Annual Home Housing Norm Annual Host Expatriate Accommodation Housing Differential 53'992 Married + 2 7'926 24'973 17'047 ZAR 625'958 Married + 2 91'890 289'524 197'634

Mercer

87

Host location expatriate housing costs by income level / family size Example 2010 UK Base salary GBP 53992 UK to Johannesburg Married with 2 children

Mercer

88

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

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

Moscow
Dubai Bogota Tokyo Tunis Sao Paulo Beijing Lagos

Mercer

90

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

Mercer

91

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
Mercer 92

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

Mercer

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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

Mercer

94

Related to Hardship compensation?

Danger Pay
Remote Location Premium Pioneer Premium

Completion Bonus

Rest and Recreation Leave Security measures

Mercer

95

Understand the Methodology and Principle: Mobility Premium and Other Incentives

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

Mercer

97

Assignment-related Incentive Payments

45 40 35 30 25 20 15 10 5 0
Foreign Service Mobility Amount based Premium Premium (lump on level, family (ongoing sum) size, location payment) Performance related Other No incentive payments

Worldwide EMEA

Source: Mercer 2010/2011 Worldwide Survey of International Assignment Policies and Practices
Mercer 98

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

Mercer

99

Other expatriate allowances

Education allowance based on international schools

Moving allowance

Relocation / settling-in allowance

Car allowance / benefit based on host country policy

Mercer

100

Appendix 2: 2010 Survey of Policies and Practices

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

Mercer

102

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

Top Three
2010 Overall Cost Effectiveness 2008

Global Policy Development

Short Term Policy Development

Short Term Policy Development

Overall Competitiveness

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Company Profile Expatriate Programs Which functions does your company currently outsourced ? 2010 All functions Cultural orientation 27% 66% 2008 32% 71%

Spousal career assistance

International Compensation Administration

32%
12%

29%
16%

Mercer

104

Company Profile Expatriate Programs Over the last two years, which of the following has your company implemented ? 2010 2008

Decreased use of expatriates

Reduced incentives Reduced vendor fees

26%
16% 12%

21%
10% 7%

Heavier reliance on localizing expatriates

Increased use of cost effective COLA Changed tax policy None of the above

24%
22% 14% 37%

20%
14% 12% 48%

Mercer

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Company Profile Expatriate Programs Which of the following statements best describes the number of expatriates assigned in recent years ? 2010 Increasing use of expatriates Decreasing use of expatriates 47% 29% 2008 52% 25%

No marked changes in the number of expatriates

24%

23%

Mercer

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Company Profile Expatriate Programs Which countries are you sending expatriates to ? 2010 China India 60% 17% 2008 59% 22%

United Arab Emirates

Brazil USA Canada

18%
17% 43% 12%

13%
9% 54% 17%

Mercer

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Company Profile Expatriate Programs Which countries are you sending expatriates out from ? 2010 China India 11% 18% 2008 23% 22%

United Arab Emirates

Brazil USA Canada

4%
10% 84% 22%

6%
10% 79% 24%

Mercer

108

Company Profile Expatriate Programs Approximately what percentage of your companys expatriate population fall into the following age bands 2010 35 or Younger 36 or Older 28% 72% 2008 36% 64%

Mercer

109

Selection and Development Is Human Resources actively involved in the selection of candidates for assignments ? 2010 Yes, always 32% 2008 30%

Yes, on a case by case basis No

41% 27%

38% 32%

How well is selection of candidates handled in your company ? Very well Well Somewhat well Not very well 11% 34% 47% 8% 9% 42% 42% 7%

Mercer

110

Orientation Programs Does your company make use of an orientation program ? 2010 Yes, conducted by outside consultants Yes, conducted by company personnel Yes through contact with employees who know the assignment country Yes, through written materials provided for the employee study Yes, through on line or electronic materials provided from employee study 33% 40% 16% 16% 13% 2008 37% 40% 14% 14% 11%

Yes, when assignment country presents difficulties

No
Mercer

6%
25%

6%
25%
111

Family Matters How does your company define spouse ? 2010 Wife or husband Wife, husband and long term, live partner of the opposite sex Wife, husband and long term, live partner of the same or opposite sex Company does not define spouse 28% 7% 47% 18% 2008 30% 6% 42% 21%

Mercer

112

Family Matters Does your company have a dual career / spousal assistance policy ? 2010 Yes 48% 2008 43%

No, but planning to develop one No

5% 47%

6% 51%

Mercer

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Family Matters What is the average payment made to address spousal assistance ? 2010 One-time lump sum cash payment / allowance Average amount 19% $3,704 2008 23% $4,727

One-time reimbursement of receipts to a max Average amount Annual payment or allowance Average amount Annual reimbursement of receipts to a max
Average amount

35% $3,646 7% $4,188 17%

$3,775

34% $3,868 8% $4,181 11%

$4,841

Mercer

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Assignment Compensation What best describes your companies policy regarding assignment related incentive payments ? 2010 Ongoing payment throughout assignment 28% 2008 34%

Expatriate receives a lump sum amount

Expatriate receives an amount based on job grade, family size of host location Payment based on expatriate performance Other, that the above No assignment related incentive payment

21%
7% 2% 5% 49%

9%
3% 2% 5% 48%

Mercer

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Assignment Compensation Caps on payments 2010 Assignment Premium Average Salary Cap $173,412 2008 $155,609

Assignment Premium Flat Amount

Hardship Allowance Average Salary Cap Hardship Allowance Flat Amount Goods and Services Diff Average Salary Cap

$16,063
$177,418 $25,797 $192,797

$13,832
$166,387 $26,703 $195,740

Mercer

116

Assignment Compensation How does your company determine a hardship allowance ? 2010 Independent data provider 74% 2008 69%

Government data Management determination

26% 9%

28% 9%

Mercer

117

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 Direct purchase of employee home 2% 2008 2%

Third party purchase of home Reimburse selling costs no limit Reimburse selling cost up to a limit
Case by case basis No assistance Other than the above

12% 9% 16%
18% 54% 3%

15% 10% 20%

17% 47% 4%

Mercer

118

Assignment Compensation Housing Does your company provide assistance to an employee who retains his or her home while on assignment ? 2010 Manages rental of employees house 6% 2008 10%

Pays property management fee Pays rent is house becomes vacant Pays some or all of the maintenance cost
Provides referrals to relocation companies Case by case basis No assistance with retained home Other than the above
Mercer

39% 3% 13%
13% 4% 40% 6%

48% 5% 16%
6% 14% 31% 8%
119

Assignment Compensation Housing Which of the following best describes your companys foreign housing policy ? 2010 Company pays housing costs but deducts a home country offset as the employees contribution* 45% 2008 50%

Company pays housing costs but does not deduct a home country (free assignment housing) Company pay a housing differential Company make no contribution to foreign housing costs
* Was 60% in 2004
Mercer

38%

33%

12% 6%

14% 3%

120

Assignment Compensation Housing How does your company compensate for foreign housing utilities costs? 2010 Pays actual without limitation 29% 2008 33%

Pays actual up to a limit Pays a separate allowance for utilities Include allowance in G&S allowance
Include allowance in monthly rent payments Does not pay for utilities

19% 12% 10%

13% 16%

18% 13% 11%

14% 12%

Mercer

121

Relocation Home Country Automobile Does your company assist with the disposal or a car prior to assignment ? Sale of Car 2010 Yes, pays difference between sale price and market value Yes, pays the difference between the sale and market value up to a limit Yes, pays a flat amount Does not provide assistance 11% 36% 9% 44% 2008 14% 40% 9% 37%

Mercer

122

Relocation Home Country Automobile Does your company assist with the disposal or a car prior to assignment ? Leased Car 2010 Reimburses lease cancellation fees with no limit Reimburses lease cancellation fees up to a limit Reimburses lease cancellation fees up to what would have been reimbursed as a loss on sale Provides a loan for lease buy out Does not provide assistance Other than the above 13% 24% 12% 1% 43% 8% 2008 19% 22% 14% 1% 36% 7%

Mercer

123

Relocation Shipping Which of the following best describes your companys policy about shipping an expatriates household furnishing ? 2010 Pays all actual and reasonable shipping costs Company pays shipping costs up to a specified weight Company pays shipping costs up to a specified volume limit Company pays shipping costs up to a specified amount Company does not pay shipping cost 37% 18% 37% 4% 4% 2008 38% 24% 33% 2% 3%

Mercer

124

Exceptions Among the following policy elements for which of the following categories do you grant exceptions ? 2010 Cost of living allowances Host housing allowances Home housing norms Temporary living Transportation allowance 11% 46% 17% 44% 9% 2008 15% 52% 20% 49% 13%

Mercer

125

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