Localizing Expatriates – Trap or Solution?

Author:
Warren Heaps – Birches Group LLC

Expats are expensive. With more and more focus on the cost of international assignments, companies are looking for ways to reduce expenses. The challenge is finding the most effective way to do it.

I believe one of the alternatives companies should consider is to simply reduce the number of expats! But this is easier said than done.

Localization is one approach which can be used to achieve this goal, but it’s hard to get it right.  Let’s look at some approaches and pitfalls when considering localization.

Localization Approaches
One of the most common approaches to localization is to convert the expat to local terms and conditions, and provide a phase-down of expat allowances and benefits.  For example, the expat would receive a salary according to the host country salary scale and participate in the host country benefits.  During a transition period (usually one to three years), the employee also would get some expat benefits.  This usually includes a transition allowance which provides the full net difference for a year, reducing in equal installments to zero after three years.  In addition, companies often provide continued schooling assistance for several years.

Some of the challenges with this approach are in the areas of benefits, taxes, immigration, schooling and housing.

• Retirement Benefits – Companies face the issues of different levels of benefits, bridging of service, and shortfalls in both the home and host social security plans. Careful attention and analysis is required to resolve these issues.
• Health Care – Many expats have coverage under global plans. When localization occurs they switch to local coverage. How does the local plan measure up? What about pre-existing conditions? College-age dependents at home? What if the local plan is not adequate when compared to the prior coverage? Some organizations allow continued coverage under the global plan in these cases.
• Taxes – Many companies provide tax preparation assistance to newly localized staff (but not equalization). You should also be aware of trailing tax liabilities generated by incentive pay and equity compensation.  In some cases, equalization may be appropriate.
• Immigration – Laws must be consulted to ensure expats can remain employed legally in the host country, and family members can stay in-country. This is one of the most critical issues to address, since mistakes can result in severe consequences.  In some cases, long-term expats can get permanent residence, which may also provide opportunities for spousal employment.
• Schooling – Assimilation and adjustment of the family is a key to a successful localization. Schooling for the kids is often the biggest challenge, especially if the host country language is different from the home, or if local schools have lower standards or different curriculum options than the international schools. Many companies provide generous support for schooling during a transition period, aiming to prevent disruption in studies, especially for older students. Consulting with educational specialists, such as School Choice International, can be a very effective way to assist employees in making the best choices.
• Housing –This is the other major element of the expat package that dramatically impacts the expat and family, and can be quite contentious.  Expat housing standards are often much more generous than local standards, and are located in the most desirable and expensive neighborhoods.  Localized expats may not be able to afford housing in the same locations.  Companies can provide limited assistance for a local move, as well as a shipment of goods from home. Assistance with buying a home is another benefit to consider.

Saving on Expat Costs
Localization generates savings for the company when the cost of local salary and benefits is less than the expat package. When calculating the savings, don’t forget to consider the cost of transition benefits (including any tax gross-ups). You may find the savings to be elusive for the first few years.

Useful Tools
One excellent tool to help employers calculate localization costs is the Permanent Transfer Calculator from Airinc. This tool calculates the net differences for all of the key package elements and illustrates the level of transition benefits needed. It is a very useful tool which enables companies to make informed decisions when localizing staff.

Other Considerations
The most common localization options are usually applied in host locations such as the US and Western Europe.  It is usually easier to localize staff in higher wage locations, and in developed countries.  Some companies localize staff in lower-wage locatio ns in the developing world, but these cases can be very challenging and demotivating for staff.  In addition, family assimilation can be much more difficult.

Companies sometimes localize staff only to re-expatriate them a few years later. This is generally a bad practice and causes a lot of confusion, especially for retirement benefits.  Instead, look at your career and succession planning and evaluate the chances of another expat assignment in the future. It may be more practical to consider reduced allowances instead of full localization in these situations.

Finally, always consult with your legal counsel when changing terms and conditions for expats. In many countries, laws limit the ability to reduce compensation.

Summary
Localization can be a useful technique to save money and reduce expat costs. Careful analysis and planning is required to make it work, and attention to family transitions is essential for success.