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Essential for recruitment and retention in locations with challenging living conditions, Lauren Smith explores methodology and policy issues related to this costly allowance.
All expatriates, no matter where they are posted, have to make some adjustment to life in an unfamiliar environment, and all members of an expatriate’s family will be affected by the move. The spouse and family are integral parts of a global assignment and must be given special consideration. Because each city and each country in the world has unique characteristics, cultures, and charm, the global move requires the ultimate in patience and adaptability.
The expatriate family may experience stress, frustration, anxiety, and considerable disturbance during an assignment, especially when living conditions in the host country differ from those at home. The hardship allowance is paid in recognition of these difficulties. According to the 2007 Expatriate Salary Management Survey, conducted by ECA International, New York, NY, nearly all companies pay a hardship allowance in certain locations.
There are many organisations that provide hardship tables that note their recommended allowance by location. One of the most frequently used providers within the United States is the U.S. State Department (DOS). DOS data should be scrutinised for a few reasons:
The formula used to generate hardship recommendations is tailored to government workers and does not consider conditions applicable to employees working for commercial or charitable enterprises. In some locations abroad, U.S. government civilian employees have access to military or post commissaries, duty-free imports, and use of military mail and medical facilities. If these benefits were not available to employees, the hardship recommendation may be different.
Other factors, such as the quality of housing occupied by government employees, also could affect the post differential level.
Questionnaire reports are required to be updated by posts with established differentials every two years. Voluntary reports may be submitted by any post at any time. Consequently, some locations are surveyed less often than others.
The hardship calculated by DOS is, by definition, compensation for living conditions that differ substantially from those in the continental United States. Thus, the global use of these tables may not be justifiable.
In this growing global market of talent, a one-size-fits-all (typically hardship based on only one home location) may not satisfy the global workforce or the goal of the compensation programme. The 2007 Expatriate Salary Management Survey notes that assignee populations are becoming far more diverse within organisations that have assignee populations in excess of 50 people, noting their assignees are transferred from six or more countries. This diversity requires a global approach to hardship. Enabling a point-to-point comparison will ensure a compensation rate reflective of each national’s experience. A Malaysian family would face many of the same challenges of language, climate, and culture in a move to the United States as would an American family transferring to Kuala Lumpur.
Calculating the hardship allowance
Once the grading of the various factors has occurred, an overall score for the combination is determined. Reviewing the American family in Kuala Lumpur, the hardship score would be 123 with the major factors of climate, language and culture, and socio-political tensions driving the score upward (see Chart 1).
The Malaysian family also would experience hardship with climate, language and culture, and isolation, driving the scores upward in Boston (See Chart 2)
By having a system of grading the major factors affecting the quality of life at the location, comparisons can be made throughout the world.
Each of the locations (noted in Chart 3 on page 47), Sofia, Bulgaria; Jerusalem, Israel; and Castries, St Lucia, all share the same total score though the reason for the high scores are quite different. Sofia scores high because of personal safety issues and lack of health facilities, Jerusalem because of socio-political tensions as well as personal safety risks, and Castries because of natural phenomenon (hurricanes) and a lack of adequate health facilities.
It also is possible to tailor the hardship allowance for unique characteristics of the company. For example, if a company only sends employees on single-status assignments without families, it is possible to remove the education score.
Once an overall score for the combination has been determined, the company then can ascertain the appropriate compensation level. According to the “Expatriate Salary Management Survey,” most companies will tier the scores into four to six levels. Companies then typically pay between 5 to 35 percent, although some companies pay as much as 50 percent.
With regard to the actual allowance, according to the same survey, 27 percent of organisations have a cap on the salary on which the allowance will be based. In addition, about 18.6 percent fix the allowance at the start of the assignment and do not revise on salary increases during assignment.
Home location: Boston
Host location: Kuala Lumpur
Section score (Maximum section score)
Climate 29 -50
Health 16 -40
Language & culture 26 - 50
Goods & services 2 -25
Isolation 19 -30
Social network & leisure 3 -30
Housing, utilities, education 4 -40
& socio-political tensions 24 -65
Total score 123
The company also must determine the tax treatment of the allowance. Should the employee pay the tax (via hypothetical tax) or will the company pay the allowance gross paying all tax on the allowance? According to the 2007 Expatriate Salary Management Survey,” 23 percent of companies hold the employee responsible for hypothetical tax on the allowance.
It is important that companies make provision in their policy to review the hardship allowance on a regular basis as changes (for the good or bad) do occur constantly. As an example, in the survey, the benefits of closer relations with the EU were noted in the scoring in North Africa, with Tunisia, Morocco, Algeria, and Egypt showing signs of improvement in a number of categories. Scores relating to security concerns, health, goods and services, and facilities for expatriates, such as recreation, education, and housing, recorded better results in the survey, resulting in recommendations for decreases in allowance. Meanwhile, sub-Saharan Africa has seen continued deterioration, with Mali, Senegal, Sudan, and Ethiopia registering large increases in scoring. In part, security and political tensions have a large role to play in the changes in each location because of ongoing and expanding conflicts.
We also have noticed a trend in Asian intercontinental transfers. Some Asian-based employers transferring employees within Asia (for example, Korea to China, Malaysia to Japan, and the like) will not pay a hardship allowance regardless of location.
Home location: Kuala Lumpur
Host location: Boston
Section score (Maximum section score)
Climate 18 -50
Health 2 -40
Language and culture 18 -50
Goods and services 0 -25
Isolation 15 -30
Social network and leisure 2 -30
Housing, utilities, education 7 -40
& socio-political tensions 11 -65
Total score 73 -330
Reasons for allowances
Forty percent of companies surveyed noted that this allowance is one of the tools used to motivate employees to accept assignments to undesirable locations, and 52 percent pay this allowance to compensate for adapting to a difficult environment. With a cost that can be as high as 35 to 50 percent of base salary without consideration of income tax, companies should monitor this allowance to ensure that it is kept current and is satisfying its desired purpose.
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