Location Allowance – An ECA Global Perspective
Making people move internationally is probably good for your business and also for the assignee’s career. But an international move will very often present a hard challenge to an assignee and his/her family in terms of adapting their life to a new location. Differences in climate, language and culture are some of the factors that will influence the assignee and his/her family life.
ECA provided deeper data and insights on this topic and the Ingenimundi team is reviewing such information today.
Location or hardship allowance?
When thinking about international mobility, you should probably take more things in consideration than only the hardship. Indeed, a lot of other factors will impact the lifestyle of an assignee. Since the hardship is only one of those factors, it’s probably more relevant to talk about location allowance.
Use of location allowances around the globe
First, you should know that when calculating the salary package for mobile employees, two types of approach can be chosen:
A. Home country approach: salary methodology that starts with the salary that would be paid for the expatriate’s job if it were done in the home country. Usually a portion of the home net salary is indexed for cost of living differences and is added back to the remainder of the net, without indexation, together with extra mobility allowances, such as an expatriate or location allowance.
B. Host country approach: salary methodology that applies the norms of the host country. The starting point may be the market rate for expatriates or for local nationals in that country, in which case additional allowances are usually paid to compensate for financial burdens over and above those of local nationals.
As you can see these are two reverse methodology that might impact on the determination of the salary of an assignee.
Reasons for paying a location allowance
This survey has shown that there are two main reasons that are currently pushing companies to give a location allowance: 64% of companies are using it to compensate employees for adapting to a different environment and 32% of companies are currently using it as an incentive to persuade people to move into an undesirable location. Hence, there is two opposite logic’s: compensation or incentive.
Types of mobility policy in which location allowances are used
Many companies apply location allowances for policy types beyond the traditional long-term assignment for which they were originally designed. This again indicates its increasing use as an incentive to undertake an international move.
Expressing location allowances
The most common way to express a location allowance is as a percentage of the national home gross salary, delivered as a net amount. The most usual alternatives are to pay a percentage of your home net salary, or a fix cash amount (varying by location), so that the same allowance is paid regardless of seniority. Just over a fifth of companies applying a percentage impose a ceiling on the allowance. It is far less common to specify a minimum allowance to be paid.
Over half of the companies applying location allowances use a banding system to define them. It means that the locations are grouped into five to seven bands and a recommended allowance is assigned to each band. Normally it’s ranging from 0% to 30% of your gross salary.
Interestingly, about 40% of companies do not use a structured system of scoring and bands to calculate their location allowance. In some cases this is because companies consider the location allowance as a mobility incentive, calculated using a fixed percentage or allowance for all locations rather than a location-specific payment.
Other companies estimate what they consider to be an appropriate allowance for each location based on their own internal system, which may be as simple as sorting locations into two categories: those that qualify for a hardship payment and those that do not. This ad-hoc approach may be sufficient when managing a limited number of assignments to a handful of locations, but as the number of mobile employees, nationalities and destinations increases, so does the likelihood of the company having a more systematic approach to determining location allowances.
By using objective and systematic location ratings to underpin their location allowance policy, these companies can be sure that they are treating their employees consistently, regardless of their location, and not being unduly influenced by subjective opinions about particular destinations. This defensible and robust approach provides companies with an objective framework with which to respond to challenges from employees and quantify improvements or deterioration in living conditions over time.
Delivery of location allowances
The large majority of organisations pay location allowances on a monthly basis rather than as a one-off payment at the beginning or end of the assignment or otherwise. This is in keeping with the original purpose of these allowances being financial compensation for adapting to a different environment rather than an incentive to move, funding for one-off set-up costs in a new location or a completion bonus.
9% of companies pay additional allowances on top of the location allowance to compensate assignees living in a very remote area or an area of extreme risk e.g. where there are high levels of violent crime, political instability or war (commonly referred to as “danger money”).
However, ECA reminds that companies considering paying danger money to employees who have to work in extreme locations should think carefully before doing so; a more appropriate provision might be to ensure that suitable security measures are arranged.
Reviewing location allowances
Half of companies review their location allowances every year, corresponding with the review of other elements of the expatriate salary package on an annual basis.
It is interesting that 17% of companies review the allowances less frequently, or not at all after the initial calculation has been made, meaning companies who never review their allowances may be over-compensating employees for living in an environment that is becoming increasingly easier to adapt to. Some companies may well be comfortable with this arrangement, but in the reverse scenario where living conditions are deteriorating, it may be prudent to review the location allowance in order to ensure the continued success of the assignment.
Phase out of allowance
As a location allowance is most commonly paid as a compensation for adapting to a new environment, it follows that the need for this payment should decrease the longer the employee remains in the host location. In practice, other factors may come into play.
In this recent survey, 57% of participants reported that they applied a localization policy once an assignment had extended beyond a particular period of time, most commonly five years.
Companies look to reduce the overall level of compensation or phase out specific elements of the package. Of the latter, more than half will immediately remove the main mobility-related allowances and benefits, including location. The remaining will generally look to phase them out over a year or more, but it is worth noting that nearly 10% never fully remove location allowances when they “localise” their assignees. Added to this, nearly two-thirds of companies with a localisation policy do not always apply it everywhere, and one of the reasons commonly cited is that the employee is working in a hardship location.
It is important, once again, to understand that the location allowance is something that matters and affects both companies and assignees, and both should consider carefully how the decision is made and which factors are taken into account.
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About the content contributor:
ECA was established in 1971 by a number of leading international companies. Its purpose was, and still is, to provide employers with information and advice on terms and conditions for staff employed abroad, whether local national or expatriate.
About the Location Ratings ed. 2013:
ECA Location Ratings report looks at the use of location allowances in compensating employees for adaptation and hardship when working in a new location.