2013 EMEA EXPATRIATE MANAGEMENT CONFERENCE · High Income Purchaser Designed for high income employees from lesser developed/low wage countries who, due to their higher income, have

2013 EMEA EXPATRIATE MANAGEMENT CONFERENCE 11-12 APRIL 2013

ADDRESSING THE COMPLEXITIES OF EXPATRIATE COST-OF-LIVING ISSUES 12 APRIL 2013

Nathalie Constantin Métral,

Geneva

Ulrike Hellenkamp

Hamburg

MERCER

Agenda

• Cost of Living: one concept, several methodologies

• Cost of Living trends

• How to address the challenges of currency fluctuations ?

• Case study with various pay delivery options

• Managing the expatriate purchasing power in high inflation locations

• Negative Cost of Living indices

Section 1

Cost of Living: concept & methodology

MERCER

PROTECTING ASSIGNEES’ PURCHASING POWER THE BALANCE SHEET APPROACH

Expatriates kept on same base salary structure as peers at home

• Series of allowances and differentials to ensure that expatriates neither gain nor lose financially while assigned abroad; typically covered are:

- Goods & services

- Housing

- Income taxes

- Potentially enlarged to car, family allowances …

• Incentives

- Premiums

- Hardship

- Other

Appropriate for limited-duration assignments; generally 1–5 years

MERCER

THE COMPOSITION OF BASE PAY GOODS AND SERVICES SPENDABLE INCOME

Différentiel B&S

Reserve/Savings

Spendable Income

(Goods & Services)

Housing

Income Taxes

Differential

= BASE PAY HOME SPENDABLE INCOME breakdown:

Food at Home

Food Away from Home Tobacco and Alcohol Household Supplies

Personal Care Clothing and Footwear

Domestic Services Recreation, Sports, Leisure

Transportation* Utilities*

*optional in the multinational approach

Home Country

MERCER

What Philosophy Best Suits Your Organization? 2 choices in compensation approach assume international assignees…

% o

f in

co

me

sp

en

t

% o

f in

co

me

sp

en

t

Multinational philosophy Home-Host philosophy

YES YES

… spend SIMILARLY regardless

of where they come from. Or…spend DIFFERENTLY

depending

on their country of origin?

MERCER

Consider Mercer’s Multinational Approach Assumes all assignees spend similarly, regardless of nationality Three index options

Mean to Mean Compares average of prices at home

to average at host for common items

at comparable retail outlets. The best

indicator of absolute price differences

between locations without

consideration of assignee efficiency or

availability of goods in location.

Efficient Assumes assignee has a wide variety

of outlets and retail prices in the

assignment location to choose from, but

due to short term nature of assignment

may not have same efficiency in

purchasing as in home location.

Convenience Based on more expensive or

convenience stores in the host

location. Applicable for locations where

shopping convenience is essential, or

locations that lack a wide variety of

alternative retail outlets.

Host Prices Home Prices Allowance

=

=

=

Low Med High Low Med High

MERCER

Consider Mercer’s Home-Host Approach Assumes assignees spend differently, depending on their home habits Three index options

Efficient Purchaser Assumes assignee has familiarity with

local market and is therefore more

efficient by purchasing combination of

international and local/regional brands

and outlets.

High Income Purchaser Designed for high income employees

from lesser developed/low wage

countries who, due to their higher

income, have spending practices more

typical of the expatriate or international

community than of typical locals from

their home country.

Expatriate Based on comparison of prices in

retail outlets frequented by local

nationals in the home location to

prices from retail outlets frequented by

expatriates in the assignment location.

Appropriate for newly arrived

expatriates or lesser developed

locations where local brands / outlets

are inappropriate.

Host Prices Home Prices Allowance

=

=

=

Low Med Low Med

Section 2

Cost of Living trends

MERCER

International assignment program administration For which package elements do German companies receive the most requests for exceptions?

17%21% 21%

24%28% 30%

35%40%

48% 50%

70%

81%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Har

dship

prem

ium

s

Dep

enda

nt e

duca

tion

Dua

l car

eer a

llowan

ce

Tran

spor

tatio

n allowan

ce

Hom

e ho

using

norm

s

Tem

pora

ry living

Ince

ntive

prem

ium

s

Tax eq

ualis

ation

Hom

e leav

e –

clas

s of

airfar

e

Cos

t-of-l

iving allowan

ces

Hos

t hou

sing

allo

wan

ces

Hom

e leav

e –

num

ber o

f trip

s

Source: 2012 Worldwide Survey of International Assignment Policies and Practices

% o

f re

sp

on

de

nts

MERCER

International assignment program administration For which package elements do German companies grant the most requests for exceptions?

13% 14%

25% 25% 25% 27% 29%35% 36%

43%

63%68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Har

dship

prem

ium

s

Dua

l car

eer a

llowan

ce

Hom

e ho

using

norm

s

Ince

ntive

prem

ium

s

Tax eq

ualis

ation

Tran

spor

tatio

n allowan

ce

Cos

t-of-l

iving allowan

ces

Hom

e leav

e –

clas

s of

airfar

e

Tem

pora

ry living

Dep

enda

nt e

duca

tion

Hom

e leav

e –

num

ber o

f trip

s

Hos

t hou

sing

allo

wan

ces


% o

f re

sp

on

de

nts

MERCER

Goods-and-services/cost-of-living allowance What index pricing level do you primarily use for typical long-term assignments?

14%

59%

12%

7%

13%

48%

23%

10%

0%

10%

20%

30%

40%

50%

60%

70%

High Medium Low A combination

Globally

Europeancompanies

MERCER

Goods-and-services/cost-of-living allowance Is there a cap or a limit on the amount paid for goods and services differentials/COLA?

17%

4% 6%

73%

8%2%

6%

85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Yes, for assignees

with salaries above

a predefined

threshold

Yes, based on a flat

amount

Yes, other No

Globally

Europeancompanies

% o

f re

sp

on

de

nts


Section 3

How to address the challenges of currency

fluctuations ?

Case study with various pay delivery options

MERCER

INDEX CHANGE AND IMPACT ON THE SPENDABLE INCOME TRANSFER FROM BOSTON TO SAO PAULO MARRIED COUPLE + 2 CHILDREN

Survey dates Gross salary Spendable

income

COL Index

Mean to

Mean

Exchange

rate USD 1 =

? BRL

Exchange

rate

variation

Spendable

income adjusted

by COL index

Variation

Spendable

Income

adjusted by

COL index

6 month

Mercer

basket

inflation

Boston

6 month

Mercer

basket

inflation Sao

Paulo

USD USD (%) USD (%) BRL (%) (%)

March 2012 70'000 24'035 145 1.719345 34'851 59'920

sept.12 70'000 24'035 125 2.027000 17.89% 30'044 -13.79% 60'899 1.00% 1.75%

MERCER

Remuneration approach How do companies typically deliver expatriate remuneration?

31%

30%

21%

5%

13%


Split pay

Home country currency

Host country currency

Case by case/other

According to expat’s wishes

MERCER

METHODS OF PAY 100% AT HOME

• Amount paid directly into home bank account: need for currency

protection

• Host obligations: housing, spendable income, other host expenses

• Monitoring - employee speculation

• Lead time between pay determination and exchange rates may

cause large gains/losses

• Typically requires inter-company recharge: watch out for transfer

pricing issues

• Ease of administration (?)

Full salary paid in home currency: currency protection needed for

the host part*

*Spendable income, housing, car, school fees or any other

expense to be paid for in local currency

MERCER

METHODS OF PAY 100% AT HOST

• Need for FX monitoring – employee speculation

• Home obligations (storage costs, mortgage etc)

• Employee loses ability to save in home

• May be a legal requirement (e.g. local contract)

• Ensures local company bears full cost

• Highlights cost of expatriation to receiving company

Full salary paid in local currency, currency protection needed

for the saving part*

*Home country reserve (i.e. net salary minus spendable

income and housing) plus premiums and incentives

MERCER

Paid by

Company

Paid at

Host

Paid at

Home

Split Pay Method

Income

Taxes

Goods &

Services

Housing

Savings/Reserve

Premia &

Incentives

MERCER

METHODS OF PAY SPLIT PAY (PROTECTING THE EXPATRIATE)

• Stable number of local host currency units

• Stable number of home-country currency units

• Neutralised effect of foreign currency fluctuation

• Adjustment only when prices change (inflation) in the home country

or in the host country

• May add payroll and reporting complexity

No need of any currency protection

The assignee receives salary and premiums in the currency it

needs to be spent; no need to monitor currency fluctuations.

Section 4

Managing Cost of Living in high inflation locations

MERCER

Managing Cost of Living in high inflation locations

• Only a handful of locations with high price movement in 2012

Cities with twelve-month price movement > 10% from September 2011 to September 2012

City Country Price

Movement

ADDIS ABABA ET 19.89 %

BLANTYRE MW 26.06%

BUENOS AIRES AR 24.30%

CARACAS VE 14.22%

CORDOBA AR 24.30%

KHARTOUM SD 12.36%

MANAGUA NI 11.55%

MINSK BY 59.45%

SAMARKAND UZ 11.93%

TASHKENT UZ 10.44%

TEHRAN IR 21.78%

MERCER

HOW TO MANAGE COST OF LIVING IN HIGH INFLATION LOCATIONS TRANSFER LISBON TO BUENOS AIRES: MARRIED COUPLE + 2 CHILDREN

COL Index

increases

Total Host Spendable

income in local

currency increases in

host city (positive price

movement)

Section 5

Negative Cost of Living indices

MERCER

Cost-of-living / goods-and-services allowance

32% 33%

47%53%

61%67%

72% 72% 74% 75% 77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Fran

ce

Sca

ndinav

ia

Net

herla

nds

Switz

erland

Ger

man

y

Em

erging

cou

ntrie

s

Unite

d Kingd

om

Unite

d State

s

Can

ada

Spa

in

Aus

tralia

Headquarters country

% of companies indicating that they never apply negative COLA (employees receive a

windfall)


MERCER

Goods-and-services/cost-of-living allowance Do you apply negative COLA?

66%

13%

2%

9% 9%

55%

35%

3% 4% 3%

0%

10%

20%

30%

40%

50%

60%

70%

We never apply

a negative cost-

of-living index;

assignee

receives windfall

We apply

negative index

We make a

deduction from

other

assignment

related

allowances

We handle

case-by-case

No assignees

assigned to

such locations

Globally

Europeancompanies

% o

f re

sp

on

de

nts


MERCER

NEGATIVE COST-OF-LIVING INDEX: BAD PRACTICE OR LOGICAL SOLUTION?

Boston1st assignment 03/2011 :

La Paz, Bolivia

2nd assignment 09/2012 :

Johannesburg, South Africa

100 75 89

100 100 100

0 +25 + 11

... +25 -14

MilanBuenos Aires, Argentina -

03/2011

Buenos Aires, Argentina -

09/2012

100 73 93

100 100 100

0 + 27 7

... + 27 -20

Gain/Loss

Employee's perception

Employee's perception

Index increase

COL Index

Paid by company

Multiple assignments

COL Index

Paid by company

Gain/Loss

MERCER

Cost-of-living / goods-and-services allowance


16%

12%

18%

17%

28%

11%

15%

30%

16%

12%

7%

11%

4%

6%

13%

13%

11%

0%

7%

31%

12%

29%

16%

42%

53%

50%

43%

63%

77%

56%

47%

71%

64%

58%

42%

20%

18%

16%

8%

7%

6%

5%

0%

24%

0% 25% 50% 75% 100%

Scandinavia

Germany

Switzerland

France

Emerging countries

Netherlands

Australia

United Kingdom

Canada

United States

Spain

A combination High Medium Low

Given availability, what index pricing level do you primarily use for typical long-term

assignments?

Hea

dq

uart

ers

co

un

try

Documents

2013 EMEA EXPATRIATE MANAGEMENT CONFERENCE · High Income Purchaser Designed for high income employees from lesser developed/low wage countries who, due to their higher income, have