Converting Expatriates To Local Employees Can Pay Off
Susan Ainsworth		Printer-friendly version

In today's global marketplace, companies must send some of their best and brightest employees away from their home country to perform a variety of key functions. And to entice them to relocate—even temporarily—to another country, companies know they must offer these expatriate employees attractive packages that include such perks as generous housing allowances, cost of living adjustments, tax reimbursement and private school tuition for their children.

However, companies are now less likely to provide these rich packages over extended periods of time. When expatriate assignments start to change in purpose or take on a more permanent status, an increasing number of companies are finding it possible to "localize" expatriates as a way to cut costs.

The localization process weans employees away from expatriate packages and helps them assimilate into the host country economy by eliminating some of the expat's allowances immediately and winding down other benefits over time.

The process can be quite complex for both the employer and the employee. Calculating pension benefits between multiple countries, establishing permanent resident status, and tutoring employees on more complex host country tax laws are all challenges that often require HR to seek outside expert assistance.

Substantial Cost Savings

The cost savings associated with localization can be substantial, making the effort worthwhile. Typically, a company spends three to four times an employee's base salary for every year it keeps them on as an expatriate. "So, if you've sent a person making a $100,000 base salary on a three-year assignment, you would expect to spend somewhere between $900,000 and $1.2 million," says Geoffrey Latta, executive vice president for international compensation services at New York City-based Organization Resources Counselors, a management and human resources consulting firm. When an employee is localized, the company can bring that multiple down to one-and-a-half to two times the salary, depending on the location.

Perhaps for the potential cost savings, localization is becoming more accepted. "When people first started talking about localizing employees in 1995, everyone else thought they were crazy," says Thomas Tilghman, a senior consultant with the global management consulting firm Towers Perrin (New York City). "The thinking was that it was totally unfair to put somebody into a job in another country without continuing to offer the level of compensation that he had in the home country plus any additional costs in the host country including taxes." But since then, more companies have expanded into the global marketplace, creating more jobs outside the home country and opening up a range of assignment types, many of which naturally evolve into local positions.

Still, relatively few companies ascribe to the localization philosophy. "When we've surveyed our clients on the issue, we typically find that only about a quarter of the companies have a formal localization policy and another quarter say that they have an informal policy," says ORC's Latta.

Many companies avoid drawing up a policy because they feel it is impossible to draft one that covers the many different expatriate assignments, individuals, and country locations, says Latta. "They just throw their hands up and opt to handle localizations on a case-by-case basis."

Loosely Worded Policy

Despite the challenges, Latta still recommends a company adopt a loosely worded localization policy that does not pin down the employee or the employer with a great deal of specific detail. For example, Aventis, a global pharmaceutical company headquartered in Strasbourg, France, does have a formal policy "in order to assure consistent treatment for all associates."

Aventis looks at the localization issue on a worldwide basis, however. There's not always a cut-and-dried answer to questions about localizing expats," says Dorothea Klein, head of international mobility for Aventis. "It depends on where they are from and where they are going. We have associates coming into the U.S. from abroad, and vice versa, and among the more than 100 countries in which we do business on a regular basis."

Above all else, says Latta, a policy should require that outgoing expats receive "some written recognition that after a certain period of time at a given location, there is a possibility that the person could be placed on local conditions either immediately or over some transitional period." If a company does not spell out that possibility up front, localization can come as a shock to the expat, making it that much more difficult to carry it through, he advises.

Rohm and Haas Company, a global specialty chemical company headquartered in Philadelphia, for instance, does introduce the possibility of localization in its assignment letters, although it does not have a formal localization policy for the sake of flexibility. "Localization for an expat becomes a possibility when his or her assignment has been completed or it has been determined that the assignment needs to be extended," says Joan Burrell, the company's relocation and international assignments manager. "For example, if the assignment becomes a permanent need for the company, we might invite the person to stay in the position and localize his or her residency."

Companies vary on how soon they review their expat assignments and assess whether localization makes sense. At Aventis, for example, expats usually sign on with three-year contracts with the opportunity to expand to five years.

And generally, most companies make review assignments at the end of five years. That time frame became widely accepted partly because most countries' social security totalization agreements have a limit of five years (although they often allow an extension of one to six years beyond that), says Latta. "So, at the five year point, companies often have to make the decision as to whether an individual can continue to stay in their home country social security system or transition over to the assignment country's system. That tends to be a trigger for review of the expat assignment."

Ongoing Review

For its part, Rohm and Haas reviews its expat assignments on an ongoing basis, which was not the case many years ago, says Burrell. The company is now organized around Unit Development Committees—multidisciplinary teams of professionals, including HR—that focus on leadership and talent development. These aspects of each business are continually assessed, she notes. "The economy is forcing companies to take a harder look at costs. So, all of our businesses are keenly aware of why and on which assignments we have expats," says Burrell.

Burrell says the difficult economic conditions are causing many companies to closely monitor their costs across all functions, including expatriate programs. Part of her job is to benchmark Rohm and Haas' expat programs with those of other chemical companies to be sure they are on the same playing field. "We want to [set up] fair and equitable expat policies while remaining competitive in the marketplace," she adds.

Companies like Rohm and Haas recognize, however, that they cannot afford to cut expatriate packages too aggressively. And localizing an employee cannot be a purely financial decision. It must make sense from both a business standpoint and a personal standpoint. "In the end, mutual interests need to be met," says Burrell.

Companies realize, too, that it is becoming more difficult to get people to go on assignment, so they don't want to accelerate their localization plans and make foreign assignments less attractive to existing or future expats. "Reducing the financial incentive could discourage potential future assignees from going or drive assignees to opt to return home," creating the difficult problem of replacing them, says Latta. "So companies still need to make the package generous enough for the employee to accept an assignment and stay there," says Latta.

As the number of dual-career couples continues to increase, it makes it difficult for many employees to accept expat assignments. "For example, sending an employee on a three-year assignment in Bangkok might create a big problem for his working spouse. Even if the spouse could afford to walk away from an existing job and go, it may difficult to for her to get a work permit in the host country," Latta points out.

Secondly, a lot of employees are "increasingly skeptical—and rightly so—about whether an international assignment will really be a valuable career move," says Latta. "A number of studies show that a significant percentage of expatriates leave companies after they return home," he adds. "And many companies do a poor job of reintegrating expats and using the experience they've picked up."

And like many U.S. citizens, prospective expats may be much more skittish about traveling and living anywhere outside the U.S., Latta adds. "In the wake of the September 2001 attacks, people are just a little more concerned about security and I think that is beginning to impact international programs at a lot of companies."

Unattractive Salary Structure

The fact that much of the new business growth is in underdeveloped or third world countries further hampers companies hoping to cut costs by localizing employees. In most cases, the standard of living and salary structure are not rich enough to entice an employee to stay on as a local. "Typically, when an employee is localized, he is given the same salary package as local employees," says Latta. "Well, in a place like Indonesia, someone earning $100,000 in the U.S. would only earn about $15,000 when localized there, he says. "You're just not going to get anybody to accept that."

But as some of the underdeveloped parts of the world become more westernized, localizations are becoming more common there. Sometimes an expat even drives the decision to localize. For example, at Rohm and Haas, Burrell has helped localize an American in Asia who decided to stay for personal reasons. "He came to the realization that he enjoyed living in Asia. He had a good job there so he is making his future there."

Surprisingly, Burrell says she has localized three employees recently in this part of the world, but before that it was "extremely rare." The most recent previous case was eight years earlier, she remembers, when an employee asked to localize to Asia. "Back then, that was unheard of."

Burrell attributes a slight increase in employee-driven localizations partly to a weak job market in the U.S. "I think that people realize that there are excellent job opportunities in other countries, as well as at home."

Still, the U.S. remains the most attractive labor market, Aventis' Klein points out. "It's easier to localize people in the U.S. than most other countries," she says. Burrell makes the same point. When localizing employees into the U.S., Rohm and Haas follows a specific and straightforward localization process.

But localizing an employee outside the U.S. can be a complex process. On a case-by-case basis, the company's local HR professionals draft a personalized localization agreement for each employee. "They are in the best position to tailor the agreement to the individual, the host country and the assignment," says Burrell, who reviews the document "from a U.S. perspective" before it is finalized.

In addition to drafting an agreement, HR has a lot of critical information to communicate, which can be challenging. Employees want to know how being localized will affect them and their family members.

One part of the process involves going through each individual element of the expat package and explaining how soon it will be revoked. "HR staff typically sits down with the expat and goes through a checklist, which frequently turns into a kind of negotiation, particularly if the company is initiating the localization," says Latta.

Depending on the situation, most companies wind down benefits over a period of three to five years. "What we recommend to clients," says Tilghman, "is to calculate the difference between the rich expatriate package and the local package and pay the difference in a declining amount over a three-year period."

Often, companies phase out allowances on a more accelerated schedule. For example, at Rohm and Haas, if the employee's U.S. home is still under home rental management, "we've allowed them up to six transition months to relocate their belongings and sell the real estate property," says Burrell. And in less developed countries like China, the company may extend international medical coverage by six months for localized employees.

Some benefits can be very complicated to convert to local status and explain to the employee. Outside the U.S., countries have various legally fixed, socialized benefits such as pension, health and unemployment that can create concerns for employees from the U.S., Aventis' Klein notes. Recognizing this, the company provides a broad range of tax advice, benefits assessment, pension planning and other counseling to the employees that it localizes.

Pension Headaches

Pension and retirement rank as the most confusing and worrisome for localized employees. Cross-border integration and transfer of pension benefits is very difficult. In addition, employees on multiple assignments may not legally be able to accrue retirement credits in their home countries or their company plan may not allow it.

"Many localized employees don't end up with a pension plan that's equal to what they would have had if they had stayed in one country for the duration of their careers," says Tilghman. "If you are coming from a country that has a rich pension program like many in Europe into the U.S.," he says, "that can be a problem."

"It's very complicated, especially when an employee comes from a country where the social security and the company-defined benefit plan was fairly generous and moves to the U.S. where all he will have on a going-forward basis is a defined contribution plan such as a 401(k)," says Tilghman. "It can be a bit of a culture shock for the localized employee."

To compensate, companies will often come up with some sort of supplemental plan or give credit for past services in the new plan "so that the employee does not lose," says Tilghman. In general, companies try to make sure the employee ends up with at least what the company calculates as an appropriate retirement income for somebody that's been a loyal employee for a long period of time, he adds.

Most HR departments will go to a benefits planning firm for outside help to work through the intricacies of converting pension plans and retirement packages for localized employees. Likewise, most companies will go to one of the big four accounting firms for help with winding down any tax equalization allowances paid to expats, Latta notes. Recognizing that tax laws are complex in some countries, HR typically provides support to help the employee understand and complete tax returns for a year or two after localization.

Rohm and Haas provides tax assistance for expats in their year of transition. "So people who are localizing this year will get tax help next year, for 2003 tax filings," says Burrell.

Indeed, the goal behind localization is to cut costs while still meeting the mutual needs of the company and the assignee. To do that, some companies still provide some minor benefits or allowances to their so-called localized employees to help them thrive in an environment that is not native to them.

It's a difficult balancing act. "When it comes to expat programs, companies are dealing with two countervailing pressures," says Tilghman. "One is globalization, which is driving companies to put their best people in the right place at the right time. The other is the economy, which is forcing companies to be judicious about expat packages. Therein lies the conflict. Localization can be part of the solution."