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back to index backGLOBALtalk May,  2007


The Alternatives—Changing International Assignment Terms in the Asia-Pacific Region

Are you up to date on your localization lingo? A variety of new terms have appeared on the international assignment scene, including local terms,” local plus,” lopat terms,” and hybrid terms.” Woodhams sorts through some of these confusing terms and answers some of the questions they bring up, especially in the Asia-Pacific region.

With many traditional expatriate assignments costing well in excess of US $1 million for a three-year posting, many organizations have been searching for lower-cost solutions.

Some of these solutions that have been adopted include new terminology such as localization,” local terms,” local plus,” lopat terms,” hybrid terms,” and the like. Not surprising, there is plenty of room for confusion.

Therefore, one of the pressing issues of the day is to understand and answer some of the questions that arise from the use of these new terms. What is meant by these terms? How widely have these alternatives been adopted in the Asia-Pacific region? What parts of the expatriate package have been excluded or changed? To what extent have organizations localized” existing expatriates, and what elements of their expat package have changed? And, most important, what savings have organizations achieved?

It is likely that the answers to these questions are relevant for other parts of the world.

Factors at Play

When considering these new terms and their effects on employee mobility, there are several business and social trends that affect international assignments in the Asia-Pacific region that first must be analyzed. These trends include the competitive pressure to reduce assignment costs, the need for executives with international experience, an increasing Western business-educated talent pool in Asia with Asian cultural roots, and the worldwide war for talent.”

Regarding competitive pressures, the anticipation is that these may lead to a reduction in offerings in the expat terms” mentioned, and an increase in alternatives to said terms.

The need for executives with international experience and the attendant war for talent may lead to the continued need for assignment terms to be attractive for candidates.

In addition, an increase in the Asian talent pool might lead to an increase in intra-Asia moves, as well as lower-cost alternatives to expat terms. Also, dual-career concerns might lead to an increase in alternatives to long-term assignments and increased spousal support.

The overall effect of these variables probably will push assignment costs downward.

Cost Components of Expat Packages

Before considering these new expat terms, it is worthwhile to be aware of the major cost components of traditional expatriate packages. According to a case study used in the 2004 Reloc8 Asia-Pacific Survey of Relocation Trends,” housing, including utilities, comprised 40 percent of the non-payroll assignment costs of a traditional package. Education accounted for 15 percent, allowances encompassed 10 percent, movement of household goods covered 10 percent, and home leave involved 8 percent of the cost.

Other forms of support made up 16.5 percent of the cost, with medical costs covering 5 percent, motor vehicles accounting for 5 percent, and temporary housing covering another 5 percent. Tax advice/return, assignment training (including language and cultural), and homesearch/settling costs all account for 0.5 percent each.

In seeking to reduce assignment costs, we could expect organizations to target the higher-cost components—particularly housing, education, and allowances (i.e., cost of living, disturbance, hardship, and the like).

What Was Uncovered

With regard to the extent of the move away from traditional expat terms, the June 2006 issue of The Economist reported in the article Traveling More Lightly,” that many companies are sending more people abroad than ever before. But they are trying to keep down the costs of doing so. The traditional business-class expat, usually male and Western, is steadily being replaced by an economy version who may well come from a developing country.”

In the traditional approach, the balance sheet” methodology takes the components of remuneration and taxes and seeks to protect the employee from adverse results when going on international assignments—for instance, cost of living, taxes, housing, education, as well as providing incentives to encourage mobility, such as home leave, mobility” or disturbance” allowances, and hardship” allowances.

As expected, this approach can result in a total assignment cost several times the cost to the corporation in the home location, as well as engendering a quasi-royalty” mentality among the favored group.

Cost considerations have driven a search for cheaper alternatives—both in reducing the generosity of expat terms and more dramatic changes and new terminology such as local, lopat, hybrid, local plus, and localization—all terms that convey a substantial shift in the expectations of employers and employees of what the package” may comprise.

Reduction in Allowances

Results from the 2006 Reloc8 Asia-Pacific International Assignment Terms in the Asia-Pacific” survey found a reduction in the generosity of expat terms” compared with the 2004 survey, in particular in housing allowances, as well as other cash allowances such as mobility” and hardship.” However, the extent of change could hardly be characterized as dramatic.”

Phillip Stanley, head of Asia-Pacific operations for ORC Worldwide, Singapore, said that hardship allowances are shrinking as working and living conditions improve in many countries. Furthermore, organizations are increasingly asking, Do we really need to provide incentives such as a ‘foreign service premium’ to get people to relocate?”

Kathy Curtis, SCRP, GMS, senior global mobility manager for Flextronics International USA, Inc., San Jose, CA, describes the company’s policy as bare bones” expatriate terms (with many sourced from within Asia) involving few cash allowances, modest housing allowances, but including tax equalization. For new hires that are not current employees, their preference is to start on local or local plus” terms.

The Growing Use of New Terms

In the search for lower-cost alternatives, a variety of terms that all have similar meanings—such as local terms, local plus, lopat terms, hybrid terms, and the like—have been coined. Ultimately, they all are lower-cost alternatives to traditional expat terms.

The 2006 Reloc8 survey, which queried 24 corporations who have initiated more than 1,400 international assignments in the last 12 months, found some polarization on this point. Thirty-three percent of respondents said they have no international assignments on lopat terms” (or local plus,” hybrid,” or local”). Thirty-seven percent reported that between 1 and 50 percent of their international assignments were on lopat terms, while 30 percent said more than 50 percent of their assignments featured lopat terms.

Typically, it was the housing, education, and allowances—such as hardship, disturbance, mobility premium, foreign service, and expat allowances—that were eliminated, as these are the high-cost elements of a traditional assignment.

Curtis said, many new hires are now local plus—providing minimal cash allowances but including assistance with finding housing and schools, home leave, but no tax equalization. It is harder to do this with existing employees.”

Stanley said, local plus can sometimes be more plus than local. It is much easier to do this in Singapore and Hong Kong with [their] higher wages and lower taxes. Furthermore, a reasonable pool of people with some experience of Western business methods means U.S. and European companies don’t have to rely on expats from the U.S. or Europe for Asia assignments, but can transfer people within Asia.

Other locations, such as Thailand, would be more difficult to use local plus packages because the local remuneration is much lower.”

Asian-based international corporations can have a very different perspective on reasonable” international assignment terms and conditions.

The Economist article Traveling More Lightly” takes the case of Wipro, a technology research and consulting firm headquartered in India. It reads that, More than 11,000 staff are outside India, and more than 90 percent of these are Indian…. [W]e sprinkle Indians in new markets to help seed and set up the culture and intensity.”

It is perhaps a reasonable generalization to say that a transferee who recently arrived from India may have a different perspective on what constitutes life’s necessities” compared to a peer from North America or Europe.

Localization

Perhaps more than any other, localization” is a term that means different things to different people.

For example, among the meanings in current usage are the following:

- Changing a job from one filled by an expat to one filled by a local national.
- Appointing a new hire on terms that are less than expat terms” but more salary than a local hire.
- An employee who has served three or more years in a foreign destination and either the employer or the employee wishes the assignment to continue, but some elements of the package are changed to closer mirror remuneration received by local hires.

There are significant practical difficulties with the third alternative, according to Curtis. If the manager feels they need this person, it is not easy to turn to the expat and say, ‘Yes, we’d like you to stay, but we don’t want to pay you as much,’” she said.

It is much easier to do if the employee has strong personal reasons for wishing to stay. According to the 2006 Reloc8 Asia-Pacific survey, approximately half the organizations reported that they had localized existing expats; however, of those that had done so, only two had localized more than five employees.

This indicates that while many are talking about localization, few have succeeded in implementation other than in exceptional circumstances.

Conclusions

International mobility in the Asia-Pacific region is growing, but with a very different starting point from the traditional quasi-royalty” approach to international assignees of mature multinational corporations headquartered in North America and Europe.

Young” corporations find it easier to implement less costly expat terms with less generous allowances and benefits than multinationals with a long legacy of international assignments.

With an Asian talent pool that is rapidly improving, as well as increasing acceptance of international experience as routine rather than special, local plus or lopat terms are becoming more common and easier to make stick. Again, however, mature multinationals may find it harder to achieve.

Terminology of these recent developments in assignment terms is inconsistent, and can cause confusion.

Localization,” in the sense of reducing benefits to existing expats, is perhaps of less significance than previously thought, partly because the term itself is being applied to a variety of different circumstances.

Source:  Mobility - GAI


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