July 7, 2009 by MSI
Most companies sending employees on international assignment provide some type additional above-base compensation benefits to mitigate the expense of living abroad. Typically, the assignee’s new compensation package is based on the home-country salary structure with possible adjustments to the cost of living and housing, combined with a type of home and host income tax protection, and possibly some form of incentive pay. The balance sheet approach is frequently employed to ensure that the assignee neither gains nor loses as a result of taking the assignment. These above-base compensation elements are routinely called “allowances,” “differentials,” and “premiums,” but it is important to use these words correctly as the terms are often misused. While not a serious problem, it still behooves those of us in the business of global mobility to understand and use these terms properly.
In the majority of instances, the most costly component of an expatriate assignment is housing. Very few organizations want their employees to live for “free;” rather they provide a housing differential, which represents the difference between the actual or average housing cost in the home location and the actual or average housing cost in the host location. Employee salary and family size are usually taken into account when determining the housing differential. The assignee contributes to the cost of housing by maintaining home country mortgage payments, for instance, or through housing deduction taken directly from salary based on the average housing costs as presented by an independent consultant.
In addition to differentials, there may be a variety of allowances paid to expatriates; such as one-off payments at the time of their relocation to the host location or repatriation to the home country, or during the course of the assignment. The miscellaneous expense allowance, also known as the relocation allowance or settling-in allowance, is a good example of a one-time payment made to the assignee to be used to offset expenses that are not specifically covered under some other aspect of company policy. Whenever an allowance is paid to supplement a gap in an assignee’s balance sheet, such as housing or cost of living, the allowance actually becomes a differential because the sum was calculated to fill the discrepancy between the two amounts. On the other hand, if the company opts to provide additional cash for transportation, let’s say, and the assignee is free to decide how to apply the money, than this payment is considered an on-going allowance.
Premiums are sometimes offered to assignees as an incentive to accept the assignment. Not as common today as in years past, the International Assignment Premium (IAP), also called the Foreign Service Premium (FSP), is an above-base compensation payment that recognizes the challenges faced by the assignee and family in moving to a foreign country. More companies are willing to offer a Hardship Premium, Hazard Pay or Danger Pay, which is a type of payment that acknowledges the unusual difficulty living in the host country, whether due to climate, political instability, environmental risks, or lack of amenities. The Hardship Premium is usually a percentage of salary and some companies decide that a certain threshold must be reached before this is applied.
Understanding the differences between international assignment allowances, differentials, and premiums is an important element of the knowledge-base necessary to manage and administer complex global mobility programs, whether one works for a service provider or the corporation sponsoring expatriate assignments.
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