MANAGING ALLOWANCES AND PREMIUMS - imercer

1 MANAGING ALLOWANCESAND PREMIUMSCOST-OF-LIVING, housing , QUALITY OFLIVING ALLOWANCES ANDMOBILITY INCENTIVES23 24 APRIL, MADRIDTHESE ALLOWANCES REMAIN AT THE HEART OF HOME-BASED EXPATRIATE PACKAGES AND REPRESENT ASIGNIFICANT COST FOR THE COMPANY This session is an opportunity to reflect on the evolution of these allowancesand the concepts underpinning them Hot topics We will discuss what new developments and concepts are emerging on themarket. to what extent allowance costs can and should be controlled? Should allowance management go in the direction of simplification or on thecontrary seek further customisation to adapt to new types of assignmentsTODAY S AGENDAD efining ALLOWANCES and PREMIUMS Equalisers: Cost of Living & housing Incentives.

2 Quality of Living (hardship) & MobilityThe evolution of ALLOWANCES and premiumsTrends in MANAGING ALLOWANCES and PREMIUMS Challenges and solutions for MANAGING housing budgets Challenges and solutions for MANAGING cost of living fluctuationsKey takeawaysTODAY S SPEAKERSC arlos MestreTitleNarcisaChelaruSenior AssociateTalentMAKE TOMORROW, TODAYDEFINING ALLOWANCESAND PREMIUMSDEFINING TYPICAL ALLOWANCES AND BENEFITSP olicy Remuneration andBenefitsThe underlying remuneration and benefitsthat applies during the assignment. Base salary Paid time off Bonus and other incentive compensation Retirement and deferred compensation2.

3 EqualisersPolicy components designed to make surethat the employee is no better and no worseoff than if they had not taken the assignment Income taxes Social Security housing housing Norm COLA - Goods and services3. IncentivesBenefits provided when necessary toincentivise employees to take theinternational assignment Hardship allowance Danger pay Remote site/Isolation Pay Foreign service (or Mobility ) premium R & R rest and relaxation allowance Completion / repatriation bonus4. EnablersServices and benefits provided to help theemployee relocate and focus on their role Compliance Services Shipment of household goods Transportation Temporary accommodation Children/Spouse Support Language/cultural training Medical benefits Security/SafetyIn addition to assignment compensation.

4 Most organisations typically provide a suite of additionalbenefits to international assignees or those being deployed EXPATRIATE REMUNERATION APPROACHTHE BALANCE SHEET MODEL MOST PREVALENT APPROACHFOR LONG-TERM INTERNATIONAL ASSIGNMENTSI ncomeTaxesGoods &ServicesHousingReserveReserveReserveRes erveGoods &ServicesGoods &ServicesHousingHousingHousingIncomeTaxe sHome HypoTax DeductionIncomeTaxesCOLAG oods &ServicesSpendablePremiumsHome CountrySalaryAssignmentLocationCostAssig nment LocationCosts Paid byCompany andEmployeeHome CountryEquivalentPurchasingPower plusFinancial IncentiveAll actual taxespaid by companyHousing Supplementor housing paid in TaxesHousingSpendableIncome(Goods &Services)SpendableIncome(Goods &Services)Reserve/SavingsHomeCountrySala rySpendableIncome(Goods &Services)Differential/COLAS pendableIncome(G&S)Spendable income in the host countryPositiveIndex/COLAN egativeIndex/COLAH ousingCOLA/DifferentialCOLA/Differential Reserve/Savings+ THE COMPOSITION OF BASE PAYGOODS AND SERVICES SPENDABLE INCOMEWHAT PHILOSOPHY BEST SUITS YOUR ORGANISATION?

5 OUR 2 CHOICES IN COMPENSATION APPROACH ASSUMEINTERNATIONAL philosophyHome-Host SIMILARLY regardlessof where they come DIFFERENTLY dependingon their country of origin?Differential/COLAI ncome TaxesSpendableIncome(Goods &Services)SpendableIncome(Goods &Services)Reserve/SavingsHomeCountrySala ryDifferentialTotal housing costs in the host country(paid by company, delivered as cashallowance, or differential)HigherHousingCostsLowerHous ingCostsHousingHousingHousingDifferentia lReserve/Savings+ DeductHousing Norm?THE COMPOSITION OF BASE PAYHOUSINGTYPICAL ALLOWANCES AND BENEFITSP olicy Remuneration andBenefitsThe underlying remuneration and benefits thatapplies during the assignment.

6 Base salary Paid time off Bonus and other incentive compensation Retirement and deferred compensation2. EqualisersPolicy components designed to make surethat the employee is no better and no worseoff than if they had not taken the assignment Income taxes Social Security housing housing Norm COLA - Goods and services3. IncentivesBenefits provided when necessary toincentivise employees to take the internationalassignment Hardship allowance Danger pay Remote site/Isolation Pay Foreign service (or Mobility ) premium R & R rest and relaxation allowance Completion / repatriation bonus4.

7 EnablersServices and benefits provided to help theemployee relocate and focus on their role Compliance Services Shipment of household goods Transportation Temporary accommodation Children/Spouse Support Language/cultural training Medical benefits Security/SafetyIn addition to assignment compensation, most organisations typically provide a suite of additionalbenefits to internatonal assignees or those being deployed PREMIUMS AND BENEFITS Hardship allowance Remote-site allowance Additional reward paid to employees residing in isolated areas or camp sites( mining and oil companies) Danger pay Foreign Service premium / Mobility premium Pioneer premium Completion Bonus Rest and RecreationQUALITY OF LIVING (HARDSHIP)

8 allowance Objectives Compensate for harsh conditions Encourage transfers to difficult locations On-going payment, which can increase or decrease Typically a percentage of salary (0 to 40%) Determination based upon Government Data Consultant s data Internal company evaluations Two approaches: Hardship is based on comparison of home and host location Hardship is based only on host location* As a % of home base salaryHome-Host approachShanghai to Jakarta: Hardship: to Jakarta: Hardship: 25%Sydney to Jakarta: Hardship: approachShanghai toJakarta: Hardship: 25%Singapore toJakarta: Hardship: 25%Sydney to Jakarta: Hardship: 25%QUALITY OF LIVING (HARDSHIP) PREMIUMSTWO APPROACHES DIFFERENTRECOMMENDED PREMIUMS *FOREIGN SERVICE premium / MOBILITY premium On-going payment or lump sum payment Percentage of salary ( , 15 percent), often tax free to expatriate Some variations: Percentages range from 0 to 25% Caps or maximum Objectives: Reward international service Compensate for: Disruption of uprooting and saying goodbye to life at home Different living patterns, different work patterns, career risk, separation fromfamily and friends, etc.

9 Encourage staying on assignment, repatriation or completion of objectivesARE PREMIUMS NECESSARY?Arguments against PREMIUMS : Assignment presents opportunity For employee s personal growth For employee s career development Globalisation Our shrinking world makesinternational activities the rule ratherthan the exception, lessening theuniqueness of international workexperiencesArguments for paying PREMIUMS : Career development Is there demonstrated link betweeninternational experience and upwardmobility in the company? Is nature of assignment careerenhancing? Talent War Are you able to attract the skillsneeded internationally?

10 TYPICAL ALLOWANCES AND BENEFITSP olicy Remuneration andBenefitsThe underlying remuneration and benefitsthat applies during the assignment. Base salary Paid time off Bonus and other incentive compensation Retirement and deferred compensation2. EqualisersPolicy components designed to make surethat the employee is no better and no worseoff than if they had not taken the assignment Income taxes Social Security housing housing Norm COLA - Goods and services3. IncentivesBenefits provided when necessary toincentivise employees to take theinternational assignment Hardship allowance Danger pay Remote site/Isolation Pay Foreign service (or Mobility ) premium R & R rest and relaxation allowance Completion / repatriation bonus4.