Local-Plus' Expatriate Policies Are on the Rise

​Most U.S. multinational companies follow the balance sheet approach when it comes to paying workers who are living abroad, but many companies are finding it cost-effective to use "local-plus" policies instead.

Under the balance sheet approach, expatriates stay on their home-country payrolls and retain the same salary and benefits. They generally receive allowances to compensate them for a higher cost of living in the host country, housing assistance, hardship allowances if applicable, increased tax liability on company source income, as well as educational assistance for any school-age children.

However, local-plus policies are becoming more popular as an alternative.

Under a local-plus approach, transferees receive a salary based on the host-country salary structure, plus additional allowances that can include housing assistance and educational assistance for children. Transferees generally do not remain on their home-country benefits plans. In general, the "plus" elements vary considerably by company and location.

For example, a local-plus package for a U.S. employee transferred to Singapore is likely to be quite different than one for an employee transferred to the United Kingdom. In many cases, local-plus packages are determined by negotiations between business leaders and prospective assignees.

Local-plus packages are sometimes seen as the "magic elixir" of expatriate compensation because they can strike a balance between local packages and expensive expatriate packages.

However, differences in host-country conditions make these policies a challenge.

Local-Plus Policies Beneficial for Some

The balance sheet approach is still by far the primary method for assignments of a limited duration, but mobility patterns have changed with an increased number of locally hired foreigners, one-way indefinite international transfers and early career development assignments.

Mercer's 2016 Local Plus and Location Specific Survey, which polled 110 global companies, showed that 47 percent of respondents already have policies for local-plus assignments.

Based on the survey results, the most common assignment locations for local-plus policies are the Asia Pacific region and the U.S., with large numbers of local-plus assignments also found in United Arab Emirates and the United Kingdom. Many employers in financial services, technology, and engineering and construction have local-plus policies, with far less prevalence among energy and manufacturing companies.

The local-plus approach is also infrequently used for assignments to most third-world countries, except in cases where employees are being transferred from another such country.

Reasons for Popularity of Local-Plus Approach

North American participants in Mercer's survey were asked why they introduced these policies. Market competitiveness was cited by 55 percent of participants. Another critical factor was cost reduction, regarded by 54 percent of participants as the key driver behind local-plus policies.

Often, they're less expensive than the balance sheet approach. Sometimes they're not.

Sending a U.S. expat to Switzerland to earn a local Swiss salary plus receive housing assistance and education support, for example, would almost certainly be costlier than using a balance sheet package because of the high Swiss salaries.

Global Applicability

It is important to determine the type of country where the local-plus approach may be feasible. Three main scenarios need to be considered:

• Assignments from high-salary to low-salary countries. An American sent to India under a local-plus package would suffer a significant drop in income because Indians earn far less than Americans. Employers can avoid that reduction in income with an inflated local salary and supplementary allowances.
• Assignments from low-salary countries to high-salary countries. A Filipino employee transferred to the United States or Switzerland, for example, will typically see a significant increase in income. In these situations, a pure local package is generally sufficient.
• Assignments between countries where salary levels are reasonably comparable. To date, companies have had the most success with local-plus approaches where salary levels, taxes and standards of living are reasonably comparable—for example, within Western Europe and other countries in the Asia Pacific region.
  

  Critical Issues with Local-Plus Policies
  

  For organizations that wish to establish local-plus policies and create guidelines on a global basis, there are a number of considerations:

• Determine what plus elements are appropriate locally. This can be a challenge, as information on local competitive practices may be difficult to obtain or may not exist.
• Decide whether all local-plus employees at a location should receive the same plus elements. For example, should employees transferred from low-salary countries receive the same plus allowances as employees transferred from high-salary countries?
• Establish what levels of housing, education and home leave benefits to provide. Should these be tiered by organization level?
• Does it make sense to give an employee who's transferred to a low-salary country a far higher salary than equivalent local salary levels just to put the employee on a local package? In those situations, would a balance sheet package be more appropriate?
• Should plus elements be phased out? For example, in Singapore plus elements are frequently phased out within three years. However, is this feasible in countries where salary levels are lower and taxes are higher than in Singapore?
• What happens if an employee on a local-plus package is later transferred to another country? This will be problematic if salaries in the new country of assignment are lower than the country from which the employee was transferred.
• How should employee benefits be addressed? For health benefits, companies will generally either include the employee in the local plan or in an international health care plan. Most companies, however, have not yet found long-term solutions to pension entitlements.
• Decide the role of corporate versus local management. Should an organization establish reasonably consistent local-plus guidelines globally or take a decentralized and often inconsistent approach?
  
   
  
  Roger Herod, SHRM-SCP, SPHR, is a global mobility author and consultant. He is also the author of the Global HR Management Series of books (SHRM, 2009-10).