Addressing "Goods and Services" in Canadian Expatriate Packages

Lynne F. Molnar

Multinationals today have a more difficult task developing cost-effective, motivational expatriate packages due to an increased variety of assignment types, length, expatriate nationality, and destination. All of these issues are driving employers to seek creative solutions.

Assignment type and length may run the gamut from a commuter who returns home on weekends to a highly mobile employee who no longer has a home base. Complicating the issue, today's assignees no longer originate exclusively in western industrialized countries but nations in every part of the world, with destinations that frequently include host countries whose economies are emerging onto the international arena.

Challenged to provide a fair and competitive expatriate pay package in light of these diverse factors, many Canadian employers continue to follow the balance sheet approach to international compensation, allowing expatriates to maintain their home-country lifestyle on assignment in terms of goods and services, housing, and taxes. This balance sheet methodology, specifically with regards to goods and services, offers a diverse and flexible array of options to match different assignment scenarios. To understand how Canadian employers address the issue of goods and services, ORC Worldwide's 2004 Worldwide Survey of International Assignment Policies and Practices provides insight.

Market Basket: A Tool for Measuring Price Differences

The "market basket" of goods and services is the foundation for comparing home-host prices (represented by the index) and ultimately calculating a cost-of-living differential. Roughly 180 individual goods and services – including such diverse items and services as canned tuna, chocolate, shampoo, Internet services, a taxi ride, crayons, doctor visit, and car battery – stand in place of all the typical purchases expatriate families make both at home and abroad. A consumer uses "spendable income" (the portion of salary allocated to goods and services) to buy these items at home.

Each market basket item or service has an associated weight – that is, the proportion of total spendable income used for that item or category of items. For example, assume a salary of C$100,000, which results (statistically) in a spendable income (family size, four) of C$46,861 for buying goods and services. Consumers in Canada spend 10 percent of this amount on all recreation, with, let’s say, tennis balls accounting for 5 percent of recreation. In other words, consumers allocate 10 percent (C$ 4,686) for recreation, and 5 percent of that amount (C$ 234) on items such as tennis balls.

Comparing home-host prices leads to a determination whether the cost-of-living is higher or lower in the host location than at home. An index of 120, say, means that prices in the host location are 20 percent higher than in Canada. In that case, the employer provides a differential to bridge the gap between spendable income at home and abroad.

How Canadian Employers Use the Goods and Services Index

When calculating a differential for their assignees, an equal number (87 percent) of both worldwide and Canadian survey participants want their expatriates to maintain a standard of living that is comparable to what they experienced at home, confirming the continuing use of the balance sheet approach. A minority choose other compensation options.

When calculating the differential, Canadian participants include the following pay components:

Payroll Practice and Cost Efficiency

The logistics of administering and identifying pay elements in a paycheck often depends not only on the system's sophistication, but also company policy. Nearly all Canadian participants (94 percent, compared with 84 percent worldwide) separately identify a goods-and-services differential in the pay package. This practice eases administrative steps, as well as communicates to expatriates precisely what they are receiving in terms of a differential. Other employers choose to combine allowances (e.g., one lump sum that covers cost of living, housing, and miscellaneous moving expenses). Only 3 percent of Canadian participants combine allowances, compared with one tenth of all participants.

In light of cost-reduction pressures experienced by many multinationals, the survey also asked whether participants capped the differential, rather than paying out the actual difference in home-host spendable incomes no matter the amount. Although one might think that many companies would choose to follow this cost-effective strategy, only 3 percent of Canadian firms do so, compared to 23 percent worldwide.

A related practice involves changes in the differential – that is, how often do employers adjust these amounts? Although the frequency varies according to company circumstances, the majority of Canadian companies tend to update them on a semi-annual basis, while the majority of worldwide companies prefer an annual update. (See chart, "Are Differential Updates on a Predetermined Schedule?") Of those Canadian participants with expatriates in high-inflation locations, only 10 percent adjust the amount more frequently; 19 percent of worldwide organizations have a similar practice.

Another related situation occurs when expatriates move to countries with a lower cost of living, resulting in a negative index. How do employers address this situation?

The Match Game: Fitting the Index to Assignment Parameters

Different indexes serve multiple purposes. Regarding the actual index types used by Canadian participants, the most popular are the expatriate and efficient purchaser (EPI) indexes. However, participants also reported other solutions – a modified index or short-term assignment allowance (see chart, "Matching the Index to Company Needs").

Expatriate Index. This index reflects an assignee who is less familiar with local purchasing and prefers internationally recognized brands and outlets. Perhaps the employee is a first-time assignee, or the host country may be significantly different from the assignee's home country and culture. Under these circumstances, expatriates tend to act as “outsiders” and shop in import-driven outlets, which tend to be more expensive than venues used by local nationals who know where and when to shop.

Nearly half of Canadian participants use expatriate indexes for relocations within a region, a number that increases slightly for inter-regional relocations. Worldwide participants report comparable trends.

Efficient Purchaser Index. The EPI is appropriate for assignees who can easily acclimate to the assignment location, whether because of familiarity with host culture or level of industrialization. More efficient purchasing by expatriates maintains the high level of quality in goods and services, ensuring better value for their money.

However, this adaptation of purchasing behavior will not work in all locations. In less-developed countries or regions such as Africa and parts of Asia, assignees are not likely to find alternative outlets or brands that maintain comparable home-country quality.

Do employers send expatriates out with an EPI from day one, or do they provide time in which to get acclimated? In locations where EPIs are offered, 92 percent of Canadian participants – and 78 percent worldwide – use them from the start of the assignment, while half do so only for certain locations (78 percent worldwide). Of Canadian participants that use an EPI, two thirds (compared with half worldwide) do not provide a transition amount before implementing the EPI.

Modified Index. This type of index removes certain items or categories of items from the goods and services market basket. Three quarters of Canadian respondents (86 percent worldwide) use a modified index to avoid paying twice for items already covered by other features of their policy or for those items they would rather not subsidize, for example:

Short-Term Assignment Allowance. This pay option is designed for employees sent overseas for a short period, usually three months to a year. Although these assignees also require necessities abroad – such as food, public transportation, and personal care items – they are likely to maintain a permanent household back home (which means continuing home-country financial obligations for items such as education and home maintenance). A key component of this option is the use of a partial home-country spendable income, based only on those items legitimately needed abroad.

The Right Solution Improves the Chance of Success

The design of an expatriate package depends on several factors – assignment parameters (e.g., duration, geographic region, economic status, remoteness, living conditions), company policy regarding certain provisions (e.g., cars), availability of goods and services, the company's financial situation, and others. The diversity of indexes allows management to address the many different types of expatriate assignments needed in today’s competitive global marketplace. With this flexibility, Canadian employers are able to create the best package for a particular situation while motivating the assignee and keeping expenses within budget limits.

Lynne F. Molnar is a senior consultant for ORC Worldwide’s international compensation practices in New York City. This article appeared in the winter 2006 edition of Report on Mobility and is posted with permission from the Canadian Employee Relocation Council.

 

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