Challenges for Today s Short-Term Assignments

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1 Point of view Challenges for Today s Short-Term Assignments Consulting. Outsourcing. Investments.

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3 Why is there an increasing trend for short-term assignments? What are the current challenges? How do companies construct a shortterm assignment policy? How do companies compensate for short-term assignments? How do you differentiate between shortterm assignments and commuters? Current Challenges The emergence and rise of short-term assignments is a response to factors like; the increase in project-based work, critical skill shortages, changes in family requirements and increasingly remote working destinations. Short-term assignments continue to escalate according to the latest Mercer International Assignment Survey 2008 where 56% of participating companies report a rapid increase in short-term assignments over the past 2 years, particularly among Asia Pacific multinational companies (64%). The rise of project-base assignments, due to the lack of talent and specific skills needed on site, has pushed companies to send more technicians and engineers overseas on temporary basis, creating a new short-term assignment profile type that has different specifications and requirements: Non-executive Has specific skills and talents Is flexible and mobile and can move from project to project on a series of overseas short-term assignments Willing to travel and is adaptable - these factors play a key role in the success of short-term assignments, including the ability to work effectively with different nationalities and cultures, thus; Is motivated Also, employee family commitments and factors such as dual careers and children make short-term assignments a cost effective alternative solution to long-term assignments. 3

4 Companies opinions concerning short-term assignments are currently: (listed by order of most common) Extended business trips tend to turn into Short-term Assignments Short-term Assignments are more aligned to business needs with a few exceptions Companies find it easier to motivate employees to accept a Shortterm Assignment compared to Long Term Assignments Short-term Assignments are more cost-effective than Traditional/ Long Term Assignments Short-term assignments usually involve single-status foreign assignments lasting up to 12 months, with the employee remaining under a home company contract and compensation base. Therefore employees on short-term assignment are usually not accompanied by family members in the assignment location according to Mercer latest survey (61% in 2008 vs. 46% of multinational companies in 2006). In contrast, the employee will benefit from additional home visits compared to a long-term assignee. Some companies are still dealing with short-term assignments at a local level and are unable to be consistent when assignees of different origins are sent to the same project and location. Hence, increasingly companies are facing the need to develop or review a specific and detailed policy to address those challenges. Forty-seven percent of Asia Pacific multinational companies tend to only prefer single-status assignment, whereas European and North American multinational companies tend to consider single-status assignments for 68 percent and 60 percent respectively. Single-status short-term assignments Single-status assignments are normally defined as employees with no family members at the host location. The employee s salary remains as prior to the assignment, paid in the home country and the company pays for additional living costs abroad. It is likely that this includes a reimbursement of business-related expenses or a per diem. However, in cases when employees request to bring their families along, questions arise as to which party should cover the additional costs- the company, employee, or both? Is there a company policy addressing such cases? The majority of companies still provide for a short-term assignment as a single-status assignment and will not cover additional expenses in the event of any accompanying family members. However the number of company-paid home leave may be reduced and replaced with an upgrade to a two-bedroom accommodation. This approach has the advantage of allowing flexibility for visiting guests and/or family. 4

5 What are the main financial implications? Per diem allowance Company-paid furnished accommodation Paid leave and travel to home country Tax implications How do companies compensate for the living costs of assignees on short-term assignments? Overall, companies provide assignees with a per diem or daily allowance to cover essential expenditure overseas, which is paid in addition to the home country salary. Per diem or daily allowances are usually intended to cover expenses such as meals at home and restaurants, public transportation to and from work, some leisure activities, international phone calls, some laundry and dry cleaning facilities and some basic personal care items. Only a few companies would apply a cost-of-living differential payment similar to traditional/long term assignments. During a short-term assignment, there is typically no change of home residence, therefore the employee is provided with furnished accommodation (or serviced accommodation) fully paid for by the company. The size of the accommodation does not usually exceed one or two bedrooms. The challenges are to find reliable information in order to determine the appropriate per diem and the right accommodation budget needed in each location. Companies have the following options: 1. Tax authorities per diem limit 2. Reimbursement of actual expenses 3. External consultant firm with expertise in assess ing the actual expense level at each location Per Diem Allowance Examples Depending on company policies and practices, the per diem definition and composition may vary greatly to include meals costs at restaurants and meals at home, laundry and dry cleaning costs, entertainment and other activities (especially if the employee is not accompanied by family), telephone and additional personal care expenses. Finally the types of accommodation companies allow may also vary between hotel and apartment rental costs. The tables below provide examples of per diem allowances in category 1 to 2 depending on the composition of the per diem as well as the expensevlevels (Low, Med, High, Avg) in Singapore, US and a European city like Berlin. 1. Tax authorities in most countries publish per diem allowances which are capped before being taxable to the employee. Such per diem allowances have the advantages of being tax exempt for the employee but may not reflect the real cost of living level at each location for foreigners living overseas. Moreover each country tax authority will define their own per diem allowances which will show inconsistency when companies send employees from different origins on short-term assignments to the same project location. 2. Companies with fewer shortterm assignments may opt for reimbursement of actual employee expenses. This approach has the advantage of covering the employee s actual additional costs but may not be equitable to all employees and end-up costly as individual spending habits may vary considerably. 3. Companies engaging in more short-term assignments will require a more equitable and cost effective approach and will opt for an external consultant firm to assess a reasonable per diem allowance per location and/or per position level. This approach has the flexibility of determining the per diem allowance according to company policy and strategy and at the same time taking into account the tax authorities per diem limit. 5

6 Mercer Short-Term Assignment Allowance Category 1 March 2008 Survey Singapore, Singapore USD 1 = SGD (Exchange rate 01/03/2008) Categories Low Med High Avg SGD USD SGD USD SGD USD SGD USD Food away from home Meals at restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Entertainment Transportation Hotel Furnished apartment Daily rates for one person Excluding hotel/ accomodation Low Med High Avg SGD USD SGD USD SGD USD SGD USD Including hotel Including furnished apartment Mercer LLC, All Rights Reserved. Mercer Short-Term Assignment Allowance Category 2 March 2008 Survey Singapore, Singapore USD 1 = SGD (Exchange rate 01/03/2008) Categories Low Med High Avg SGD USD SGD USD SGD USD SGD USD Food away from home Meals at comfortable & elegant restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Personal care Entertainment Transportation Telephone Hotel Daily rates for one person Low Med High Avg SGD USD SGD USD SGD USD SGD USD Including hotel Excluding hotel Mercer LLC, All Rights Reserved. 6

7 Mercer Short-Term Assignment Allowance Category 1 March 2008 Survey US Average, United States Categories Low Med High Avg USD USD USD USD Food away from home Meals at restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Entertainment Transportation Hotel Furnished apartment Daily rates for one person Excluding hotel/ accomodation Low Med High Avg USD USD USD USD Including hotel Including furnished apartment Mercer LLC, All Rights Reserved. Mercer Short-Term Assignment Allowance Category 2 March 2008 Survey US Average, United States Categories Low Med High Avg USD USD USD USD Food away from home Meals at comfortable & elegant restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Personal care Entertainment Transportation Telephone Hotel Daily rates for one person Low Med High Avg USD USD USD USD Including hotel Excluding hotel Mercer LLC, All Rights Reserved. 7

8 Mercer Short-Term Assignment Allowance Category 1 March 2008 Survey Berlin, Germany USD 1 = EUR (Exchange rate 01/03/2008) Categories Low Med High Avg EUR USD EUR USD EUR USD EUR USD Food away from home Meals at restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Entertainment Transportation Hotel Furnished apartment Daily rates for one person Excluding hotel/ accomodation Low Med High Avg EUR USD EUR USD EUR USD EUR USD Including hotel Including furnished apartment Mercer LLC, All Rights Reserved. Mercer Short-Term Assignment Allowance Category 2 March 2008 Survey Berlin, Germany USD 1 = EUR (Exchange rate 01/03/2008) Categories Low Med High Avg EUR USD EUR USD EUR USD EUR USD Food away from home Meals at comfortable & elegant restaurants Coffee and drink at cafe/bar/hotel Food at home Laundry and dry cleaning Personal care Entertainment Transportation Telephone Hotel Daily rates for one person Low Med High Avg EUR USD EUR USD EUR USD EUR USD Including hotel Excluding hotel Mercer LLC, All Rights Reserved. 8

9 How do companies design their short-term assignment allowances and premiums policies? Fewer companies (26%) tend to provide a Foreign Service or Mobility Premium on short-term assignments. This premium is an incentive usually designed to increase the international mobility of employees. Its purpose is to compensate for some of the inconveniences relating to the move, such as separation from family, friends and adjusting to a new culture or environment. As such it is usually expressed as a percentage of annual home gross base salary (between 5% and 15%) and generally varies depending on whether it is an intra-regional transfer or an inter-continental transfer. In the current competitive employment environment, this incentive has come under close scrutiny, and many companies have now abolished, or are attempting to phase out this premium. More frequently, short-term assignments are considered as less disruptive for the family and/or as part of the role s responsibilities. 48% of participant companies continue to provide hardship allowances to employees on short-term assignments in locations which are considered difficult. Similar to long-term assignments, hardship allowances are generally determined as a percentage of the home gross salary, varying by location. Companies also report providing 4 home trips per year for single-status short-term assignments. How do companies define commuters? Commuters carry out job-related tasks by commuting usually every week or every two weeks from the home location to a place of work in a host location while maintaining a principal residence in the home location. Commuter assignments continue to increase in popularity, particularly in North America and in Europe. Factors determining the status of a commuter vary between companies and sometimes, there is little distinction between a short-term assignment to a near location, a long-term single-status assignment or a commuter assignment. Among the Euro commuters for example, we also find employees who have elected to live in another country than their country of employment as a personal choice. Here are some quotes from companies which illustrate the diversity of definitions for commuter status : These assignments are rotational, and are on a fixed schedule (for example, a 28 day rotation whereby the employee is in the host location for 28 days, then in the home location for 28 days). Distance is not a consideration. An employee who handles overseas operations but is based in the Singapore office (home country), therefore needs to travel frequently. The number of working days travelling abroad must be more than 100 per year; destination must be at least 2 different countries, otherwise it is considered as a short or long term assignment. It is a question of number of days spent in the second location. 9

10 The definition criterion is the duration and frequency of trips. When people are going to work in a [host] country and are flying back to their family on weekends all year round. In Europe, it tends to be a temporary arrangement to bridge the gap before a move to the host location. In Latin America, it is because the employees do not wish to move and have a significant amount of international travel in their role already. Working in more than one country for one cost centre with resulting tax liability in more than one country. How do companies compensate employees on commuting assignments? 44% of companies use the home-base salary plus a per diem when the commuter is in the host country. 34% of all companies base commuters salary on a home country compensation scale which seems to be more relevant among North American companies (50%). Two-thirds of companies do NOT provide their commuter population with a form of mobility premium for the inconvenience of travelling frequently from the home to the host country nor tend to provide a hardship allowance. Mercer Short-term information and services Short-term assignments will continue to increase in frequency and it is therefore important for companies to have the right, equitable and cost-effective solution to deal with and successfully manage them. More and more companies opt to refer to Mercer data and expertise to assist them. Mercer can provide the actual cost-of-living level to define a per diem allowance and also the accommodation budget, based on market research conducted twice a year in more than 260 cities worldwide; allowing companies to fairly and effectively assess the right per diem allowance depending on company policy, location and/or position level for short-term assignment. 10

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