Localization Proclamation

With a rising number of companies localizing international assignees to host locations, companies are trying to figure out what the best policies are to police the trend.

Friday, August 1, 2008
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It got to a point after awhile that Steve Dulieu was ready to stop moving.

Working in human resources at Ford Motor Co. just outside his hometown of London, he was relocated to Madrid in 1986, then to Detroit in '88, back to the United Kingdom in '91, then to Germany in '96 and finally back to Detroit in '99.

While on international assignment for so long, Dulieu certainly got a taste of the added perks that come with working abroad: a housing allowance, money to send his daughters to private school and paid trips back to England.

By 2004, Dulieu was also enjoying his ever-growing career, as he was promoted to director of human resources for global product development. While he considered his expatriate perks a welcome bonus, he desperately wanted some stability for his wife and two daughters, who were 14 and 18 at the time.

"We would travel for an annual home-leave trip but [my daughters'] friends and their social infrastructure were really in the United States," says Dulieu, adding that, for the whole family, England started to feel less and less like home.

Leaders at Ford had concerns of their own, like trying to ensure a talented employee such as Dulieu would stay with the company.

So both sides agreed to localization, meaning the company would cease to give Dulieu expatriate benefits and pay him according to the American pay scale, discontinuing his status as an employee of Ford in Great Britain. (Ford calls this process a "payroll transfer.")

After the transfer, Dulieu's title and responsibilities did not change, and Ford calculated his new salary on the company's Effective Position in Range scale, meaning it figured out Dulieu's American salary by matching his job description in the United Kingdom with one from the United States, then paid him the corresponding salary. In Dulieu's case, his pay rate stayed about the same, he says, but the bonus was the ability to finally stay in one place, considering the joint commitment from him and the company to keep him indefinitely in Detroit.

"I got the chance to put down firm roots, buy a bigger house and really settle down," he says. "Although I gave up some financial benefits, it did give my family stability."

With the business world becoming increasingly global and companies hoping to cut the costs of benefits for extended expat stays, more and more companies are turning to localization.

In a recent study of 115 employers conducted in 2007 by Worldwide ERC, the Washington-based member organization for the relocation industry, nearly two-thirds (64 percent) of respondents predicted a rise in localizations, compared to only 5 percent that predicted a decrease.

One of the main reasons for the increase is the reduced cost, since allowances on expatriate packages can cost considerably more than employees' salaries, says Jan Hatfield-Goldman, vice president of research and education at ERC.

Companies are also localizing to promote employee equity, she says, considering that many workers think it's unfair for an expatriate to make more money -- and receive extra benefits -- while doing the same job in the same office as a local employee.

Often, she says, companies localize simply because the employee asks for it, and they know that individual can fulfill a need.

"Sometimes, it's the employees themselves saying, 'I want to stay here. I want to be localized. I'm getting married or I really found that I like this environment,' " she says.

Anders Halden, a senior consultant at the Stamford, Conn.-based professional services firm Towers Perrin, also attributes the increase to the fact that companies and employees are better versed about international locations today.

"There is a different level of maturity; people have become more global," says Halden. "They've been reading up better on what's happening with other companies, realizing that working in another country isn't as traumatic anymore as it used to be. This foreign country isn't so foreign anymore."

Companies React

With increased localizations, however, employers are faced with a considerable number of questions: How long should they keep a worker on an international assignment before localizing? Should they transfer the pay to the host country and get rid of expat benefits all at once, or do it gradually? What if the worker refuses?

With those and many other questions coming up in greater number and frequency, more companies are choosing to create formal localization policies.

In the ERC report, half of the companies that ever localized an employee said they had a formal localization policy -- up from 26 percent in 2004. Of all respondents with formal policies, nearly two-thirds had just adopted theirs within the last three years.

In a survey of 285 companies by New York-based HR consulting firm ORC Worldwide, 44 percent have initiated formal policies on localization, beating out those that make decisions on a case-by-case basis (36 percent), companies with an informal policy (10.5 percent) or companies that have no policy (9.5 percent).

"You need to have a policy because you need to have something firm to stand on and it has to be properly grounded in the company," says Halden. "Line managers have to be aware what rules we have all agreed on."

Is the increase in formal policies a response to any past problems or global economic shifts, or are companies simply trying to cut down on the rising cost of expatriate benefits?

According to Halden, companies are taking a much harder look right now at the expatriates they have to make sure there will actually come a time when benefits run out and localization or repatriation is enforced.

"Without a policy to fall back on," he says, "it's more difficult to initiate a discussion and there is little to enforce."

According to Ford's official policy, employees are offered the option to become localized if they have significant promotional opportunities in the new location, have "outgrown" the job opportunities at their former location, have skills not immediately available in the new region or have asked for localization outright.

In Dulieu's case, the company localized him for two reasons: He asked for the transfer and the company saw a need he could fill, he says. While he did have a position to return to in the United Kingdom, the company knew it needed him in Detroit, and that situation suited Dulieu just fine.

Companies can protect themselves from the added cost of ongoing expat assignments by setting a deadline on how long assignees can receive benefits before they have to become localized or return home. On paper, companies appear to wait an average of 4.4 years, according to ORC'S review of the respondents' official policies. In practice, though, the surveyed companies said, they actually leave employees on international assignment for an average of 5.2 years.

Lisa Johnson, director of consulting services at Danbury, Conn.-based Cartus Global Consulting, says international assignments traditionally cost more than three times an employee's salary because of the added cost of housing, education and moving, all of which count as added income.

Since American workers earning money abroad are taxed by both the host country and the United States, the company pays that as well.

That just can't last forever.

"That is definitely why companies are adding a maximum number of years for international assignments and are really trying to put some governance around making sure that someone either repatriates or transitions to become a local employee," says Johnson.

Having a formal policy also allows the company to discuss the prospect of localization as soon as the employee begins an expat assignment, which can cut down on refusals down the line.

Oftentimes, the employee will refuse to be localized, especially when he or she is working in a country where the pay structure is much lower than in his or her home country. For that worker, localization means a drastic pay cut. For example, if an American worker is paid using the structure in India, he or she would lose a significant amount of salary -- not to mention valuable expat benefits, although the area does have a significantly lower cost of living.

"A sales manger in the United States may be paid $100,000 per year, but in India, a sales manager might get paid the equivalent of $25,000 a year," says Geoffrey Latta, executive vice president at ORC. "[The company is] not going to pay the $100,000. When you try to localize them, you're going to pay them as if they were a local, Indian employee -- that's the problem."

Even with the dollar falling, the United States is the most popular localization destination, according to the ORC study, with 56 percent of companies permanently relocating employees here. What puts the United States at the top of the list? Johnson says it's the country's infrastructure that makes it easy for immigrants to integrate into society.

"Housing, schooling for children, a spouse who can start a new career, English being a global language and hospitals that are considered top rate for medical care are the kinds of infrastructure areas that facilitate localizing someone into a new environment," she says.

That's followed by the United Kingdom, with 35 percent of employers localizing workers here; Australia, 18 percent; China, 17 percent; Germany, 16 percent; Singapore, 14 percent; Hong Kong, 13 percent; France, 11 percent; and Switzerland, 10 percent.

As for employees who refuse to localize, companies are dealing with them in varying ways. In the ORC study, if "key" employees (defined loosely by ORC as senior management) refuse to be localized, 38 percent of the companies will repatriate them, 26 percent will offer another assignment, 18 percent will enhance the package and 6 percent will terminate the employee. For "non-key" employees who refuse the deal, 47 percent of companies would repatriate them, while 14 percent would offer another assignment and 12 percent would fire them.

"If employees say, 'No, bring me back home,' but the company still wants them there because they're doing a good job, then, typically, [the company will] back away and not do the localization," says Latta.

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Many companies are finding there are a minimal number of suitable jobs waiting for employees when they return home after long assignments.

"Repatriation has historically been a challenge, so if a [company has someone] who is on an international assignment and is doing a good job and [the company doesn't] necessarily have a specific role for the expat to come back to, it might make sense for that person -- who's developed some expertise in a certain location or a certain market -- to stay there and integrate into the local employee base, as opposed to coming back to a world that doesn't exist," says Johnson.

When companies do localize, half make the transition all at once, while half take gradual steps, according to the ERC study. When companies did use a phased-in approach, they completed it within two years.

In a phased-in approach, the companies often use a system to wind down salary and any type of expat benefits -- from 100 percent in the first year of localization to 66 percent in the second year and 33 percent for a third year, says Johnson. A company might also provide one last trip home and pay for one more shipment of household goods.

"A wind-down approach is usually taken in locations that are more challenging to localize," she says.

As for children's education, employees are eager to keep their kids in international schools as long as possible, perhaps a reason it's one of the most common benefits for companies to continue providing after localization, according to ERC's Hatfield-Goldman.

"It may be that the company sees a value in continuing to cover the educational component," she says, "which it was covering under the expatriate package, because it's one of those elements that could keep the employee there."

Applying any of these policies, however, is not cut and dry. Of the companies that have formal policies, many do not follow them strictly. More than three-quarters apply them on a case-by-case basis, and just 19 percent say they follow policies verbatim.

Halden, from Towers Perrin, says that a lot of companies are "a bit too sloppy" when it comes to enforcing their policies.

"If you don't adhere to a policy in 50 percent of the cases, you don't have a policy anymore," he says, noting that a company should strive to stick to its policy at least 80 percent of the time.

The reason for the discrepancy may be just how different one localization can be from the next. Localizing into emerging regions such as India or China is different than localizing into the United States or Europe because of the differences in pay structure, not to mention culutre.

Also, the company may decide that the need the expat is filling is important enough to warrant a continuation of at least some expat benefits.

"The biggest problem is that it's fairly easy to mobilize people under certain sets of conditions, but in others, it's very difficult," says Latta.

What Does Brown Do?

At shipping giant United Parcel Service, based in Atlanta, the amount of time U.S. employees spend as outbound assignees ranges from two to five years, says Jeff Wilson, international compensation and benefits manager.

"Our policy is not so rigid that it insists on automatic localization at the end of the five-year term," he says.

Relocatees, whether they are coming into the United States, leaving from the United States or going from one outside country to another, do not represent a large portion of the employee population, says Wilson, even though the company has offices in 200 countries.

When expats are on assignment, the company usually provides allowances for housing, utilities and education, as well as a bonus for working in a foreign country.

"Typically we have a graduated phase-out of the international-assignment allowances over, say, a three- or four-year period such that at the end of the fourth year, a person may be fully localized," says Wilson, who recently spent three years as an expat in Singapore, the headquarters for the company's Asia-Pacific region.

Wilson says UPS arrived at its current way of doing things because it allows for a progressive step down of allowances and an employee can begin to adjust to budgeting for life in the new location.

"I believe it works because it allows for a reasonable transition from the terms, conditions and compensation-related components of the employee's [home] country as he or she assimilates into the 'new'[host] country's local compensation terms and conditions," he says.

The "obvious" benefits to UPS of localizing workers are succession planning and career development, says Wilson.

"We now have an opportunity for a person to stay for a longer tenure in what was, at one point, his or her host location . . . to benefit the business in that particular location, without the added cost of continuing to have that person there as an international assignee with all the relocation-related allowances," he says.

In the end, the entire process is still contingent on employees saying "yes" to the deal, says ORC's Latta, which is why companies are trying desperately to figure out the best approach.

"That's why everyone is always looking for the kind of magic potion that will let them localize people in difficult situations," says Latta, "but, so far, unfortunately for us as consultants, no one has figured out a way to do it."

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