Localisation is the changing of an employee’s expatriate status -- in whole or in part -- to host location employment terms and conditions, including compensation and benefits. This frequently results in lost income for the employee and, thus, creates challenges for HR professionals.

ORC Wordlwide's survey aimed to highlight trends in international localisation practices, in order to assist in the development of future policies. The survey scored highly for methodology and was ranked fifth in the Expatica HR 2007/2008 Industry Survey Awards.

The survey covered 285 participating companies, located in the Americas (55%), Europe (34%) and Asia (11%). One-third of participants employed fewer than 50 expats, 28 percent between 50 and 249 expatriates, and the remaining 26 percent employed 250 or more.

The group represents a wide range of industries, with most in the banking, financial services and insurance industry (11.5%), followed closely by the `all other manufacturing’ industry (10.7%), consumer products (9.6%) and pharmaceutical (6.4%).

The 285 companies have a total staff of more than 13 million employees, of which 89,009 are expats, and 6,333 employees localised over the last two years. On average, companies with fewer than 50 expats localised five employees over the past two years; those with 50 to 249 employees localised 14 and those employing 250 or more localised 72.

Some of the key findings are as follows.

Localisation is on the increase
Over the last two years, 48 percent of participants have noted an increase in localisation and 57 percent project an increase over the next two years. This is an increase from 2004, when 40 percent noted and 52 percent projected the increase.

Where and why do employees choose to localise?
The number one reason among participants for choosing to localise is that the employee has expressed a desire to remain in the host location. However, for companies with fewer than 50 expats, the top reason was that the employee had a skill set that was needed long term in the assignment location.

The most popular countries where companies are permanently localising employees are the US (56% of companies), UK (35%), Australia (18%), China (17%), Germany (16%), Singapore (14%), Hong Kong (13%), France (11%) and Switzerland (10%).

Localsation policies
Forty-four percent of all participating companies had a formal policy on localisation, whether it was a single policy for all locations, a single policy for some locations or multiple policies tailored to individual locations. Just over a third of participants handle the situation on a case-by-case basis, while 10.5 percent have an informal policy. Companies with fewer than 50 expatriates are the most likely to handle on a case-by-case basis (56%).

However, only 19 percent of companies with a localisation policy will strictly follow it; just over three-quarters apply the terms and conditions of the policy on a case-by-case basis. Among companies with a larger expat population however, 31 percent will strictly adhere, compared with 16.5 percent and 11 percent of those with 50 to 249 and fewer than 50 expatriates.

When do companies localise?
The average time according to policy is after 4.4 years but, in practice, it is after 5.2 years. Companies vary on how far in advance they enter into discussion with the expatriate about localizing. The majority (51%) does so on a case-by-case basis, more than a quarter (28%) wait until near the end of the assignment and a smaller number (13%) begin discussions from the start of the assignment.

The challenges
Globally, the ranked issues posing a challenge when localising employees are:
1: Employee retirement plans
2: The need to establish a consistent approach for local compensation packages
3: Management’s need to negotiate terms versus adhering to a policy
4: Establishing acceptable local salary in lesser developed countries and requests to continue payment of international schools for children
5: Employee health care coverage
6: Lack of an official policy
7: Loss of allowances and tax equalisation

When localisation is refused
For both key and non-key employees who refuse the offer of localisation, companies typically handle the situation on a case-by-case basis. Other options include repatriating the employee, offering another assignment, enhancing the package (on a case-by-case basis) and terminating the employee's contract.

Compensation
Companies have three major options when moving salaries and bonuses away from expat packages towards local terms:
• Transferring the salary and bonus to local terms immediately
• Phasing in the new salary and bonus
• Continuing the same salary and bonus, either indefinitely or with a review after a certain period of time

Nearly half of respondents (46%) transfer base salary to local terms immediately, of which 14 percent would provide the employee with a lump-sum payment to help with the transition. Six percent phase the employee to the local level over an average of 29 months. Another six percent continue the employee at the same salary level, two percent of which review after a certain period, on average 20 months. Similarly, bonuses are predominantly transferred to local terms immediately (48%).

In the case that a new salary package results in a lower net income for the expat, nearly 25 percent of respondents apply the local package immediately, regardless of the effect on the employee.

Allowances
Similar options exist for handling the removal of typical expat allowances, such as cost-of-living adjustments: eliminating immediately, phasing out and continuing with no change or with a partial allowance. Eliminating the payment immediately is the most common method used by participating companies, for all allowance types. Assistance with a dependent’s education is least likely to be immediately eliminated.

The majority of companies (66%) will provide some form of assistance to purchase property in the permanent country of residence (formerly the assignment location). Typical assistance includes moving cost coverage (43%), home search assistance (42%), a settling-in allowance (35%), temporary accommodation (30%) and the payment of legal, inspection or purchase fees (28%).

Taxes
In only 46 percent of participants the expat is required to assume full responsibility of their tax obligations. Fewer than 30 percent will continue to cover the expatriate under tax equalization or protection programs for a certain period of time, on average for 19 months. Fifty-nine percent of companies will continue to offer tax return preparation assistance for a period, on average 17 months. Only 15 percent will not offer this to localising employees.

Benefits
The predominant method of handling benefits such as social security, employer-provided pension plans, savings plans, health and life insurance is to transfer or enrol the employee in the local plan immediately. Differences based on expat population are evident when it comes to retaining employees in the home country social security plan: nearly 10 percent of respondents with fewer than 50 expats follow this approach, compared with 6 percent (250+) or five percent (50--249). Only 10 percent of those with 250 expats or more handle on a case-by-case basis versus 37 percent with fewer than 50 expatriates and 26 percent of those with 50 to 249 expats.

The majority of participants transfer to the local pension immediately, with companies with a larger population more likely to do so. If the change results in a significant decline in the employee’s final pension, the majority of companies (62%) provide no assistance, while a few provide additional lump-sum payments (13%), maintain the assignee in the home-country plan (10%) or include the employee in an international pension plan (7%).

Nearly half of the responding organisations transfer their employee savings plans to local status immediately. Thirty-eight percent handle this on a case-by-case basis. When the change results in a significant decline in the employee’s final savings plan, all companies will provide some form of assistance, most likely the provision of a lump-sum payment (34%) or maintaining the employee in the home-country plan (28%). Other options include adjusting salary (14%) and adjusting the host-country benefit (14%).

The majority of respondents (65%) transfer health and life insurance coverage to the local plan immediately.

Just over three-quarters of participants, regardless of size, do not have an international retirement plan. Among those that do have a plan, 47 percent will not include localised employees. For 29 percent of those that are covered, the host salary is the compensation covered in the plan.

Returnees
Returnees are foreign nationals working outside of their home country who are transferred back to their home country on a planned permanent basis. Eighty-one percent of participants have some form of policy to address the transfer of a returnee to local status. While 30 percent handle on a case-by-case basis, 34 percent have a single formal policy that applies to all assignment locations.

Winners of the Expatica HR 2007/2008 Top 5 Industry Survey Awards

1.    2007 Expatriate Work-life Balance Survey – ORC Worldwide
2.    Global Relocation Trends - 2008 Survey Report – GMAC Global Relocation Services
3.    Employment Outlook Survey – Manpower
4.    2008 Global Tax Policy Survey Report – ORC Worldwide
5.    2007 Survey of International Localisation Policies and Practices – ORC Worldwide
 
Click here for more information on the Expatica 2007/ 2008 Top 5 Industry Awards.