The answer depends on the situation and the employee, but if you decide to localise, be aware of the issues that will crop up, writes Neil Krupp of Deloitte & Touche.

During the past 18 months, global business conditions have caused an increasing number of companies to revisit the issue of "localisation" for their international assignees, according to a number of reports.

In summary and on a composite basis, approximately one-third of all surveyed companies have considered or are considering the possibility of localisation, with the typical timeframe for initial inquiry through actual implementation ranging from three to five years.

The question "to localise or not to localise" is not an easy one to answer and shouldn't be approached in a cookie-cutter fashion - one size does not fit all.

Overview

Many organisations are faced with the question, "Is it possible to localise international assignees who are accustomed to the benefits of traditional 'expatriate' packages?"

When business needs change and cost becomes a major factor, some organisations can no longer continue to support an expatriate package.

An obvious but important question to address is whether the localised position (and candidate) will meet the business needs of the organisation and whether local status fits into the candidate's personal and professional interests. If the answer to both of these questions is yes, then it is sensible to look at the next set of issues.

Assess the cost differences

Generally, a local hire position will be less expensive than that of an expatriate. In order to understand the real financial benefits of localising, it's wise to undertake a cost assessment comparing the current international assignment package to the proposed localised pay package.

The assessment of the localised pay package can be accomplished by using internal salary structures or external job comparisons, plus market/industry facts, to ensure that compensation is structured appropriately.

The transition: immediate or phase-out

Upon deciding to pursue a transition to localisation, the biggest challenge companies face is how to make it happen in the most effective, efficient and least disruptive manner.

Most employers try to implement the transition gradually by granting separately identified premiums that are not considered part of the local pay package.

Sometimes premiums take the form of a simple buyout whereby the employee receives a lump sum amount as additional compensation for the loss of foreign allowances. Other companies do nothing special for immediate phase-out.

The elements that are most often localised immediately include:
*base pay
*performance pay
*goods and service differentials (phased out or eliminated)
*expatriate premiums (phased out or eliminated)
*hardship and danger pay (phased out or eliminated)
*automobiles

Although many organisations immediately localise other components in the expatriate package, such as tax reimbursement and benefit provisions, there are some complex factors inherent in these items.

Tax re-imbursement

These arrangements are often complicated by a number of factors. Most international assignees are covered by tax-equalisation policies, which are designed to ensure that expatriates pay no more or no less tax had they remained at home.

When localised, an employee should be subject solely to local tax law. If the assignment country has a lower tax level than the home country, no problem exists.

However, higher local tax rates may reduce the standard of living and lead companies to consider a phase-out period rather than a one-time transition. Localisation of Americans overseas is more complex due to continuing US tax obligations.

Recognising these diverse considerations, some employers phase out tax arrangements over a transitional period of one to two years.

Retirement and stock plans

Transitioning to a local policy is complex (if it is possible at all).

However, common considerations are:
*maintaining the employee on the home country plan
*integrating the employee into the existing local plan
*using an offshore plan

Retirement plans and stock options present the most complex issues when localizing an employee due to country and plan-based restrictions of portability, eligibility and long-term benefits to the employee. Careful consideration needs to be given in this area before proceeding with localisation.

Health and welfare benefits

Most companies immediately transfer healthcare benefits to local coverage.

Conversion often depends on the comparability of medical insurance plans and availability, adequacy of coverage of dependents, etc.

Home-leave benefits

Severing ties with the home base and disposing of the home-country residence can be a sensitive issue for many assignees.

A phasing-out period over one year is usually adequate.

Immigration

Work permit and permanent residency issues will need to be managed with extreme care.

Assessment of existing permits and transitioning them to permanent/long-term residency will be required to determine the appropriate course of action.

Organisations generally provide assistance in this regard. The process can be time-consuming, and the company and the employee will need to allow for this.

Employment contracts

Labour regulations in many countries require an employment contract to protect the interests of the employee.

The contract usually includes compensation and benefits, retirement, and severance clauses. Also, the employee will generally be required to resign from the home company for the employment contract in the new location to be effective.

Organisations should seek legal advice in drafting the contract to ensure that all relevant issues have been addressed.

Areas of compromise

Some components of the expatriate package, such as housing and education, are controversial, but are easily phased out over a period of two to three years.

Career and personal development plans and goals will need to be re-established in line with local business requirements.

Conclusion

As organisations expand globally, more employers will be faced with the prospect of reviewing their policies regarding transition to localised packages.

Employers will need to assess each location and each assignee's issues, as it may not be practical to localise all aspects of any employee's "package".

Comparisons between the home-based approach and proposed host-based approach are imperative to enable the company and the assignee to make an informed decision.

The key is to establish a set of guidelines that are flexible enough to respond to the changing global environment, while also supporting the ongoing productivity and success of the employee.

Neil Krupp is a practice leader of the IHR Consulting group, a part of the International Assignment Services practice at Deloitte & Touche.

December 2001