Using the International Assignment Management (IAM) Calculator

One of the most common, but also one of the most complicated to administer approaches to compensating an employee while they are on an overseas assignment is to use the buildup or balance sheet approach. This approach normalizes the employee’s overseas compensation with what they would earn in a similar position at the home office.

The Xpatulator.com IAM calculator allows HR departments to calculate an equitable package of compensation and benefits during the employee’s overseas assignment. At the end of the assignment the employee is able to maintain the same relative purchasing power and standard of living when they return to the home base salary and benefits structure. The IAM calculator is recommended for extended overseas assignments of from 6 months to 5 years.

Here are the major components used to calculate an overseas assignment compensation package.

Home Net Salary

The employee’s home net salary is calculated using their gross cash payments minus any variable payments such as performance bonuses. Hypothetical tax is then subtracted to calculate the net salary. From this amount the employee is expected to spend 40% on essential living expenses and 60% on discretionary spending such as savings, vacations, maintaining a residence at their home location etc.  

Home Component

The home component of the employee’s compensation typically includes their discretionary spending amount plus hardship and expatriate premiums. This amount is paid in the home currency. (60% Net Salary + Location Hardship Premium + Expatriate Premium)

Hardship premiums help to offset relative quality of life issues that employees and their families are likely to encounter while on their overseas assignment. Xpatulator.com maintains hardship ratings on over 700 locations worldwide and calculates a hardship premium based on the relative difference of the hardship rating between the host and home locations. 

The expatriate premium is an incentive offered to employees to encourage them to take overseas assignments. The international standard is 15% but this number can be adjusted based on company policy or negotiation.

Host Component

The host component includes the amount needed for essential living expenses adjusted for any differences in the cost of living. It is typically paid in the host location currency. (40% Net Salary X Cost of Living Difference X Exchange Rate)

The difference in the cost of living is calculated using the Xpatulator.com Cost of Living Index (COLI). The COLI uses price information on approximately 200 common goods and services in each location. Data is verified and updated quarterly by trained analysts. Price information is grouped into 13 baskets of related expenses such as groceries, communication, education etc. The COLI baskets are weighted based on surveys of actual expat spending habits and the applicable COLI uses only those items that the employee will be responsible for paying out of their salary.

Benchmark Housing Allowance

The host location will typically be responsible for providing housing or reimbursement for housing. The IAM calculator includes a benchmark housing allowance based on the host location and the employee’s level and family size.

Transportation Allowance

If company transportation was provided at the home location, that benefit will typically be extended in the host location. If transportation was the responsibility of the employee at the home location and they will receive company transportation or a transportation allowance at the host location, then that amount should be excluded in the calculation of the employee’s net salary. The IAM calculator provides a benchmark transportation allowance for each host location.

Medical, Education and Benefits

Providing appropriate medical services and maintaining equivalent quality education for the employee’s children are normally the responsibility of the host location. Where appropriate, private and/or boarding school may be included.

Company benefits such as retirement plans and performance bonuses will continue to be paid as part of the home component of the employee’s compensation package.

Global Mobility Costs -- Do You Need The Answers?

The days are gone when people remain in one job their entire lives, let alone the same city, people want to move where the work will take them and moving from one country to another is now more common than ever.  These expats are also readily taking up positions in places known for being medium to high hardship locations.

What exactly is Hardship? This is the relative difference an expatriate and their family are likely to experience and the relative impact on their lifestyle when moving between different locations. Measuring the relative quality of living in each location, and assessing the level of difficulty that will be experienced in adapting to each location.
These can include: Economic, Political, Religious, Public Service, Environment/Climate, Personal Safety, Health, Education and Transportation Factors.

The latest Xpatulator.com cost of living survey results out for 2014 show that the countries that are the  cheapest on the global markets are not actually cheap for expats. 

With more and more companies looking at emerging markets, relocation is becoming more prevalent in most multinational firms and more projects are being set up across harsher environments or not so comfortable socio-political zones. There is also the appeal of cities such as LA, New York or Switzerland which will always attract people, no matter how high the cost of living.  Salaries and compensation differ between companies and from one region to another.

If a company wants to retain its talent and curb attrition rates in these trying times, then it has to ensure ongoing career opportunities and growth as well as the right employment benefits. It is the responsibility of the HR department to keep itself updated on changes in the locations under their purview, offer appropriate salaries and benefits that will make for a comfortable expat transition. 

Some of the key benefits include –

• Attractive salary packages
• Medical and other insurance coverage
• Guidance on family, education and social life
• Information on the socio-political and economic situation of the location
• Growth opportunities within the region and company

The Internet and advances in technology have opened up opportunities and markets to global competition. Therefore, it has become even more imperative for companies to attract and retain the best talent in their fields. In order to do so, they need to offer competitive packages to their employees who are the face of the company across the globe.

Luanda in Angola is the most expensive expat destination internationally and although it shows a fall in its currency and an apparent low cost of living, in reality rising inflation and the high cost of imported goods have ensured that it is the most expensive expat destination worldwide. Caracas in Venezuela, is the fourth most expensive for expats due mainly to the massive increase in the inflation rate (between 30 and 40%) in 2013 and severe shortages of imported goods. 

The cities of Zurich and Geneva are still within the top five most expensive expat destinations,  this is mainly due to the high living expenses for expats with a strong and stable currency and lower rentals than last year. 

Asian markets are booming and attracting talent however places such as Tokyo and Singapore still rank high due to their high rental costs.

Companies have to ensure that they offer good compensation for these cities and maintain a healthy bottom line at all times. This means, ideally every zone should work as a profit center for them.
and salary packages that are offered should not compromise their financial stability or their employees’ ability to maintain their standard of living in their new location.

The cost of living variances can be determined by using the correct mobility calculator -- Salary Purchasing Power Parity, Cost of Living Index, Cost of Living Allowance or International Assignment Management.

To know more about the cost of living calculators visit http://www.xpatulator.com/calculators

and to obtain a comprehensive review for each city visit http://www.xpatulator.com/cost-of-living-reviews.

Steven McManus is a Remuneration and Benefits Consultant and founder of  http://www.xpatulator.com where employers and employees can calculate how much they need to earn in another location to have a similar spending power.

Calculators include Salary Purchasing Power Parity (recommended if you are an organization planning to relocate an employee to an international location, or an individual with a job offer in another country), 

International Assignment Management (recommended for the calculation of the compensation and benefits for a typical expatriate assignment of six months up to five years duration using your choice of home and host location), 

Cost of Living Allowance (recommended for calculating a cost of living allowance for short-term assignments and a detailed cost of living comparison basket by basket) and 

Cost of Living Index (recommended for the calculation of 3 or more host location cost of living indexes using your choice of home base city).