Hardship Allowances in Expatriation: A Default Practice?

Be it for the purposes of business expatriation or self-initiated expatriation, when moving abroad one of the main factors that matters is the expat’s destination, namely the host location. According to the Economic Intelligence Unit (EIU) 2014 Global Livability Rankings, the top ten choices for relocation would be (ordered from highest to lowest rank) Melbourne, Vienna, Vancouver, Toronto, Adelaide/Calgary, Sydney, Helsinki, Perth, and Auckland. As the survey authors highlight, although the list of most livable cities has remained very stable in recent years, there is a clear decline in the general scores that is driven by a growing global instability. Taking some of the most recent examples, the events in Ukraine are naturally having consequential impacts on livability scores in Ukranian and Russian cities. The survey data shows that, similar to Kiev, Tripoli in Libya and Damascus in Syria have seen the biggest falls in livability scores over the last five years.

Naturally, the increase in unrest and instability hotspots in the world, highlighted in the EIU survey, draws my attention to the topic of hardship locations and hardship allowances for global mobility. As discussed in one of my previous blog posts, hardship allowances seem to come in handy for multinationals that need to attract and retain expatriates in ‘uneasy’ destinations. For example, such multinationals as Coke and Panasonic are paying extra allowances to their expatriates working in air-polluted Chinese locations. Related to health risks, we will most likely see an increase in hardship allowances due to the Ebola outbreak in certain regions. Finally, expat safety and security issues are being raised in relation to emerging markets, which may pose risks that range from hostile political environments, natural disasters and exposure to disease to travel accidents and other common travel problems.

Given all these sources of potential expat problems and risks, it seems as if hardship allowances are to form again an integral part in expat compensation. However, to avoid oversimplification, companies could use some clarity and transparency when dealing with hardship destinations and hardship allowances.

As such, how can we define the hardship levels and make hardship allowances fair?

I believe that a useful structure to answer this question is proposed in the Location Rating system by ECA International.

First of all, the ECA professionals suggest that hardship allowances should consider not only the host destination but also the expat’s home location. As such, host location hardship levels should be relative to the place an expat is coming from. This makes perfect sense, and it also echoes the cultural adjustment literature, which suggests that the bigger cultural distance between two locations, the more challenging the adjustment process is. ECA’s location rating accounts for such variable factors as climate, language, culture, external isolation, and education, which should be evaluated relative to their respective levels in the home location. For instance, the climate differences between Dubai and Norway are naturally bigger than between Dubai and Egypt. As such, a Norwegian expatriate moving to Dubai could be assigned a higher hardship allowance based on climate than an expatriate moving from Egypt to Dubai.

Secondly, the location rating system also accounts for a number of factors that are not influenced by the variability of the expat’s home location. These non-variable factors include health, air-pollution, natural hazards, personal security, socio-political tensions and others. As of the year 2013, combined data for personal security and socio-political tensions indicates that the highest scores would be assigned to Yemen, Afganistan, Iraq, Somalia, Haiti, Nigeria, Pakistan, the Palestinian territories, and Kenya.

As such, ECA’s location rating system implies that the overall location rating and the resulting recommended allowance is derived from the total sum of all the factors that have been assessed for a particular location. Hence, given all the different factors involved, it becomes clear that there can be unexpected surprises and supposedly attractive destinations may actually warrant a hardship allowance. For example, as much as we can perceive Dubai a destination for a luxury vacation, the reality of living there can turn out to be relatively hard for many Northern European expats.