Localization: A Way to Deal with Expat Cost Pressures?

Fotolia_21733313_XS1Expatriates are expensive, and this doesn’t come as a surprise. Indeed, according to the latest Brookfield Global Relocation Trends report (2014) expatriation cost pressures continue to be a predominant concern among multinational corporations. Although the majority of companies (98%) are still using long-term assignment policies, most probably with a balance sheet compensation approach, the continuous pressure to reduce costs has given rise to alternative policies as well. For example, one-way permanent moves and localization policies, which imply compensation at local terms, have substantially increased in popularity compared to historical averages.

The Brookfield data further suggests that localization is usually triggered by an employee’s request to stay in the host country (26%), cost pressures (19%) and the lack of a suitable position upon repatriation in the home location (10%). 23% of the surveyed companies have used localization as a standard policy for international assignments of a predetermined length (most commonly two to five years).

 

What is in it for the company and the employee?

Given that localization usually means converting an expat contract to local conditions and gradually eliminating expat allowances and benefits, the corporate motivation behind the policy is clear. Primarily, localization policies allow for a reduction in expat-related costs. Yet, as suggested by last year’s Santa Fe group report on expat localization, apart from cost reduction, localization practices can also be of high strategic value for talent management. In essence, localization allows keeping an employee with the necessary skill set for a longer term in the assignment location. Moreover, localization may help in building strong relationships between different subsidiaries and headquarters of a multinationals. Specifically, a localized compensation package may minimize the perceived inequities between the expat and similar local positions, which is beneficial for developing trust and cooperation. Additionally, localization may demonstrate a long-term orientation towards a unit or region. Indeed, local employees can be sensitive in perceiving temporary expats as employees using the host unit either to exert HQ control or as a jump-start for prospective managerial positions back home.

As for the expat’s willingness to localize, it is most probably linked to their personal career prospects in the host location and the lifestyle choices in a certain host country.

 

What are the risks?

While in the case of expatriate support, localization policies seem like a win-win and a magic solution for a company’s budgetary constraints, the practice has its own drawbacks and limitations.

The Santa Fe report argues that, as attractive as localization policies may seem on the paper, in reality localization creates many problems for both the company and employees. Firstly, localization might not work in all locations, due to immigration restrictions, high taxes, complicated health insurance and pension policies. It is also naturally easier to get an expat to agree to localize in a country with higher salary levels than in a country with lower compensation. For instance, localization from Germany to Mainland China, with its relatively low salaries and high taxes, may not seem very attractive to the employee. In turn, given the additional costs associated with local health insurance, taxes and retirement benefits a company may not be too far off from the financial burden of an expat benefit package. As a result, this requires careful consideration.

Secondly, in the case of localization the employee loses the ‘expat’ status with all its benefits yet remains an expat in terms of being a foreign worker in the host location. As such, the adjustment challenges and other expat difficulties, such as those related to kids’ schooling remain, but with less support available. These problems can become even more acute in cases of unplanned localization, which happens when the employee did not have localization in mind when relocating initially but rather is localized as a result of the employer’s later initiative. Given the scale of such a one-way relocation decision for the expatriate and his/her family, unplanned localization can be difficult to accept and cope with.

Finally, in the case of employees’ willingness to localize, the company may be at risk of attrition problems, as the employee’s local marketability will increase.

6 thoughts on “Localization: A Way to Deal with Expat Cost Pressures?

  1. i have never understood why expats are more expensive than local professionals. localization is the only real strategy that is not discriminatory. to pay an expat more just because they are expats is not good and creates unnecessary hostilities in the workforce. i have seen positions like coaching jobs where a local coach is given less whilst a foreign coach is given more. this is wrong. coz at the end of the day especially in football the local coaches are performing better than the foreign coaches for international teams.

  2. It is really unfair that the expats are more expensive for the companies and they get so much more benefits and health care and all… local specialists deserve the same treatment… Many times they speak the language or do the job on the same level or better than the expatriates who are paid better.

  3. More and more the expat conditions are limited to HiPos in development stages of their careers when being groomed for top management positions.
    I agree that localization can be tricky sometimes, but being based in Switzerland, it is becoming really critical due to the even higher costs of employees in the country with the stronger CHF.

  4. Good day Guys,

    i am going through the same challenge in my organization and i would therefore appreciate it if you could assist me in an Expat to Local contract as i have never done it before.

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