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Foreign service inducement and hardship premium

Parent-country nationals often receive a salary premium as an inducement to accept a foreign assignment, as well as a hardship premium to compensate for challenging locations. Under such circumstances, the definition of hardship, eligibility for the premium, and amount and timing of payment must be addressed. For example, where a host country's work week may be longer than that of the home country, a differential payment may be made in lieu of overtime, which is not normally paid to PCNs or TCNs. In cases in which hardship is determined, US firms often refer to the US Department of State's Hardship Post Differentials Guidelines to determine an appropriate level of payment. As a number of researchers in this field have noted over many decades18 making international comparisons of the cost of living is problematic. It is important to note, though, that these payments are more commonly paid to PCNs than TCNs. Foreign service inducements, if used, are usually made in the form of a percentage of salary, usually 5 to 40 per cent of base pay, but are also sometimes offered as a lump-sum incentive (i.e. as a one-off payment made at some point during an assignment). Such payments vary, depending upon the assignment location, tax consequences, and length of assignment.

Allowances

Issues concerning allowances can be very challenging to a firm establishing an overall compensation policy, partly because of the various forms of allowances that exist. In this section we will discuss the six most common allowances.

Cost-of-living allowance. The cost-of-living allowance (COLA), which typically receives the most attention, involves a payment to compensate for differences in expenditures between the home country and the foreign country. COLA payments are intended to compensate for cost differentials between an expatriate's home and host country, for example, the costs of transportation, furniture and appliances, medical, alcohol and tobacco, automobile maintenance and domestic help. Family size is the predominant method for determining COLA payments, with increments provided for each child. Often this allowance is difficult to determine, so companies may use the services of organizations such as Mercer (a US-based firm)19 or ECA International (based in Britain).20 These firms specialize in providing COLA information on a global basis, regularly updated, to their clients. The COLA may also include payments for housing and utilities, and discretionary items.21 Various COLA indices exist, which, for example, allow an American to live like an American in Paris or which presume that the American will adapt to the assignment location by adjusting to the local life style and international living costs.

Housing allowance. The provision of a housing allowance implies that employees should be entitled to maintain their home-country living standards (or, in some cases, receive accommodation that is equivalent to that provided for similar foreign employees and peers). The amount of housing allowance is determined predominantly by family size, and to some extent job level. Other alternatives include company-provided housing (either mandatory or optional); a fixed housing allowance across a particular job level, with the expatriate 'topping up' according to personal preferences; or assessment of a portion of income, out of which actual housing costs are paid. Housing issues are often addressed on a case-by-case basis, but as a firm internationalizes, formal policies become more necessary and efficient. Financial assistance and/or protection in connection with the leasing of an expatriate's former residence is offered by many MNEs, but less so for selling a house as many MNEs encourage their employees to retain a presence in their home country real estate market. Those in the banking and finance industry tend to be the most generous, offering assistance in sale and leasing, payment of closing costs, payment of leasing management fees, rent protection and equity protection. Generally, TCNs tend to receive these benefits less frequently than PCNs.

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