Hardship and Danger Premiums in the New World Order
MOBILITY Magazine, June 2005
Companies have several options when it comes to providing compensation packages that help encourage employees to accept international assignments. Pfeiffer explores several of those options and explains how to enact them.
By John Pfeiffer
In the summer of 1989, tanks rolled through Beijing’s Tiananmen Square. The Berlin Wall still stood and the Soviet Union was one state. Few people had heard of Saddam Hussein, and fewer still of Osama bin Laden. The Internet was the exclusive domain of university professors and defense ministries, and South Africa still operated under the laws of apartheid. And it was during that time, more than 15 years ago, that Francis Fukuyama predicted “The End of History” in the pages of The National Interest.
In those heady days of non-violent revolution, as Western Europe moved from Community to Union, Central and Eastern Europe sloughed off 40 years of planned economy, and China lurched toward market reform, it seemed perfectly reasonable to conclude that democracy and market economy had triumphed. Soon all the world would be living in a “Global Village,” where standards of living would converge and moving across national borders would be as easy as moving across town.
With the benefit of hindsight, we know history has not ended, but has continued to move on. It has become easier for expatriate families to live and work in places like Shanghai, China; Moscow, Russia; and Johannesburg, South Africa. Barriers to trade have fallen with the creation of NAFTA and the accession of 10 new countries to the European Union in May 2004. Mexico, Poland, Hungary, and the Czech Republic, among others, have become hubs of business activity in the absence of tariffs.
On the other side of the coin, new challenges have appeared for international human resource managers tasked with recruiting staff to international locations. The targeted kidnappings of expatriate employees in Central America and violent terrorism have transformed countries previously thought to be stable, safe locations into hardship areas. And who would have thought in 1989 that we would be dealing with expatriate assignments into, and out of, places like Kazakhstan, Tajikistan, and Estonia?
Location Premiums
To provide motivation for employees to accept international assignments, an overwhelming majority of companies pay an incentive premium to their expatriate staff. Although it is often talked about as a single element of the expatriate package, the incentive premium is, in fact, more properly thought of as two separate pieces.
A base global mobility premium typically is used to compensate for the difficulties inherent in any international assignment such as career risk for the expatriate and uprooting of the family.
Unlike the global mobility premium, which is traditionally paid to all international assignees regardless of home and host location, the location premium (hardship premium) is built to compensate for the difficulties and hazards of life in a particular location.
The reasons for designating a location as a hardship location are varied. The most immediate examples of hardship include assignments to war-torn areas such as Iraq or Afghanistan. Clearly, the danger of extracting oil or constructing telecommunication networks in these locations is a real, immediate, and a headline-grabbing fact of life for people engaging in such pursuits. Expatriates in Johannesburg or Moscow are more likely to encounter street crime, whereas expatriates in Pyongyang, North Korea, may be concerned primarily with the prevalence of disease and the generally low-quality medical facilities.
The existence of such high profile locations, however, should not discount the hardship experienced by expatriate families living and working in isolated, climatically challenging locations like Sakhalin Island or the Arabian Gulf, where physical, cultural, and geographic isolation are topics of concern.
Last, but not least, many expatriates posted in seemingly idyllic locations—the Caribbean, the South Pacific islands, Mexico, or Thailand, for example—may experience hardship ranging from pollution and traffic congestion to limited availability of quality schools and “island fever,” which is the feeling of having experienced everything a place has to offer and being unable to travel far from home.
The object, then, is to establish a globally consistent, fair guideline that ranks these varying forms of hardship relative to one another.
In the past, many companies relied on their home country’s foreign ministry to provide an assessment of hardship. However, as expatriates increasingly have come from outside the home country, companies have sought out other sources of information to provide a more multinational view of the world.
In general, these systems seek to eliminate hardship based on three broad categories: physical threat, discomfort, and inconvenience, each of which has a corresponding weight to account for the severity of the hardship faced.
- Physical threat is potential or actual violence, hostility to foreigners from local population, commonness of disease, and the adequacy of local medical facilities and services.
- Discomfort is an evaluation of the physical environment and climate, as well as geographical, cultural, and psychological isolation.
- Inconvenience is the most lightly weighted category, and rates the local educational system, the availability and quality of local housing, access to recreational and community facilities, and the availability, quality, and variety of consumer goods and services.
Advances in information technology mean that more sources than ever can be considered in the construction of hardship evaluations. Various foreign ministries’ recommendations and travel warnings, official crime statistics, reports from centers for disease control, and Internet and print media reports all play into a thoughtful evaluation of hardship around the world. However, these must be blended with on-site experience from local HR, expatriate families, and impartial third-parties to understand the true experience of expatriate life in a location.
This analysis leads to a percentage recommendation applied to a base salary, which often is capped at an agreed-to level. These salary caps can be denominated either as a currency amount, or—because of an increasingly multinational world—at the midpoint of a salary range for each home country in the expatriate system. According to a 2004 AIRINC survey of 25 leading global companies, slightly more than half of the respondents employ a salary cap on hardship payments.
In most traditional hardship systems, one percentage payment is used for each host location, regardless of home location. For instance, a Malaysian, a Swiss, and a Canadian engineer in Shanghai might all receive 15 percent of base salary as a location premium during their rotation. This stresses equity among expatriates doing similar jobs in the same location.
However, because the base salaries of these engineers differ in their home countries, the amount a single hardship percentage delivers to each assignee will differ. For instance, the Malaysian might earn the equivalent of $20,000 USD, while the Swiss engineer might earn as much as $120,000 USD. So, although the headline hardship pay is equal for all expatriates in a given city, the end cash dispersal can be quite varied.
The Changing Face of Hardship
The world of expatriation is growing more and more complex. Today’s landscape is a “from anywhere to anywhere” environment. Employees are not only going into hardship locations, but also are being transferred out of hardship locations. Moreover, companies have grown in their ability to shape the environments in which they operate. Reorganizations of business models and the increase of locally available talent mean that once-remote locations in West Africa have grown into thriving regional hubs.
The evolution of global business has given rise to challenges to the traditional methods of calculating and compensating for hardship:
- Relative hardship. Increasingly, companies are asking whether someone who was transferred from one hardship location to another should receive the same percentage as their colleagues transferred from non-hardship locations. The theory goes that a person transferred from Ukraine to Moscow or from Taiwan to Beijing, China, does not experience the same challenges as someone transferred from New York or Zurich, Switzerland, to these locations. In these situations, the cultural element of hardship is clearly less of a factor for the intra-regional assignees. However, when the Ukrainian employee discovers she is being paid less than her Swiss and American colleagues, will she feel she is being punished for having the cultural skill set to perform at a high level in Moscow? Moreover, as we have seen, the base salary of the Ukrainian employee most likely would have yielded a lower hardship payment than the Western packages in the first place.
The equation becomes even more complex when transferring between more far-flung locales. For example, take the employee who is transferred from a violent location to a location where disease is prevalent, or from a location where malaria is widespread to one where the Avian Flu and SARS are threats. Does being prepared for the crime of Lagos, Nigeria, prepare an assignee for the crime of Caracas, Venezuela, where one does not have language or cultural skills to easily blend into society?
Lastly, is it true that what goes down must also come up? In the days following the terrorist attacks of September 11, 2001, many Arab—and some Indian—assignees stationed in the United States perceived an increase in the hostility of the local population. One could have argued—and many did—that New York and Washington had become hardship locations for families of certain origins.
True point-to-point hardship systems are incredibly complicated to administer and require a host of cultural judgment calls. Few companies feel comfortable with the level of support and expense necessary to run such a system globally.
However, by clustering countries into geographic regions, or by making comparisons of only certain sub-categories of hardship, some companies are pushing the envelope of evolution in constructing a more globally mobile hardship ranking.
- Company infrastructure. As companies center their businesses around regional hubs, a one-size-fits-all hardship ranking may make less sense.
If a company has built regional headquarters in Abidjan, Ivory Coast, for example, they may have invested in building-up company-sponsored medical clinics, schools, and housing compounds. They may have an expatriate population of 100 or more on-site, providing a built-in social network and a high level of security and safety.
An expatriate transferred from another company—possibly even in the same industry—to Abidjan would not have access to this network of support, and may, in fact, be the first expatriate moved into that location. He would experience a much different level of hardship, although he would be doing the same type of job in the same city.
Should not the first company be able to realize a return on their investment in Abidjan by lowering the hardship payments delivered to its expatriates? Companies must retain the facility to override vendor or government recommendations to suit the particulars of their local infrastructure and investment.
- Family size. Cost-of-living allowances and housing traditionally vary by income and family size; why not by hardship?
In recruiting expatriate staff to work in hardship locations, companies must recognize the reality that attracting a single employee can be an altogether different proposition from attracting an employee with a family.
These additional risks are not necessarily addressed through increased cash payment. For example, companies will house families in compound housing, where singles are housed in apartments. Moreover, it is typical for families in free-standing houses to receive additional security staff paid for by the company, including security guards and drivers. A greater number of recreational trips or family leave trips can be arranged to compensate larger families for the different types of risk the employee assumes.
Special Risk Premiums
Of course, locations change over time—many for the better, some for the worse. Generally, location premiums are built to capture the long-term characteristics of a specific location. They are relatively stable over time, increasing or decreasing only when the character of a location changes from such events as the construction of new hospitals or schools and the ascension of a stable government.
However, one-time events do increase the risk of a given location at a moment’s notice. There may be a flair-up in rebel violence in a Nigerian province. A tsunami or earthquake may wipe out existing facilities, which will be rebuilt relatively quickly. An entire region may be struck with an outbreak of a previously unheard of disease, such as SARS.
These circumstances may not warrant an increase in the location premium, which tends to “stick” at high levels and is exceedingly difficult to decrease. Many companies address these flash events through a special risk premium or danger pay allowance, which can be layered on and removed again with more flexibility than the more institutional location premium.
In a recent survey of 10 of the world’s leading telecommunication companies conducted by AIRINC, 80 percent of respondent companies stated that they provide a special risk premium in selected countries, in addition to the usual location premium. These companies rely on a blend of local management input and third-party data, often with a corporate approval process for determining special risk premiums.
Special risk premiums are typically subject to a rolling review, making them an extremely nimble way to respond to crises without institutionalizing the higher level of premium.
Like location premiums, special risk premiums often are expressed as a percentage of base salary. Typical maximum levels for special risk premiums are 25 percent to 30 percent, paid in addition to the normal location premium.
Ultimately, the location premium must be viewed within the context of the overall expatriate pay package and the career consequences of an international assignment. To do this, a company also must assess the internal factors that influence the premium. Are expatriates critical to the company’s international business? Are a company’s international locations major business centers or remote outposts away from major cities? Are international moves a routine part of an employee’s career development? The company must assess external factors, as well. Is the expatriate pay package competitive for the industry? Can a sufficient pool of qualified candidates be identified?
The location premium likely will continue to be a fundamental element of the expatriate pay package, as it influences a firm’s ability to recruit and retain expatriate personnel. Management must ensure that the location premium is equitable, impartial, and responsive to competitive and local changes; firms can then retain expatriate staff and begin to compete effectively in the world market of the new century.
John Pfeiffer is managing director, AIRINC Europe SA/NV, Brussels, Belgium. He can be reached at +32 2 650 0790 or e-mail JPfeiffer@air-inc.com.
top of page
Worldwide ERC® networks and educates workforce mobility professionals and HR innovators.
Copyright © 2008, Worldwide ERC®. All rights reserved.
For information about Copyright Complaints, click here.
Privacy Policy
