When it’s Important to Offer Location Allowances to Assignees

One man’s paradise is another’s compromised one. One can say the same thing about working abroad. ECA International, a provider of international assignment management solutions, offers location allowances to encourage professionals to take “undesirable” international assignments, undesirable being a relative word, of course. Still, global mobility professionals have to realize how expats and their families have to adjust to an unfamiliar environment when assigned abroad.

Different from hardship pay or cost-of-living compensation, a location allowance is remuneration for the employee’s change of location. They are determined by a series of factors that affect living conditions, such as climate, language, culture, personal security, housing and air pollution. 

The distinction is important to point out here because the expatriate family may experience distress and anxiety during an assignment, especially when living conditions in the host country differ substantially from those at home. In such a scenario, a location allowance compensates expatriate employees for the adjustment they need to make to live and work in a new environment.

According to ECA’s research, most companies (95 percent) apply location allowances for the traditional long-term assignment for which they were originally designed, but their use for short-term assignments has grown in recent years (62 percent).

What does a location allowance entail? The most common way to express a location allowance (used by 58 percent of responding companies) is as a percentage of the home gross salary, paid in net. Other survey respondents pay a percentage of home net salary (15 percent) or a fixed cash amount based on location (14 percent), so that the same allowance is paid regardless of seniority. Just over a fifth of companies that apply a percentage impose a ceiling on the allowance.

But what many may not be aware of is how two-thirds of companies use a location allowance system when calculating salary packages for their mobile employees. ECA’s Location Ratings report explains how an effective location allowance system takes into account many actors, including those that have different levels of impact depending on the expatriate’s country of origin.

For example, a Singapore-based employee would need to make far greater an adjustment to life farther away than they would in Tokyo, Japan, because of various factors such as distance from home, cultural dissimilarity and risks to personal safety. ECA found that 9 percent of companies provide additional pay on top of the location allowance to compensate assignees “living in a remote area or an area of extreme risk.”A risky area would be one where coronavirus, the latest virus outbreak that is causing some concern worldwide, is accelerating.

In Silicon Valley, companies need to review their location allowances. This is because only about 29 percent review them less frequently or not at all after making the initial calculation, and 21 percent do so on an ad-hoc basis. Fifty-seven percent of respondents reported that they apply a localization policy once an assignment has extended beyond a certain time, most commonly five years. Notably, 10 percent never fully dispense with location allowances when they localize their assignees.

How are location allowances calculated and applied? ECA’s Location Ratings ensure assignees are appropriately compensated for the differences in adjusting to life in a new country using an objective scoring system that creates equity across your mobile population.

Each factor is given a score and the individual scores from each category are added together to provide an overall score for the location, which determines the band it falls into. The higher the score, the more difficult it will be to adjust to the new location, and thus a higher location allowance is required. 

A ratings system provides the basis for fair and consistent location allowances across all locations. The Location Ratings that ECA offers are unique in the market, because some aspects of the score vary depending on the home and host combination. 

Many factors of daily life will affect people, regardless of where they come from. Among them are air pollution, the expatriate community, goods and services, health, housing and utilities, natural hazards, personal security and sociopolitical tensions. 

For housing, California Corporate Housing has been the leading provider of customized homes for many assignees.