How do you set hardship allowances?
The ideal mobility policy aligns with the company’s strategy and meets the business’ needs. Defining the level of generosity of the expat allowances is important. With respect to hardship, you could pay premiums purely based on the host location or you could also consider the home location, meaning you pay a hardship differential.
The standard AIRINC hardship is determined solely on conditions in the host location based on an evaluation system that provides an objective, comprehensive and consistent measure of expatriate living conditions. This measure is expressed as a total hardship score, ranging from 0 to 100 points, covering three categories of evaluation: Physical Threat, Discomfort, and Inconvenience, which is then converted into a percentage of gross base pay using a hardship allowance scale. This allows the same percentage to be applied for all expatriates going to the same host location regardless of their home location. This approach is in line with market practice but may also be more costly as the home location is not taken into consideration.
While the standard approach is more consistent than applying differential hardship, it should be noted that although you are paying the same hardship percentage for expatriates going to the same host location, you are still differentiating the hardship allowance as not all expatriates in the same host location will get the same allowance as the hardship percentage is applied to the gross salary, meaning the higher paid expatriates will be paid a higher hardship allowance compared to their lower paid peers, although everyone is experiencing the same level of hardship. For that reason, companies may elect to apply a cap to the salary to limit the hardship allowance for higher paid expatriates.
Differential Hardship, on the other hand side, considers the home location and is a way to reduce assignment costs. When there is cost pressure from the business, and you are sending expatriates from and to diverse locations, differential hardship could be an ideal alternative. It needs to be noted however that when you are sending expatriates from highly developed locations (e.g., Europe and US), cost savings may be limited as the home location hardship scoring will be lower.
Should a differential approach be decided, AIRINC recommends subtracting the home location points from the host location points for all or some of the assessment categories. It is common practice among companies to consider the net points for the assessment categories of Discomfort and Inconvenience while leaving the Physical Threat category fully intact. The overall net points are totaled, resulting in a differential hardship percentage.
We also see other approaches, such as subtracting the home location hardship percentage from the host location hardship percentage or reducing the host hardship percentage by subtracting a certain percentage (e.g., 5%) if certain conditions or criteria are met (e.g., the expatriate's family speaks the local language, or the transfer is within the same region).
Based on recent AIRINC benchmark information, host-location-based hardship is the prevalent approach with 73% of companies using this strategy with 27% of companies varying hardship by home and host locations (differential hardship) primarily for transfers within a region or for developmental assignments.
Do you want to discuss this in more detail? AIRINC is here for you! We are happy to advise the approach that best aligns with your company’s mobility policy.