Mobility Basics: Location allowances

What are location allowances?

Location allowances are often paid to globally mobile employees on top of their base salary in recognition of the difficulties they face adjusting to life in a new location. They are also known as “hardship” allowances, but this term can be misleading. When people talk about “hardship locations”, they tend to think of places that are very remote or isolated, that have high security risks or where it is difficult (if not impossible) for assignees to enjoy the lifestyle they were used to at home. It is easy to see why additional compensation should be considered for a move to a hardship location, but even a move between two well-developed, safe and cosmopolitan cities can require the assignee (and potentially their family) to adapt to a significantly different lifestyle. For such an assignment it may still be appropriate to provide a location allowance.

According to ECA’s latest Expatriate Salary Management Survey, 74% of companies using a standard build-up approach apply a location allowance system in their assignment packages. When using the local-plus approach, 30% of organisations pay a location allowance. This represents a considerable drop compared to 2018, when 43% of organisations included a location allowance in local-plus packages. Two-thirds of those providing a location allowance consider it a means to financially compensate the assignee and their family for adapting to a different location and/or any reduction in their quality of life. The other third provides it to motivate their employees to take up assignments to undesirable locations, but it is more common to provide a separate mobility incentive for this purpose. 

So, the mobility allowance is generally used as a motivator, whereas the location allowance is considered a compensator. To clarify, however, location allowances aren’t about maintaining home purchasing power or lifestyle in the host location. Differences in living costs are usually accounted for separately using a cost of living adjustment. 

How are location allowances calculated and applied?

Location allowances are usually calculated as a percentage of gross salary and paid net. Based on our unique and objective Location Ratings scoring system (discussed below), ECA groups locations into six bands and recommends a different allowance for each band according to the level of hardship or adaptation required.

The beauty of our system lies in its flexibility: you have the option of using and adapting our bands to determine allowances that meet your individual business needs but are based on the same objective scoring system. We see this approach a lot with clients operating in industries where extreme locations are the norm. For example, some companies might not provide an allowance at all for locations that fall into the first three bands but provide significantly higher allowances for locations falling into the remaining, higher-rate bands.

As location allowances are paid in recognition of difficulties in adjusting to new surroundings, if the home and host locations are similar enough, an allowance may not be necessary. If your company applies location allowances, it is important that this is communicated clearly to the assignee to avoid any misunderstandings. A way to achieve clarity is to include a line for the location allowance in all salary calculations – even where the move warrants no allowance. By referencing the fact that an assessment has been made but that it calls for a 0% location allowance, employees assigned to “easier” locations won’t feel like they’ve been cheated out of an assignment-related payment.

ECA's Location Ratings system

Location allowances have the potential to be very subjective because everyone’s views about the quality of life in certain locations are different and how we react to changes in our surroundings is very personal. To remove this subjectivity, ECA's Location Ratings system objectively evaluates over one hundred relevant individual factors in 503 locations. These factors cover all aspects of quality of life, ranging from the threat of tropical diseases and terrorism to the availability of goods and services.

Each factor is given a score and the scores from each individual 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. It is important to note that all factors have a different maximum score to reflect their impacts on everyday life and weight their influence on the final score. By assessing each factor as objectively as possible, our Location 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. For example, sending a Canadian on an assignment to Norway wouldn’t result in a high climate score, because the climates in both locations are similar. Sending the same Canadian to the Middle East, however, would lead to a high score for the climate factor, as the Canadian wouldn’t be used to the searing heat. 

However, a comparison of the situation in the home and host countries is not appropriate for all the factors we assess. For example, someone assigned from a country with a poorly developed healthcare system into another one with equally poor provision will not necessarily find life easier than someone assigned there from a country with good provision. This aspect of the location allowance should reflect the issues with healthcare in the host country only, as the situation is the same for everybody that lives there no matter where they came from.

ECA’s system also reflects how likely it is for crises like natural phenomena or terrorist attacks to affect each location. For instance, hurricanes sweep over the Caribbean every year, and this is already considered in the scoring for locations there. We recommend not changing the location allowance immediately after high-profile events like terrorist attacks or hurricanes, not only because their likelihood has already been considered but because it can be near-impossible to predict the long-term implications they will have on expatriates. It would be impractical to increase the location allowance for, say, two months, and then face the difficult conversation of readjusting the allowance back to what it was.

Moreover, increasing the location allowance as a direct response to a crisis situation may imply it is used as “danger pay”, which isn’t its purpose. Practical support in the form of evacuation, additional security or other appropriate response measures might be a more relevant form of immediate assistance.

Our Location Ratings also recognise the importance of the mental health of expatriates, which is reflected in higher health scores in locations where risks to mental health are significant. In our recent survey, expatriates in a number of difficult locations reported the extreme anxiety and mental strain they experienced. In recent times we have seen a much greater recognition of mental health issues, with an increasing willingness from expatriates to discuss the impact of conditions in their host location on their mental health. For example, in our latest survey all Chinese cities saw a score increase, largely because expatriates have experienced increased anxiety and stress owing to the country’s harsh Zero-Covid policy. While the rest of the world had largely removed or drastically reduced any remaining pandemic restrictions by late 2022, China steadfastly maintained its stance, despite the futility of such an approach once the highly contagious Omicron variant had emerged in late 2021. You can read more about this topic in our blog about mental and physical hardship.

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