Is this the end of the long-term assignment?

It’s no secret that companies have been increasingly using alternatives to long-term assignments to manage their mobility programmes in recent years. While many companies still expect their numbers of long-term assignees to increase, successive ECA surveys have found that the rate of increase is slowing each year. In contrast, the use of short-term assignments, commuter assignments and permanent transfers is on the rise.

Our latest Permanent Transfers survey found that nearly 40% of international transfers lasting more than one year are made on a permanent basis, where there is no expectation or commitment for the employee to return to the home country. Four years ago this figure was only 22%. Nearly two-thirds of companies have seen the proportion of permanent transfers increase in the last three years and a similar number forecast further increases in the next three.

Given this rate of increase, will traditional long-term assignments soon become a thing of the past?

Why permanent transfers are on the rise

As more employees want and expect to be internationally mobile to satisfy their own personal and professional ambitions, 38% of companies report that they will increasingly use permanent transfers to meet employee demands. However, overall the results indicate that the rise is being driven primarily by the needs of businesses rather than employees.

The most common reason for the increasing use of permanent transfers, cited by 65% of companies, is that they are more cost-effective than traditional long-term assignments. This may be due to employees being more likely to be employed on local salary terms and provided with fewer benefits than assignees, as we will see.

Just over half of companies expect their permanent transfers to increase simply because the role requires the employee to be in the host location permanently. Where companies are struggling to fill a role with a local national they must search internationally to source the talent they need. It makes sense to first advertise to interested parties offering a cheaper permanent transfer package before resorting to incentivising less eager candidates with a more generous assignment package.

When to use permanent transfers

The main reasons companies use permanent transfers are to fill skills gaps and to manage operations, which are also common purposes of international assignments. Companies are far more likely to use assignments, however, as a way of transferring expertise or corporate values. Broadly speaking then, companies are more likely to use assignments for strategic purposes whereas permanent transfers are more suitable when there is simply a job that needs to be done. That may depend on where the job is based, however; assignments are more likely to be used for postings to more challenging locations (the Engineering and Construction sectors, for example, use permanent transfers less than the Finance and Technology sectors which tend to be based in well-established urban centres).

Permanent transfers work better for some combinations of home and host countries than others. The top ten home-to-host combinations reported in our survey suggest that geographical proximity and the existence of a common language influence the likelihood of a transfer being made on a permanent basis. Another finding was that companies headquartered in Europe are expecting a bigger rise in the use of permanent transfers than other regions; this may be because it is easier for Europeans to integrate into other European countries due to similarities in culture and the relatively short distance from home, plus the fact that it is easy for employees to relocate permanently within the European Union without visas.

Most importantly, unless they have personal reasons for wanting to relocate and request a transfer themselves, employees are unlikely to undertake an international move if it makes them poorer. Although companies look to provide leaner packages for permanent transfers compared to international assignments, if the employee is moving at the company’s request the package on offer still needs to ensure that they will be no worse off than they would have been at home.

Are permanent transfers cheaper?

Relocation costs

Just over 40% of companies reported that they provide a less generous package of relocation assistance for their permanent transfers than they do for their long-term assignees, but this finding may be due to companies having different understandings of what counts as a “relocation benefit”. A comparison of one-time benefits typically provided within long-term assignment and permanent transfer policies suggests that average levels of provision are broadly similar for each, whereas on-going benefit provision tends to be more generous for assignees.

Salary

It is intuitive to pay a host-based salary for someone being transferred permanently to another country, and that is what the majority of companies do.  Salaries for international assignments are more commonly calculated using a home-based approach, which is often perceived as being more expensive due to the various allowances included. However, paying a host-based salary does not automatically guarantee cost savings.

The example below compares the costs of a typical home-based salary calculation including COLA and mobility allowance with the host-based salary for the equivalent job grade for a move from the UK to the USA (the most popular permanent transfer route in our survey).

In this case and many others, it would clearly be cheaper to use a home-based approach to calculate the salary rather than pay a host-based salary. However, one factor to be aware of is that some countries have race discrimination rules that prevent companies paying different salaries to different nationalities. In many countries where race discrimination legislation applies, differential treatment and the payment of additional expat-specific allowances and benefits may be permitted if there are objective business reasons for the differences. In other words, if you are transferring someone on a permanent basis you might have to pay them a host-based salary (and phase out any “expatriate only” payments) to avoid discrimination claims.

It’s unsurprising that moves from the UK to the US are so popular. As this extract from ECA’s National Salary Comparison shows, when differences in gross salary, income tax and cost of living are taken into account, UK nationals have a much higher relative buying power once they are paid an equivalent local salary in the US.

However, the second most popular permanent transfer was the reverse route from the US to the UK, which would result in a reduction in relative buying power and presumably a reluctance from the employee to relocate on such terms. In such cases companies need to find a way to make the salary package more attractive. Almost 40% of companies use alternatives to the host-based approach to calculate salaries for permanent transfers, the most common of which is the net-to-net approach. This takes into account differences in tax and living costs to ensure the employee will be no worse-off on a net basis.

Even where a host-based approach is applied, it is not unusual to include further benefits in the remuneration package above what a local national would receive (i.e. a local plus approach).

Benefits and allowances

Many companies use a host-based or net-to-net approach to calculate salaries for their long-term assignees too. The main difference between overall packages for assignees and permanent transfers relates to the ongoing provision of benefits and allowances.

Location and mobility allowances are commonly included in long-term assignment packages, even where a host-based approach is used, but they are rarely included in permanent transfer packages. Employers are similarly less likely to provide common assignment benefits such as home leave, medical insurance, accommodation and education for children. The only benefit provided to a similar extent as for assignments is tax assistance, presumably due to concerns about the potential penalties of non-compliance. Where benefits like housing and education are provided, monetary limits are more likely to be imposed than for assignments.

The simplified example below compares the costs of a salary and benefits package for a move from Taiwan to China for an international assignment and a permanent transfer. The assignee receives a home-based salary and several additional benefits and allowances, whereas the transferee receives a host-based salary and fewer benefits.

The cost of the international assignment package would cost over double that of the permanent transfer package, but all the incentives and benefits included may not even be necessary. The total net value of the permanent transfer package is 14% higher than the home net salary, which may be sufficient to persuade the employee to move (although tax assistance is less likely to be provided after the first year of a permanent transfer).

Challenges

Given these complexities, it is unsurprising that “salary package competitiveness” was found to be the third greatest challenge for staff managing permanent transfers. Considered more challenging though are managing expectations and ensuring that the policy is applied consistently. This is to be expected given only around half of companies have a policy to govern their permanent transfers (compared to 80% of companies having a long-term assignment policy) and only a quarter of those always stick to it.

Poor enforcement or lack of policy can reduce the potential cost savings of permanent transfers as expensive exceptions are made. It also increases the risk of non-compliance with tax and immigration requirements. The current lack of policy in this area compared to long-term assignments reflects the relative immaturity of this approach; as the use of permanent transfers is set to increase rapidly in the next few years we expect to see companies increasingly formalising their permanent transfer policies and enforcing them more strictly.

Conclusion

Permanent transfers will become an increasingly popular alternative to long-term assignments over the next few years but are unlikely to replace them altogether. When a skills gap arises that cannot be filled by a local national, permanent transfers can be a cost-effective way of recruiting foreign talent without resorting to a “full” international assignment package to incentivise a less willing candidate. However, they work better for some home-host locations than others and the salary and benefits on offer still need to be sufficiently generous to persuade the employee to relocate; in some cases the necessary package may not be any cheaper than that for a long-term assignment.

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