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By bringing more locals into the overseas operation, the use of expats can be reduced. In addition, the cost of expats should be factored into the decision to enter a market. Major markets will still be profitable even with the presence of expats, but there are many marginal markets that may not be viable once expat costs are included (for example, where Malaysia may be profitable, adjacent Brunei may not be).
The human resources department can also reduce the value of the package offered to expats. If assignment allowances and property costs are 70% of the expat costs, then these costs should be the focus of efforts to reduce total expat costs. For example, one solution is to introduce funding at a blanket level, and then allow the expat to determine how those funds should be dispersed. This strategy fixes the amount of money that is spent on the assignment, rather than have the costs subject to market fluctuations. For example, the price of a trip home can vary significantly depending on when and how the trip is booked. An employee with a finite budget will choose the lowest price option, whereas one with an undefined budget may choose a more expensive option.
Housing costs in particular can be controlled through the use of a fixed total budget (Friedman, 2010). The housing needs of different expats will vary. Any given expat may prefer to have the choice between luxury accommodations with few trips or spartan accommodations with many trips. The expat should appreciate having the choice while the company benefits from having greater cost certainty.
Another financial means of saving money on expat is through the use of deductibles (Friedman, 2010). Deductibles account for the fact that the employee saves money in some areas. For example, if a long-term assignment allows the employee to rent his/her domestic residence, this can be deducted from the housing allowance paid by the company. Other deductibles can be made for education, maid service, medical costs and other areas where the assignment may deliver savings. Similar to deductibles is gain-sharing. In a system where the employee has a set housing allowance, but gets to keep half of what is not spent, the incentive is to take more modest accommodation. The result in a win-win situation where housing costs to the company are lowered and the employee receives extra cash after choosing acceptable accommodations (Friedman, 2010).
Given that housing costs are one of the most important costs associated with expats, the company should consider evaluating the different housing options. Typically, the shorter term the rental, the more expensive it will be, with hotels being the most expensive. Lowering expat housing costs can be accomplished through the use of rentals that are well-matched to the length of the assignment. Hotels are unnecessary, for example, for any assignment over one week in most parts of the world. Short-term rental rents should not be paid for assignments over a few months in length. A human resources department can save a significant amount of money if it takes the time to investigate the local housing market. Indeed, the use of a flat benefit that the employee is free to spend as he/she sees fit will typically result in a better study of the housing market and lower housing costs for the employee.
Relocation costs can be upwards of 15% of total expat costs. As mentioned above, one way to reduce relocation costs is to relocate less often, by keeping expats satisfied. Beyond this, the actual cost of performing a relocation can also be reduced. Last minute shipping is always more expensive, and therefore should be avoided. Better planning of expat moves can reduce shipping costs dramatically. In addition, furniture should be rented locally rather than shipped, to reduce total shipping costs considerably in both directions. For popular assignment regions, shipments can be shared among expats in order to reduce total shipping costs by shipping full loads. Volume limits can be utilized to reduce shipping costs. The limit can be strictly enforced or can be the result of incentives such as deals on storage that compel employees to leave more at home (Friedman, 2010).
It is also worth considering that the human resource department should reduce its own infrastructure for dealing with expat assignments. Part of this can be accomplished through streamlining the expat cost process. For example, the use of multiple cost centers is likely to increase total costs, so the cost center structure should be simplified (Friedman, 2010). Having a simplified formula for calculating expat costs will also reduce the total administrative costs associated with expat management (Friedman, 2010).
Allowances being one of the major expenses, the company's understanding of cost structures in the nations in which it operates should be kept current. In China, for example, the cost of food is much lower than in the West, but at the same quality. Transportation costs in gulf countries with subsidized gasoline or in nations with strong public transport systems (Singapore, Hong Kong) can be much lower than at home. Firms based in expensive cities such as New York, San Francisco or London may find that housing costs are much lower abroad. Currency fluctuations can dramatically affect cost structures. There should be some attempt on the part of the human resources department to understand the changes to the cost structures of overseas assignments over time and make adjustments to allowances accordingly.
Expat assignments are expensive, especially given that they often result in failure. It is the role of human resources departments to minimize the costs associated with expat assignments, as these costs can impact the overall profitability of the project. There are a number of different sources of costs, and the company seeking to minimize these costs should focus its efforts on the most significant costs first. These include costs associated with allowances, housing and relocation. Other costs can be targeted, but the impact will be less effective.
Most of the best ways to reduce expat costs are structural in nature. The manner in which costs are calculated, in which money is allocated and in which costs are controlled by the company all have an impact on the bottom line with respect to expat assignments. The more that costs are streamlined with respect to assignments, the lower the costs will be. In addition, if the employee is given a strict allowance to spend as he/she sees fit, the company can control costs. There are also ways that incentives can be built in to the expat compensation system that can create incentives for the employee to minimize costs. With some creativity, a human resources department can alter the firm's cost structure with respect to expat assignments, lowering costs associated with expat assignments in the process.
3. I agree that merit pay grids do have the potential to undermine employee motivation. The merit pay grid is designed to encourage greater levels of efficiency and effectiveness from employees, with merit increases tied to reaching specific performance objectives. However, there are many pitfalls that can result in merit pay undermining employee motivation.
The first pitfall is that many employers only reward extreme performance. This leaves the vast majority of employees unable to hit the targets required for merit increases. For merit pay to succeed, the targets must be achievable. When an employee is faced with an unachievable target, this removes all extrinsic motivation for the employee. It also sends a message to the employee that his or her best will never be good enough, removing most if not all of the intrinsic motivation from the employee as well. This pitfall can be alleviated with better goal-setting on the part of the management. When all workers are treated as average by the compensation system, they will only strive for average results (Zenger, 1992).
Another pitfall, which can manifest in reduced motivation, is that the merit structure does not recognize the constraints faced by the employees. Employees may be willing and under ideal conditions able to perform at a merit-triggering level, but when faced with limited resources, poor training, or ineffective team members, they may be unable to achieve their potential. The employee's motivation will be undermined specifically because the employee will feel undermined. Employees must be given the tools required to achieve their potential if they are to be motivated by merit increases on a merit scale set at the high end of their potential.
A merit system in and of itself is insufficient to improve employee motivation. The nature and structure of the system is of critical concern for compensation managers. Merit-based systems, to be effective, must include achievable goals, and even then will only work if the employees are given the tools they need to succeed. If not, motivation can actually decrease as the result of the merit-based system.
4. Employers are faced with rapidly escalating health care costs and their ability to control these costs is central to their ability to maintain competitiveness in a global…[continue]
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