Expensive Expatriate : How to reduce Relocation Costs

Sending an employee abroad with his/her family can be much more expensive than expected, due to factors such as quality of life that the employee expects and the costs associated with the economy of a family with children. Proper planning by the company may reduce the high figures.

At one time a company that decided to send one of its workers to the US (New York region) contacted us, with a request to perform an analysis of the expected level of disposable income for that employee (i.e.: net income – living expenses + level of pension savings). The company had already set the employee’s standard salary package and given it to him.

After we did the analysis we found that the employee is expected to reduce his disposable income during the mission compared to his income level in Israel. Moreover, the salary package offered to him now would not be sufficient for him to make ends meet.

When we called the company’s CEO and presented our conclusions, we encountered an amazed reaction: “How can this be? We gave him a salary 30% higher than a local employee at his level! And I was sure I was too generous … maybe I should cancel the mission.. “.

Well, “How CAN it be?” Why is the salary package of the expatriate higher by double digit figures (and sometimes triple digit figures) than that of a local worker? Many tend to think that this happens because of the low level of wages of local workers (in countries like China, India, Russia, etc.). But that’s true in developed countries as well (such as Western Europe, the US, Australia, Japan, etc.), where the level of wages of local workers is relatively high..

An examination of a number of cases where we have handled workers illustrates the issue:

• An employee who went on a mission as the CEO of an Asian plant – annual cost of – $400,000.
• An employee who went on a mission to conduct an internal management system of the company in Europe – an annual cost of about €270,000 ($340,000).
• An employee who went on a mission to run a software engineer team in England – annual cost of about £110,000 ($ 200,000)
• An employee who went on a mission as a service engineer in Japan – annual cost of about ¥2,850,000 ($270,000).

The explanation for the high (and sometimes frightening) cost lies in the following factors:

• Tuition: the accepted policy of Israeli companies on this issue is to finance the tuition of the employee’s children at international schools (other than destination areas where there is public education in the English language at an acceptable level as in the US, UK and Australia). The tuition cost for one child in an international school is $20,000 to $45,000 per year.
• Moreover, in many countries (such as France), the expense of the employer for tuition is considered a benefit for the employee, therefore it must be grossed up in the salary. Consider a family with two children at the American School in Paris. Annual tuition is approximately – €33,000 per child (i.e. about €66,000 for two children). Because this expense is considered a benefit for the employee, it must be grossed up in the salary. Taking into account the level of the marginal tax (55% income tax and social security), the annual cost to company –amounts to €145,000!

• Rent: rent in the residential areas of expatriates in many destination areas is very high. Average rent for a 3-bedroom apartment in residential areas used by expatriates in Singapore is about $4,500 per month ($54,000 per year). Again, in many countries, this cost will be considered as a benefit to the employee and therefore grossed up. For example, a company that pays rent of £2,400 a month in London will end up paying almost £50,000 after grossing up.

• Work of spouse / partner: Moving abroad usually involves the loss of the second income of the family unit. This issue shows positive progress in recent years as many countries (Australia, the US, the UK) allow the spouse of an expatriate to work under their spouse’s work permit.
  Still, in most cases, the spouse / partner does not work for the duration of the mission (or for most of it). Although formally most companies do not address the loss of the second income in determining the salary package, in practice it must be taken into account in order to allow the worker to maintain his/her accustomed standard of living.

• Pension savings: Most pension savings plans in foreign countries are not relevant because the Israeli worker’s retirement pension is guaranteed only to those who live in that country at retirement age (for example in France, Belgium, the UK, etc). On the other hand, you can not set aside Israeli pension funds since in more than 90% of the cases the working relationship with the company is severed.
  The result: the company needs to take into account the net pension contributions – not the gross wage. For example, an employee whose monthly salary (gross) in Israel is NIS 25,000. His annual pension savings (including insurance and provident fund) is approximately – $20,000 and is tax deductible. To set aside this amount off the net when the worker works abroad you have to raise the gross wages by $30,000 to about $40,000 (depending on the level of the marginal tax rate in each country).

• Benefits package and relocation: Most companies tend to ignore the total cost of the transition benefits package (flights, luggage, medical insurance, temporary housing, rental car, relocation bonus, tax advice and home leave) and see the “trees” (each benefit separately) instead of the “forest” (the benefits package). The cost range (annualized) of the benefits package is $20,000 to $35,000, contributing a not inconsiderable share to the total cost.

• Standard of living and purchasing power in Israel : Contrary to conventional thinking, the standard of living and purchasing power in Israel are at a relatively very high level (at least when it comes to the standard of living and purchasing power of the working population who are candidates for a mission abroad). For example, the monthly cost of private day care in Israel is about NIS 2,500, while in London the monthly day care cost is approximately £900 pounds (more than double). Another example: the cost of the rent in a good area in the center of Israel is between $1,000 and $1,500. The rental cost of equivalent housing in Silicon Valley will be $3,000 to $4,000.

What to do to avoidthe insane costs wherever possible? Here are some suggestions of ways to deal with overseas mission costs:

1. 1. 1. Know how much it costs (before starting) – As every household consultant will tell you, the first step to reducing expenses is to be fully aware of the total expenses. Seems simple enough? Maybe. In most cases awareness of the total cost of the mission comes just after the mission has been agreed on with the employee (at best) or just after the employee has landed abroad (at worst).It is HIGHLY recommended to perform a comprehensive calculation of the cost of the mission before the first call to the candidate for the mission (in many cases the first call starts an unstoppable process)
      2. Examine alternatives:

Alternative A: Local employee – comparing the cost of a local worker compared to an Israeli expatriate sheds new light on the need for a mission. As in most cases, the fact that an Israeli expatriate has a clear quality advantage over the domestic worker (product knowledge, communication with company headquarters in Israel, the level of personal confidence, the level of commitment to the company), at the end of the day, quantity trumps quality. The company should ask itself what price it is willing to pay for the quality advantage: $50,000 per year? 00,000 per year? $200,000 per year?

If we take one of the examples presented at the beginning of the article, the annual employer cost of a local project manager to implement management system of the organization is about €95,000 (instead of an annual cost of about €270,000 per year for an Israeli employee). Is there really such an overwhelming qualitative advantage worth €175,000 a year (or more than half a million euros for a three-year mission?) As a company that makes its living providing consulting and services to companies conducting employee relocation, we often find ourselves advising companies to prefer a local worker rather than an expatriate from Israel. To tell you the truth, in most cases this advice is rejected.

Alternative B: shortening the mission – in many cases the company can shorten the duration of the mission (by up to 12 months) and send the employee without his family. This solution comes with difficult implications for the family – but also with considerable family benefits (not damaging the spouse’s career, preventing culture shock for the children, not severing the family from its social and familial environment).

the saving in this type of mission is very significant (rent, tuition, no second salary loss) and allows the company to provide the employee with higher financial incentives that could justify the family and personal price that he/she pays. For example, the company can now send an Implementation Project Manager from Israel to Europe, shorten the mission to one year, reach an agreement with the employee on 3-4 days a week in Europe, and to pay a special bonus of $50,000 at the end of the year.

Alternative C: send single workers or those with a small family – it doesn’t sound very politically correct to discriminate against an employee because of a family situation, but …it is much cheaper to send a single employee than a married worker, a couple without children than a couple with three children, or an older employee whose children have graduated from high school than a worker with children of school age.

1. 1. 1. Carefully examine the data – Is there really a need for an expensive residential apartment in the city? Do you have to send your child to school in the most expensive international school? Is it not possible to shorten the stay at the hotel? Asking the right questions can save a company substantial amounts of money.
         For example, the annual cost of schooling at the International School of Brussels is about €30,000. However, the corresponding cost of the Jewish school in Brussels (Ganenu) is approximately €3,000. Guess where many of Israeli expatriates’ children attend school in Brussels.
      2. Avoid precedents: – We must send the Haim to New Delhi. He demands that we pay for his wife’s sister’s ticket so she can help her with the children in the first few months. It seems like petty cash- why be so petty over a few thousand dollars. Right? Very true! Now go explain to David, who is flying to Boston, why his wife cannot take the her cousin with her so she doesn’t feel so lonely during the first few months of the mission (based on a real case ..). The rule of thumb says the real cost of all precedents is 10 times the initial cost. The conclusion: a cautious finger on the “precedents trigger” …
      3. 5. Give the money to the employee: -Who does not know the phenomenon of OPM (Other People’s Money)? The company’s money is by definition is always cheaper money than the employee’s. Better, therefore, to create a framework in which salary package and level of residence area, level of education, level of car is at the expense of the employee (unless tax considerations tell you otherwise). All in all, it will cost the company less money.

In an English speaking country, with excellent public education level, the expatriates of an Israeli company demanded that their children attend a private Jewish school and the company finance the expenditure. Any attempt to argue with the workers raised serious allegations of insensitivity and lack of recognition of “the need to maintain the relationship of national roots.” After a number of years, the company decided to change the policy: All workers with children receive a special salary increment and the company canceled the funding of schooling. And lo and behold: all employees (without exception) have concluded that their children can do without “education related to national roots” and enrolled them in public schools instead …

In conclusion, the correct choice of the employee profile sent for relocation and devoting proper attention to parameters such as the duration of the mission, housing and education, may significantly cut the costs for the sending company.

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