One of the most controversial and challenging international assignment policy questions is the concept of assignees sharing in the cost of their foreign housing. It is among the provisions most subject to exceptions. Why is this? Can a consistent foreign housing policy be formulated and communicated?
Background and concept: Many companies still the follow the traditional “balance sheet” approach for long-term assignments (LTAs). The classic approach strives to keep the assignee “whole” (no gain/no loss) with respect to the major areas of personal expense: income taxes, goods and services, and housing.
Taking tax equalization as an example: The company pays all actual taxes on behalf of the employee while deducting a “hypothetical” home country tax contribution equivalent to approximately what the assignee would have paid in taxes had they remained at home. In this manner, the assignee is “kept whole,” or “balanced,” from a tax perspective.
The balance sheet concept is similar regarding housing costs: The company provides foreign housing (rent and utilities), and simply requires the employee pay a hypothetical home country contribution being approximately equal to what he or she was paying before the assignment. Sounds logical, but is it that simple?
For an employee who had been renting in the home country before the assignment, it can be. The employee breaks their lease, and the company absorbs any associated penalties. The employee can usually understand that, in fairness, some approximation of what they were paying in rent beforehand, say $2,000 per month, will now be “applied” towards their fashionable £6,000 per month company-provided flat in central London.
The same logic may apply even for homeowners who decide to sell their home before embarking on assignment. In both cases, there are no longer any housing costs in the home country. And it would seem reasonable that assignees should incur one set of housing costs no matter where they live in the world.
Challenges: Complications arise, however, when considering homeowners who retain their home country properties, as many do when going on temporary assignment. They still have their ongoing mortgage, property taxes, utilities, and maintenance to consider. Many companies will still require a housing norm even in this case, as it is assumed that the homeowner has a unique opportunity to rent out their vacant property to tenants and therefore may recoup, and possibly even exceed their home housing expenses.
But here is where resistance occurs: What if they can’t, or are unwilling to, rent out their home? It may be a unique property in a remote location or otherwise situated in an impractical rental market. Perhaps immediate family members such as college students remain behind, living in the home. For non-U.S. home countries, there are often legal restrictions to renting, or it is not the cultural norm. This is where the balance sheet concept of “keep whole” is challenged. The assignee may claim double housing costs: paying their home country mortgage plus the company required contribution to foreign housing.
An added level of complexity arises from those assignees who may agree in principle with a housing contribution; however, the normative (often statistically-derived) formula the company uses to determine the norm results in a higher payment than their actual home country costs. Some companies will then delve into this claim to validate it and then may adjust the norm to match each individual’s actual pre-assignment housing cost. This, in turn, may raise questions of “meddling” in individual privacy, and overall program inequities, resulting in some assignees being charged a norm, others not, and still others with different, adjusted contributions.
This can be a bit of a mess, as well as an administrative nightmare. It is not hard to understand why some companies have thrown up their hands in recent years and gone to a “free housing for all” approach. Survey data indeed shows that an increasing number of companies have completely eliminated housing norms from their policies. But is the opposite extreme the answer? “Free housing for all” adds a large, often unnecessary, incentive to an expat package and major cost to the company’s relocation program.
SOLUTIONS: We believe a middle ground can be found. Some major considerations:
Renters vs. Homeowners: A company should first consider whether they are comfortable with a policy that may treat renters and homeowners differently. That is, non-homeowners are automatically charged a norm, while homeowners may not be. While some companies are uneasy about perceived inequities of one segment of their expatriate population paying a housing norm while others do not, I believe it can be communicated that homeowners are in a fundamentally different financial circumstance. They have made a major investment decision in choosing to buy their homes and are subject to all the personal risks and rewards associated with that investment. If they can make money on renting it, or not, that is their own personal financial matter.
Cost savings: If you waive the norm, what savings can you get in return? The answer: Elimination of home housing support. Many companies offer a number of support policies to their homeowner assignees, typically including monthly property management, tenant screening, and rental management. In extreme cases, they may even offer home sale assistance (closing costs, etc.). Many companies who have chosen to waive the housing norm requirement have also simultaneously eliminated these support services, reasoning that homeowners can do whatever they like with their homes while the company maintains a completely hands-off approach, which they are justified in doing because they are providing foreign housing absolutely free of charge.
Ease of Policy Administration: Managing support services, exception management, communications challenges, analyzing case-by-case home costs as described above – all of that administration time and headache can be eliminated from the plate of the Global Mobility Manager by taking a laissez-faire approach to home housing.
Foreign housing cost savings: Although the issue of the housing norm is theoretically separate from the decision about the cost and quality of assignment location housing, there is an opportunity to view the considerations together. That is, if the company appears “generous” in not deducting a norm, they might in turn be more restrictive in establishing the host budget. For example, capping the target budget at an inexpensive or “moderate” level rather than an expensive neighborhood, and communicating that a more expensive “over-budget” property may be chosen, but any excess will be the assignees’ to pay.
We hope this discussion goes some way towards evaluating your company’s policy in this area. Companies should carefully consider the variety of factors, including their specific assignee populations, in arriving at housing policies that are clear, concise, cost-effective, and that may be consistently applied and fundamentally justified.
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