The Future of Global Mobility in a Post-COVID-19 World Part 3: Overhead and Business Cost Reduction
The coronavirus pandemic has ushered in a “new normal” in how business is conducted across the globe, and mobility managers have had to adapt quickly to these changes. Even as we continue to contend with the ongoing effects of the pandemic, the discussion of what employee mobility will look like in a post-COVID-19 world has started. Employee mobility strategy will need to be aligned with how companies adjust to the new landscape. To determine the best way forward, we must first look at what is on the minds of company leaders and where they are focused.
Based on a BDO survey of 244 business leaders across eight European markets (Belgium, Denmark, France, Germany, Italy, Norway, Spain and the United Kingdom), business leaders have restructured their priorities as it relates to talent. Driving down costs and adopting new digital solutions have surpassed attracting and retaining talent in terms of importance. Additionally, with the pandemic exposing supply chain vulnerabilities in an already complex system, many companies have indicated that they will diversify their supply chain, and with so many employees working remotely, companies are re-assessing the need for their physical presence. Finally, the profound economic impact of the pandemic and extensive layoffs has propelled companies to take action to further drive down costs to enable them to remain viable, drive efficiencies and improve resiliency.
This three-part series reviews the impact of three factors on global mobility: remote work, diversified supply chains, and the need for overhead and general business cost reductions. Part 1 and Part 2 of the series focus on the impact of remote work, including access to talent and the tax implications for both individuals and companies, and the impact of diversification of supply chains on mobility programs. This article shifts to the impact of business cost reductions on global mobility.
Impact of Overhead and General Business Cost Reductions on Global Mobility Programs
Cost reductions and cost containment have always been a key driver in decision-making for a global mobility manager. However, the disruptions caused by the pandemic and the downturn in the economy have placed even more pressure on the need to contain costs. One area that is cost-intensive is global assignments—a traditional expatriate assignment can cost upwards of three times an employee’s compensation. Given the magnitude of assignment costs, they are an easy target for cost control measures.
Relocation Costs
Cost control solutions take various forms. One recent trend has been for companies to use cash-based allowances rather than reimbursements to reduce costs, in particular with respect to actual relocation costs associated with a physical move from one location to another. Rather than provide the individual and/or his or her family with a full-service relocation company, the employee is offered a cash allowance that is based on a percentage of current salary and family size. While this approach allows the company to better budget costs and significantly reduce the administrative time involved in the relocation, it does place a burden on the employee and his or her family to determine how best to move household effects. In addition to using a cash-based allowance for relocation costs, some companies grant such an allowance for home leave and, in some (extreme) cases, taxes! Regardless of the approach taken, a company must balance the need for cost containment with the overall burden placed on the individual. The mobility manager must look at this option and compare it to the other strategic initiatives of the company, such as talent management. Would this approach allow the company to attract and retain the top talent it needs?
Ongoing Allowances
Another cost saving measure is making adjustments to standard allowances. For example, companies that provide a goods and services (G&S) allowance or cost of living allowance (COLA) often utilize a third-party provider to calculate the allowance for a specific assignment. There are different ways to calculate the allowance. A standard calculation may compare the cost of a jar of peanut butter in the United States with the cost of the same brand in the host country. The cost of the same brand is likely to be fairly expensive given that it is often imported and only sold at specialty grocery stores. Another way to calculate the allowance would be to utilize an efficient purchaser’s approach, which compares the cost of the jar of peanut butter to a comparable product in the host country. This could be a local brand of peanut butter or may be a local condiment that typically is used (i.e. Vegemite in Australia). This type of comparison can lead to a lower index and thereby save significant costs across a larger population of assignments. As with the “cash in lieu” method above, a mobility manager is tasked with determining what would be an acceptable level of allowances and how those allowances should be determined. One must look at industry norms, company goals and general feedback from the current assignment population before making changes to the approach.
Taxes
When examining areas that potentially can result in cost savings, most companies start with the most significant cost of an assignment—taxes. Taxes typically are the most expensive assignment cost because the company covers taxes on most allowances and the differential in home versus host country tax rates. To mitigate these costs, many companies have turned to alternative types of assignments. For example, using extended business trips that allow for a potential tax treaty claim to avoid taxes, although this option has a very distinct (and short) time frame to avoid creating a taxable presence in the other jurisdiction, generally six months. After the expiration of the six-month period, a new individual would have to carry on the work if more time was required to complete the project. Another option often used is a local transfer or a “local-plus,” which places the individual on the same terms as a local employee (maybe with a temporary allowance in the initial years – hence the “plus” in local plus) and the employee is responsible for payment of his or her own taxes. While this approach takes the company out of the tax reconciliation aspect of an assignment, there are some trade-offs. Some employees may not want to be on a local package, especially if they have school-age children who would have to attend local schools that may not be aligned with the home country school system. It also adds future complications for the employee because he or she potentially may become entitled to social security in more than one country and potentially different private pension schemes. When considering cost reduction options, a company should always weigh the benefit of any cost savings against the additional burden placed on the employees.
Virtual Assignments
Of course, we would be remiss to not think about the first topic we discussed in this series – remote workforce. Why not turn the assignment into a virtual assignment? A number of companies are beginning to explore this idea to see how an employee is able to remain in the individual’s home country but work as if he or she is part of the host country operations. This has many limitations (time zones, type of work being performed, etc.) but many companies are discovering that these obstacles can be overcome with the right candidate and right approach. What we have not yet seen is how the tax authorities will respond to virtual assignments. Will this create situations where permanent establishment is created in the home country drawing the host entity into taxation? How are the costs of the individual allocated to the host entity? Will there need to be new payroll reporting regulations to cover these situations? In the end, we will have to wait and see if the potential cost savings are enough to overcome the additional burdens taken on by the company.
Closing Comments
As we look at where the global mobility industry is heading, many questions remain to be answered. This series on the Future of Global Mobility discusses only three issues–many others will need to be addressed by mobility managers. There are no one-size-fits-all approaches so determining the right solution will require discussions with various stakeholders both within the organization and outside. These actions are what will help move your mobility program further along the global mobility highway, a roadmap for developing a mature global mobility strategy. Working closely with a global mobility specialist can help you navigate the curves ahead.
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