RATIONALIZE YOUR APPROACH TO HOUSING

11 June 2013

Sandra Huertas – Mercer Mexico CityMike Shore – Mercer Boston

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Agenda

Overview

London: How Neighborhood Affects Costs

Creating Guidelines

Strategies for Reducing Exceptions

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RATIONALIZING YOUR APPROACH TO HOUSINGOVERVIEW

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Controlling Housing Costs

As an element of expatriates’ assignment packages, housing is:

• The largest controllable cost

• One of the most critical factors in determining assignee and family satisfaction

• A single point of negotiation

• Highly visible

• Subjective

3

G&SA 9%

Shipping 9%

Airfare9% Education

22%

Host Housing

34%

Location Premium 6%

Incentive Premium 4%

Transportation 4%Relocation 3%

Major Annualized Expatriate Package Costs*

US to London | Salary USD 175,000 | Family of 4

* Excludes base salary, taxes, and costs < USD 10,000;based on 2012 data

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Controlling Housing Costs:Housing exception requests, per Mercer’s 2012 WIAPP survey

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Controlling Housing CostsExpat: “I had more acreage at home”

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Controlling Housing CostsLocal Management: “This is where all our locals live”

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Controlling Housing Costs: Same Problem, Differing Perspectives

Expat

DSP/Realtor

HQ

Local Management

Data Provider

RATIONALIZING YOUR APPROACH TO HOUSINGLONDON: HOW LOCATION AFFECTS COSTS

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Controlling Housing Costs: Location, Location, Location!Asking for a country house in the city …

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Impact of Changing StandardsLondon Housing (4BR) Monthly Rents (GBP), Central vs. Suburbs

12,300

8,100

5,500

7,000

4,700

3,100

Tier 1 Tier 2 Tier 3

Central Suburbs

Expensive Moderate Less Expensive

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Impact of Changing StandardsLondon Housing (4BR), Central vs. Suburbs: Cumulative Savings (GBP) from Shifting to Suburbs, over 3 Years, by Tier

190,800

122,400

86,400

Tier 1 Tier 2 Tier 3Expensive Moderate Less Expensive

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Impact of Changing StandardsLondon Housing (4BR), Central vs. Suburbs: Cumulative Savings (GBP) from Shifting to Next-Lowest Tier, over 3 Years

151,200

93,60082,800

57,600

Tier 1 Tier 2 Tier 2 Tier 3

Central Suburbs

Expensive to Moderate Moderate to Less Expensive

RATIONALIZING YOUR APPROACH TO HOUSINGCREATING GUIDELINES

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Creating GuidelinesConsider the Role of Family Size on Budgets

• Current family-size-based housing standards? Are exceptions common?

• Any patterns to exceptions (certain locations, job levels, family sizes)?

• What problems is the business reporting?

– Costs too high for more junior transfers or for entire population?

– Difficulties getting senior strategic transferees to accept assignments?

– Are issues location-specific or more generalized?

• Do you want housing to be driven more by job level or by family size?

• Are significant differences between family sizes OK?

– If you provide a 3BR A to families of 3 and a 4 BR H to families of 4, is it OK if budgets vary by 67% (GBP 3,000 vs. GBP 5,000)?

• Do you want to cluster family sizes together (e.g., family of 4 or more)?

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How does family size currently affect your housing budgets?

a) We base housing on family size (for example, one bedroom per person), but neighborhood quality can vary with job level

b) We base housing exclusively on job level, not family size

c) We base housing on family size, but increase bedroom allocations based on job level(for example, junior expat gets a 1BR apartment, senior expat gets a 2BR apartment)

d) We base housing on some other criteria

Question 1 PLEASE VOTE

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Creating standards – Family Size versus BedroomsWhat fits best for your organization?

PROS CONSPOLICY 1:

Allow one BR per family member

Easy to communicate, housing based on need

Can result in:senior execs with small fam-

ilies getting less than junior expats with larger ones; orbudget disparities between

families

POLICY 2:Ignore family size;

rely on job level

Easy to communicate, housing equitable by job level

May provide too much housing for singles and too little for large families

POLICY 3:Blended approach,

family size + job level

Balances needs for hous-ing (larger units to larger families) with equity by job level (more-senior expats get larger units)

Harder to communicate

In each case, neighborhood quality/expense can vary with job level.

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Creating standardsWhat fits best for your organization?

SINGLE FAMILY OF 4JR SR JR SR TOTAL

POLICY 1: Allow one BR per

family member

1BR A LE 1BR A E 4BR A

LE 4BR A E

2,100 3,900 5,000 8,700 19,700POLICY 2:

Ignore family size; rely on job level

2BR A LE 3BR A E 2BR A

LE 3BR A E

2,900 7,200 2,900 7,200 20,200POLICY 3:

Blended approach, family size + job level

1BR A LE 2BR A E 3BR A

LE 4BR A E

2,100 5,400 3,900 8,700 20,100BR = Bedrooms A = Apartment LE = Less Expensive E = Expensive

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Creating standards – Fixed versus Variable StandardsWhat fits best for your organization?

• Example:– Fixed: A mid-level family of 4: 4BR home in a Moderate Neighborhood– Variable: 4BR apartment in London, but a 4BR home in Helsinki

• Do fixed standards make sense globally?– What if homes/townhomes come at a significant premium

(HK, Manhattan, Singapore, Tokyo)?– Should expatriates adapt in part to host norms?– Are all “moderate” neighborhoods the same?

“Moderate” is a relative term within a city; for example, in London, St. John’s Woods is moderate relative to Knightsbridge, but it is still objectively a high-end neighborhood

• May cut costs in some of the most expensive cities by using “moderate” or “inexpensive.” Conversely, in some hardship locations, it may be better to use only the “expensive” and “moderate” neighborhoods.

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1919

If you were designing your policy today, how would you provide housing budgets?

a) Based onn family size (for example, one bedroom per person), with ability to match neighborhood quality and job level

b) Based on job level exclusively, not family size

c) Based on family size, but increase bedroom allocations based on job level (for example, junior expat gets a 1BR apartment, senior expat gets a 2BR apartment)

d) Based on some other criteria

Question 2 PLEASE VOTE

RATIONALIZING YOUR APPROACH TO HOUSINGSTRATEGIES FOR REDUCING EXCEPTIONS

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Discovery: Getting the FactsHas the market changed?

• Consult with Mercer/DSP• Review on-line listings/ neighborhood options• Is the argument over facts – or the interpretation of facts?

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Discovery: Getting the Facts, continued

• Any special circumstances/requirements (handicapped child, large dogs, company-specific security arrangements, etc.)?

• What budget is expat asking for? Can this be documented either as an on-line listing or with photos?

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Discovery: Getting the Facts, continued

• Can a Homefinding Report be provided detailing units that the expatriate has seen? • Does the DSP or the local office (or both) support the exception request?

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Getting the Facts: Homefinding Report

• Homefinding Report: detailed log showing properties visited and why expatriate liked/disliked those properties– Increase transparency and help all interested parties better assess

reasonability of exception request– Can also discourage exception requests

• Homefinding Reports can include:– Rental rate– Unit location (neighborhood/address)– Unit size (interior, exterior, yard,

bedrooms/bathrooms)– Special features (swimming pools,

proximity to int’l school)– Why expatriate liked/disliked unit– DSP/Realtor comments on the unit– Photos or links to on-line listing

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Working with your Destination Service Provider (DSP)

• DSPs are on the front line, usually rated on expat satisfaction. Measure how often DSPs placed expatriates within budget.

• Does DSP know your expats’ relative levels? Will it know what it means to move a mid-level executive?

• Do your policies allow DSPs to show above-budget properties?

– Having firm policies relieves pressure

– Maybe allow some flexibility (5% over budget) to account for negotiability in certain markets

• Do you get reports when expats have been shown more than X properties?

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Exception Approval Processes

• Who decides?– The more senior the approver, the less likely

the expatriate is to ask for an exception.

• Is this tiered by level of exception?– Can smaller amounts be approved at a lower level?– Do you want to provide some flexibility to the field

in making small % exceptions?

• Requiring expatriate to make a business case for the exception will help reduce exception requests– Best to require pictures/detailed listings, etc. to increase transparency

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Now what?

• Housing is a significant cost savings target, but it is an emotionally charged and highly visible part of the expatriate package

• Think strategically about what problems you are trying to solve with your housing policy. Consider:– Your optimal balance between family size and bedroom

allocation– Whether “downshifting” neighborhood classifications

makes sense in certain high-priced locations (variable versus fixed standards)

• Minimize exceptions by:– Getting all the facts– Adopting clear, fair – but firm – policies

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Questions

Mike ShoreBoston+1 617 747 9507mike.shore@mercer.com

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Sandra HuertasMexico City+55 5999 1951sandra.huertas@mercer.com