How To Calculate The Cost of Living Abroad?

Correct calculation of the cost of living in the destination country should take into account important parameters that are not included in the cost of living index, such as housing, education, vehicles and special expenses arising from the nature of the mission

When a company decides to place an employee abroad, it must take into account the cost of living in the target area. This is true even if the company has decided to pay its employee wages equivalent to the local employee’s wages (as is common, for example in the US), due to the fact that the level of expenses of the employee is different from that of a local employee, as detailed in this article.

 The Magic Number

In many cases, the company “solves” the problem by achieving the “magic number”: the cost of living index factor. This index compares the average cost of living between the two cities, for example Tel Aviv and Brussels. According to The Economist, the cost of living index for Brussels is 104 relative to the index for New York, whereas the index for Tel Aviv is 87 relative to New York. A simple calculation (100X104 /87) show the cost of living index of Brussels compared to Tel Aviv is 120. Hence, the employee’s salary in Belgium should be higher by 20% compared to his salary in Israel.

 

Simple? Not exactly. The use of a simplistic average cost of living index ignores, for example, the employee’s children’s tuition. While education in Israel is state education, it is not customary in Belgium to send the children of the employee to a local school and the existing alternatives range from the annual tuition fee of €30,000 (International School of Brussels) to €3,000 (Jewish School of Brussels).

This is meaningless for an employee without children of school age, but an employee with two school-age children will face more expenditure than €60,000 per year, which makes the factor of 120 that we computed earlier, irrelevant.

It is important to understand what makes up the cost of living index, how it is calculated, what is included and mainly what is excluded from it. Measuring the total current cost of living generally includes all current consumption items:

  • Current expenses (electricity, gas, water, cable TV, internet, taxes and home insurance)
  • Food at home
  • Food away from home
  • Alcohol and tobacco
  • Entertainment (classes, clubs, movies)
  • Clothing and shoes
  • Personal care (haircuts, cosmetics and toiletries, dry cleaning)
  • Healthcare
  • Public transportation (buses, trains, taxis)
  • Home maintenance (renovations and home repairs, electrical appliance repair, cleaning, gardening)

The cost of living index usually does not include the three “heavy” expenditure items which will be detailed below:

  • Housing
  • Education
  • Vehicle

When referring to the cost of living, it is imperative to take into account the following data:

  1. The standard cost of living index usually pertains to a couple with two children. Distribution of data for individual and couples without children is significantly different. For example, a family with children spends a relatively large part of its income on food whereas a couple without children would spend a large proportion of its income on entertainment and food away from home.
  1. In many countries there is a significant difference between the level of expenses of expatriates and locals. For example, the level of spending on food in restaurants for employees in countries like India and China will be much higher than that of the local employee.
  1. Most of the cost of living indexes are measured by Western companies. These companies are still largely bound by the colonial concept aimed at copying the lifestyle of the country that sends expatriates to “colonial countries”. Accordingly, these companies measure the cost of imported drinks and foods in countries such as Vietnam, Romania and Uganda – which are naturally the most expensive. This is not required in relation to Israeli expatriates who display a high level of adaptability to local conditions.
  1. 4. Most cost of living indexes take into account an “adjustment premium”: a period of six months to a year required for expatriates to adapt to local market conditions and consumer effectiveness equivalent to a local resident. This premium is completely unnecessary when it comes to Israeli employees who are endowed with high adaptability and ability to excel in informal communication that allows them to match, and even bypass the locals in no time.

 

Housing: It’s hard to be flexible

Housing is often the main expenditure item of the expatriate. In different countries the rental cost of a 3-bedroom apartment reaches sums of over $5,000 per month (Hong Kong, Tokyo, Singapore). Rental rates for employees’ apartments tend to be expensive especially in underdeveloped countries (Eastern Europe, India, South America, Africa) as appropriate housing inventory for expatriates is low. Apartment prices can be even higher, especially in neighborhoods close to international schools.

 

Organizations often find it difficult to adapt to the high rents. The tendency is to treat the range of rent of the locals as a reference. This approach is not practical because the expatriates compare themselves with the community of expatriates in the destination area and display a lack of willingness to be flexible. Bear in mind that in Israel, the rental prices of expatriates’ apartments are very expensive relative to ordinary rental apartments. The monthly rental prices for three bedroom apartments in central Israel where expatriates live range from $3,000 to $8,000 – far beyond the usual amounts we know.

When addressing the housing issue one has to be aware of the following aspects:

  1. Many countries have contract conditions and special payment terms. For example, in South Korea a standard lease is for 24 months and the tenant is required to pay the whole amount in advance. In addition, to ensure the rights of the tenant in South Korea, it is common to register a kind of mortgage on the leased property (Keun Mortgage). It is recommended to use a local agent to help the company / employee during negotiations with the landlord.
  1. Rent cost tends to be higher when the company pays the cost and not the employee (a phenomenon known in the language of human resources as OPM, “Other People’s Money”). When a company sets a rent budget it tends to perceive the budget as the upper limit of the rent, while the employee tends to perceive it as the starting point for negotiations … it is better, therefore, to include the cost of rent in the salary of the expatriate (except for tax considerations, see the next section).
  1. Tax laws in many countries see expatriates’ rent as a deductible expense. Some of these countries (e.g. Japan) make recognition for tax purposes conditional on the company paying the rent directly.
  1. The cost of housing does not comprise rent alone. One must take into account additional expenses such as maintenance fees, parking fees, property taxes condo fees and insurance costs.

 

Tuition: Preference for International Schools

As mentioned earlier, tuition for the employee’s children can be a very significant factor when determining the cost of living. Most Israeli companies finance their employees’ children’s tuition at an international school in non English-speaking countries. Tuition for international schools ranges from $15,000 to $40,000 per year per child. And many countries do not recognize this expense for tax purposes.

For a family with two school-age children departing on a mission in Paris, the expense of the employer for tuition is considered a benefit for the employee, hence it is grossed up in their salary. Annual tuition at the American School in Paris is about €33,000 per child (i.e. about €66,000 for two children). Because the cost of this benefit is considered wages, it is grossed up in the salary. Taking into account the level of the marginal tax (55% income tax and national insurance), the annual cost for the company reaches – €145,000!

When addressing the tuition item, one must be aware of the following aspects:

  1. It is not acceptable to pay tuition for private schools in English-speaking countries (USA, UK, Australia.) The only exception in this regard is traditional families interested in Jewish – religious schools.
    1. Even in nonEnglish-speaking countries, there are usually several alternatives for private schools that offer studies in English. A careful examination of the various schools should be made and the differences in costs, which often reach significant amounts, should be taken into account

A company must take into account the fact that the first employee sent to a specific destination area sets the “standard” for the following employees who will go on a mission to the same area: If an expensive private school is selected – this is where most children of the next expatriates will study.

  1. School cost calculations must take into account the fact that the cost does not consist of the tuition only. In most cases items are added up as mandatory; such as the registration fee, capital fee, supplemental program in English and optional items like transportation and meals. The company should include the mandatory items in calculating costs and predetermine the policy regarding the optional items.

 

Car: Not necessarily a company car

Vehicle policies are typically derived from the market customs of the destination country and not those of the country of origin. For example, it is not customary to provide a company car in the US labor market. A company that gives an Israeli expatriate a company car will be anomalous in providing this benefit in the US market and will create an unlikely gap between the expatriate and the domestic employees.

In contrast, employees in managerial positions or sales positions in Italy get a company car that is a part of their salary and benefits and, therefore, an Israeli expatriate sent to Italy for an equivalent job should get a company car – regardless of whether he is or is not entitled to a company car in Israel.

When deciding to provide company cars, the following points should be examined:

  • What type and level of vehicle is customary for the specific job?
  • Is it customary to replace the vehicle every few years?
  • Does the company finance all vehicle expenses or just some of them?
  • If the benefit is taxable, does the company pay the cost of the tax?

If the employee purchases a car, consider the following costs:

  • Is leasing a car instead of buying it a practical alternative?
  • Cost of acquisition (does the expatriate have enough money to purchase a vehicle or two or does he need help in coming up with the money (a loan or an advance)
  • Level of depreciation of the vehicle (given that the employee comes for a limited period)
  • Car insurance costs (in many cases the employee will be considered a “new driver ” which will raise the cost of insurance)
  • Costs of taxes and fees imposed on the vehicle
  • Fuel costs

In summary, the calculation of the cost of living for the employee and his family is not a simple matter. Proper planning and realistic budgeting of the mission will help prevent friction and conflicts with the employee regarding funds during the mission and will ensure a level of expectations appropriate to the reality in the destination country.

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Furniture Rental Solutions

Relocation Furniture Rental Solutions

Workers who go overseas on relocation are often undecided between two alternatives – shipping furniture or purchasing new furniture in the destination country. There is a widespread worldwide third option, which preferable in many cases, and that is renting furniture for a mission.

Among the many arrangements and bureaucracy involved in the process of relocation, there is also the subject of home furnishings in the destination country. Typically, employees debate between two alternatives: shipping furniture and electrical goods abroad or purchasing them in the new place. Each option has its advantages and disadvantages, but there is a third option that is usually not taken into account – renting the necessary equipment and furniture for the family’s stay abroad. Comparing the costs of the three alternatives shows that when the mission length is up to two years, renting furniture has a clear advantage over the other options.

Finding a place to live is one of the first challenges faced by employees sent abroad with their families for long periods. In most cases, since the mission lasts 2-3 years, the company does not buy the property but rather rents it. Apartments are usually rented unfurnished (or partly furnished). The possibility of renting a fully furnished apartment (an executive apartment) is usually ruled out due to its high cost (approximately 30% to 50% more than the price of an unfurnished apartment).

 

Advantages vs disadvantages

As mentioned earlier, Israelis who travel abroad resolve the issue of overseas residential furniture in two ways: shipping furniture from Israel or buying furniture abroad (in many cases, it’s a combination of the two). The latest relocation policy survey carried out by ORI found that 94% of Israeli companies cover the cost of shipping cargo for employees and 72% of them also provide employees on relocation with a $5,000 to $20,000 grant mainly for the purchase of furniture and electrical appliances.

 

Throughout the world, however, renting furniture for relocation is becoming more and more acceptable. A survey by ORC among international companies showed that 34% of companies allow employees to rent furniture for the duration of the mission.

 

In order to compare the profitability of the three alternatives, we created a table summarizing the advantages and disadvantages of each option:

 

Cons

Pros

Option

– Not in line with the local housing standard
– Waiting period (one to two months)
– Possible damage to the cargo
– Having to deal with customs

– Keeping existing equipment
– Recognition of the cost for tax deduction

Shipping cargo (by sea) from Israel to the destination country

– Not in line with the Israeli housing standard
– Not recognized for tax purposes
– The need to store the furniture left in Israel

– the local standard

Buying furnishings in the destination country

– The need to store the furniture left in Israel

– In line with the local standard
– Recognition of tax cost

Renting  furnishings in the destination country

 

A crucial consideration in deciding which of the three alternatives is the best option is of course the cost. This factor is influenced by many variables (mission destination, the quality of furnishings, the quantity of furnishings, the cost of furnishing in the specific destination country etc.) and therefore analysis is needed for each case individually. The following analysis compares, for example, the costs of furnishing solutions for a couple with two children relocating to northern California:

 

Option Type of expenditure Total cost by duration of mission – in dollars
1 year 2 years 3 years
Shipping cargo (by sea) from Israel 20 foot shipping container (from Israel) $7,200
40  foot shipping container (back to Israel) $11,100
Insurance $1,800
Temporary housing (until the arrival of the shipment) $7,200
Appliances (different standard) $3,600
Total cost

$30,900

Buying Furniture (including grossed up) Buying furniture $14,300
Buying appliances $5,700
Buying bedding, housewares, miscellaneous $4,800
300 kg of air cargo (back to Israel) $1,700
500 kg of air cargo (back to Israel) $2,300
Israeli storage (25 cubic meters) $3,000 $6,000 $9,000
Total cost $31,800 $34,800 $37,800
Furniture Rental 300 kg of air cargo (back to Israel) $1,700
500 kg of air cargo (back to Israel) $2,300
Renting house contents $13,200 $22,800 $31,700
Israeli storage (25 cubic meters) $3,000 $6,000 $9,000
Total Cost $20,200 $28,800 $40,700

 

As shown in the cost analysis, the furniture rental alternative enjoys a clear advantage when the mission period is up to two years. For mission periods of three years or more the shipping alternative enjoys a clear advantage ,while the alternative of buying furniture is also cheaper than renting it.

 

In conclusion, as we have shown, there are advantages and disadvantages to each of the three alternatives. Cost analysis is recommended in each case, taking the individual and the family variables into account.

The Coming Home Crisis – Guide to Repatriation

Coming Home Crisis-How to have a Successful Homecoming

Return from a long relocation period is often accompanied by feelings of disappointment and difficulty fitting in the environment and the workplace. What are the reasons for that and what can be done to facilitate a smoother integration back home?

 

Many Israelis returning to Israel after a period of overseas relocation note a sense of crisis and severe adjustment problems (repatriation) – even more than when leaving. This is seemingly an inexplicable phenomenon – why would it be difficult to return to your homeland, your family, your friends and your language? A closer look at the phenomenon reveals a number of reasons:

 

Subsistence level: many Israelis improve their standard of living abroad (higher quality housing, international schools, high wage levels, nanny at home, etc.), as all of us know, it is easy to adjust to improved standards of living – but very difficult to adapt to the contrary.

 

Quality of life and lifestyle: Many Israelis adapt to the quality and style of life abroad (calmer pace of life, formal manners, maintaining personal space, etc.). Returning to the “seething cauldron” that is Israel can be a challenge.

 

False expectations: employees returning to Israel don’t prepare themselves for the return and come with unrealistic expectations of reintegrating in it, which could lead to a crisis.

 

Leaving their place of work

 

Repatriation crisis is reflected among other things, in the high dropout rate of returning Israelis from their workplace. About 35% of employees who work abroad on behalf of the Israeli company resign their jobs during the first two years of their return to Israel. There are a number of reasons for that:

 

Disappointment with the company: Some employees (and many times even their spouses) were not satisfied with the way the company handled them during their stay abroad. While abroad they had no real ability to leave the company (most work permits do not allow workers to work for another company abroad). Back in Israel there isn’t any restriction on resigning, and at the first opportunity employees will choose to get back at the company and leave it.

 

Wage cuts: returning to Israel usually involves a decrease in the level of wages, which workers find difficult to adapt to, and this motivates them to actively look for another job.

 

Status decrease: oftentimes the employee discovers that while he was abroad, the personnel at the Israeli company changed and don’t recognize his abilities and “historical rights”.

 

Expectation of promotion: the returning worker expects a promotion at the organization, in recognition of the experience he gained abroad, but upon his return to Israel he finds that “out of sight out of mind” and that all the senior or desirable positions are already taken.

 

To facilitate the process of reintegration, it is important to consider several areas which, when handled properly, will contribute to a pleasanter integration after relocation.

 

The regulation of insurance and pensions – in advance

 

Pension insurance: an Israeli who received appropriate advice prior to leaving Israel retained the framework of his pension insurance (disability insurance and life insurance) and therefore can continue with them easily when he returns to Israel. An Israeli who didn’t retain his pension insurance framework in Israel may find himself in a bind when he returns to Israel, if there are any changes in his medical condition. In any case, it is recommended to treat pension insurance immediately and try and keep the parallel foreign policies while the matter is not regulated in Israel.

 

Pension Savings: Israelis neglect the issue of their pension savings overseas. This is a serious mistake, since most of them are in the most significant period in terms of provisions for pension savings. Others contribute to foreign pension plans, but do not take the actions required to preserve the pension rights abroad when returning to Israel. It is advised for returning Israelis to seek professional actuarial advice (to check the status of their pension savings) and international benefits consulting (to check the ability to benefit from the pension contributions made abroad).

 

Social Security: upon your return to Israel you should contact the relevant branch of the National Insurance Institute of Israel and check the National Insurance benefit entitlement (child allowance, alimony, disability allowance, etc.). You might also want to check whether National Insurance benefits were paid while your stay abroad. In most cases, a person who stays abroad for more than three months loses his rights for benefits. If you were paid allowances during this period – it is better to inform the National Insurance Institute of Israel and arrange the repayment of the debt as soon as possible. In our experience, sooner or later the National Insurance Institute of Israel will track down the debt (no statute of limitations on debt) and the more the payment of the debt is delayed the more the amount to be repaid inflates (which includes fines and interest fees).

 

Health Insurance: Israelis who didn’t pay National Insurance continuity and national health insurance while abroad are likely to be subject to a waiting period of two months for each year of separation. However, it is possible to “purchase” the waiting period sixmonths before returning to Israel by paying a fine of NIS 10,000 or to purchase private medical insurance for the waiting period. HMOs also require a waiting period for those who didn’t preserve their supplementary medical insurance. It is recommended to examine the status of health insurance in Israel for at least six months before returning to Israel. As is the case with pension insurance, it is important to

retain the overseas medical insurance policy as long as the issue is not resolved in Israel.

 

Tax reliefs and other issues concerning the returning employees

 

Income Tax: An Israeli who lived abroad for more than six years is entitled to tax reliefs and exemptions on assets purchased abroad before returning to Israel. An Israeli who lived abroad for over ten years also qualifies for tax exemptions in respect to income from work abroad. It is important to keep in mind that an Israeli who is considered a resident of Israel during his stay abroad may be subject to taxation in Israel for overseas income. Therefore, it is recommended to perform tax planning using a professional consultant some months before returning to Israel.

 

Customs: An Israeli returning to Israel after a period of two to six years abroad will be entitled to exemption from customs on “necessary” furniture, household and electrical goods. An Israeli who lived abroad for more than six years will also be entitled to full exemption on the products that he brings to Israel (the same as a new immigrant) excluding vehicles. A business owner who brings professional equipment necessary for the operation of the business to Israel will be required to deposit a bank guarantee equal to the customs duty for the equipment until he produces evidence of using the equipment in a business he set up in Israel.

 

Returning Resident Rights by the Ministry of Immigrant Absorption: the Ministry of Immigrant Absorption provides a basket of benefits for returning residents (Israelis who stayed abroad for more than two years). Among the benefits granted are:

  •  Discounted ticket (one-way)
  •  Assured income (for those who can’t find work)
  •  Vocational training courses
  •  Assistance in obtaining a professional license
  •  Financing of salaries for six months

 

Housing: It’s better to rent and not buy

 

Many Israelis invest time and resources in purchasing a home when returning to Israel. In our experience, “less is more” – buying a home requires much time and resources at a time when the family is under considerable pressure. In addition, the real estate market in Israel changes rapidly and Israelis absent from the country for several years lack critical knowledge for preventing errors.

 

In many cases we spend months escorting returning Israelis who insist on buying a home , until they face reality and recognize the many difficulties. It is therefore advisable to “make do” with renting a house in the first stage (at least a year). The renting period will allow the returning employee and his family to learn more about the local real estate market and will enable a more relaxed purchase.

Work Permits & Visa Tips

Relocating to China

Setting up Operations in China: a Huge Opportunity – Expensive Human Resources

China has a rapidly growing economy, focusing the attention of the global business community for over twenty years. According to a survey conducted in 2010, 95.6% of surveyed companies see China an important market in the company’s global strategy, and 63.8% of the companies indicated that the importance of this market is critical to their global strategy. Companies surveyed expected the rate of income from China –to shoot up by over 60% in five years.

 

These figures explain the importance that global companies attach to the Chinese market. Seemingly, “The sky is the limit”, but as history teaches us – the bigger the opportunity, the higher its price, and the lower its attractiveness. More and more signs indicate that the barrier to the development of global companies in China is the human resource. In the words of the CEO of a global company in China: “The challenge now is not due to a lack of opportunities, but the fact that we do not have enough qualified people to pounce on these opportunities, to implement our strategies and express our ideas.”

 

Shortage of skilled manpower

81% of global companies in China today report a lack of skilled manpower. The more significant shortage is for jobs of senior-level management, intermediate level management (mainly in project management and customer management) and professional staff (especially sales and marketing employees).

 

You can understand this lack by examining the Chinese education system, which is based traditionally on the scientific and engineering professions. Until a decade ago, universities in China had not offered any education in business administration and during the last ten years there were only 30,000 graduates in Business Administration (MBA) in Chinese universities. Today about 64 universities in China offer courses in business administration – but it still “a drop in the bucket”, far from being able to satisfy global companies’ need for managers and skilled workers.

 

The lack of professional managers and employees is felt today in every field in China. In Beijing only there is an estimated lack of 90,000 skilled workers. But the current lack pales in comparison to the expected lack in the upcoming years, as “the appetite” of global companies operating in China increases rapidly.

Systems company Accenture, for example, increased the number of employees in China from 150 two years ago to 1,000 employees today, and plans to increase its staff to 4,000 over the next two years. Tax consulting firm Deloitte & Touche currently has nine offices in China employing 3,000 people and its business plan for the next five years include opening 11 additional offices and an increase of the number of employees to 8,000 (with half of the new employees are supposed to be experienced professional employees). Although the company has budgeted more than – $150 million for education and training of personnel, it is not clear whether it will be successful in recruiting personnel for the planned training.

 

High Personnel Turnover

Personnel turnover rates in China are very high. The percentage of employee turnover at the managerial level and professional employees in the first year currently stands at about 34% (i.e. every third worker leaves his job during the first year of work). This is an amazing turnover rate by any standards. For comparison, the turnover rates in the region are about 13% in Hong Kong, 11% in Australia, 9% in Taiwan and 5% in Singapore.

 

This turnover rate further aggravates the shortage of skilled manpower, since a training period of 3-6 months is required in order to get a new employee to produce the desired output level. This means that about 20% of the personnel of companies in China are constantly in their training period and contribute only marginally to the company’s output (this is before we take into account the amount of management investment in resigning staff and recruitment of employees to replace them).

 

Wage Levels are on the Increase

Wage level in China are constantly increasing. In the past decade, wage levels increased by more than 250%, and in 2011 the rate of increase in the wage level was estimated at about 7%. The average salary of a Chinese intermediate level manager is already $97,000 per year. The average salary of a local company CEO is $270,000 per year.

It is estimated that within three years the wage level in China will exceed the wage level in Singapore (wages for senior positions in China and Singapore already are very close), and that within five years it will exceed even the wage level in Hong Kong.

No doubt increased competition for human resources means wage increases at a higher rate. China may continue to attract investment in cheap product lines, but its attractiveness for investments that require management and professional personnel is doubtful.

 

Workers from Foreign Countries (Expatriates)

The severe shortage of management and professional manpower in China forces many global companies to send employees on relocation missions in China. Although the potential number of workers from foreign countries does not depend on the condition of the labor market in China, the use of expatriates in China incurs a high price:

The “direct” price: the average total cost of salary and benefits packages of an expatriate in China is 4.5 times higher than the cost of a parallel local worker. The average cost of an expatriate for the company is about $310,000 per year. This high cost is mainly due to the need to pay rent in expensive residential areas and tuition for private schools.

 

The “indirect” price: the ability of an expatriate in a managerial and professional position to function requires multiple communication with employees, customers and local suppliers, and is limited by the language barrier and intercultural gaps. Many global companies have tried to overcome this problem by sending employees of Chinese origin (Chinese speaking) to work in China, but it turned out that the gaps between them and the local employees are difficult to bridge as well (as expressed by one of them “I understand what they say – but I do not understand why they say it”).

Another attempt was sending workers from Hong Kong to China. Here, too, it is not a simple option: Hong Kong employees are often not fluent in the Mandarin dialect (the dialect spoken in the relevant areas in China) and encountered opposition from the local employees (who feel an aversion to Hong Kong residents for not sharing their fate during the difficult years under the Communist regime).

 

Summary

An analysis of the Chinese labor market trends indicates a worsening lack of manpower in top management, managerial and professional positions. this is in addition to ever-increasing wage costs that will match the salary levels in Hong Kong and Singapore in a few years. The Chinese market is characterized by increasing competition for suitable manpower and the highest personnel turnover percentage, which damage the output of global companies and will require large investments in training and recruitment. This important data may be a key consideration in the decision of a company to establish operations in China in the coming years.

 

Sources: Cendant Mobility, HRBS, Hewitt

Where To Start A New Subsidiary?

Where to start a new Subsidiary: HR Considerations

 

Deciding where to establish a new subsidiary is also influenced by considerations of human resources, such as flexibility of labor laws in the destination country, wage levels, employer costs, the ability to retain employees and the quality of life of employees.

One day we had a meeting with the CEO of a young company for medical devices. The company made a strategic decision to establish a subsidiary in Western Europe, and was debating between two destination countries: the United Kingdom or France. The Chief Executive Officer wanted a human resources aspect comparison survey for both countries.

Even without conducting a survey, we knew what to say to that CEO – bottom line in terms of human resources: United Kingdom – Yes, France – No! To illustrate we gave the CEO the example of the British Marks & Spencer. Several years ago, the company decided to close its operations in France and dismiss the thousands of French workers. The Company faced a complex dilemma: as a British public company, it had to issue an organized message to the public and prevent any leakage of information before the message. On the other hand, French law requires a complex and long process of laying off employees. The company chose a typical British compromise: on the morning of the day it issued a message to the stock exchange – it also sent special delivery letters of dismissal to each French worker.

At the evening of the very same day, the French prime minister called a special press conference, sharply condemning the company and calling its behavior inhumane, immoral and illegal. The French press criticized the company and the French unions announced the filing of a lawsuit of huge proportions against it.

After several days of a media uproar, Marks & Spencer issued an apology and stated that it was taking back the letters of dismissal. But this was “too little, too late”. After several days the CEO and chairman had to take personal responsibility and were forced to resign. Finally the company avoided a huge compensation lawsuit by finding a buyer for its operations in France who promised not to lay off employees.

This example was enough for the medical device company’s CEO to make a decision, but it is not always so simple. Deciding on a location for a new subsidiary in a new continent or country, involves many business considerations (strategic partners, major distributors, major customers, and corporate tax), but one should also take into account, as part of the business considerations, many considerations in the area of human resources.

In this paper we detail the HR questions facing the organization when comparing a number of alternative activity areas.

 

In which country are the labor laws more “comfortable”?

When considering this question you need to understand that in the Western world there are two schools of labor laws:

  1. The Anglo-American school: based on simplicity of employer – employee relations, clearly biased in favor of the employer, as it allows him more flexibility in recruiting, relocating and dismissing employees, and favors low statutory social insurance policies.
  2. The Continental Europe school: based on extensive protection of workers’ rights and securing their jobs, significantly biased in favor of the employee and favors statutory social insurance policies.

Israel, in this respect, clearly belongs to the Anglo-American school. For the Israeli manager it is difficult to understand why they can’t just give the employee whose performance is lacking over time a letter of dismissal, as is the case in countries of the Continental Europe school (such as France, Germany, Holland, Italy, Eastern Europe, etc.). Why do we need the approval of the local labor office (like in the Netherlands)? Why be limited to the beginning of the calendar quarter (Germany)? Or be bound by prior coordination and consultation with the dismissed employee’s authorized representative (France)?

It should be taken into account that not only local workers, but even Israeli workers sent to work in such countries, are protected by local labor laws in most cases. For example, an Israeli company that decided to lay off the majority of Israeli employees in France was surprised when it received a letter on their behalf from a local lawyer, claiming the dismissal was illegal because it not carried out in accordance with French law.

 

– Where is it easier to recruit and retain local workers?

In China there is fierce competition for English-speaking candidates for senior positions, while in India there is a huge infrastructure of English-speaking candidates. In contrast, the percentage of unwanted retirement (undesired turnover ) in India is extremely high and in professions like engineering and computers it reaches an annual rate of more than 30%!

 

– Where is it cheaper to hire local workers?

To answer this question you need to perform a comparative analysis between potential sites for establishing a subsidiary and avoid several common mistakes:

  1. Reference to averages – the average salary in Hungary is not much different than the average wage in the Czech Republic. However, the level of wages of workers in non-managerial positions or junior management positions in Hungary is higher while the level of salary of middle and senior managers is higher in the Czech Republic. One should perform the analysis of the specific groups of employees that the company is supposed to hire..
  1. Reference to the level of wages and the cost of wages (including provisions for salaries and salary benefits) – the wage level in the UK is high compared to France, but the high level of social provisions in France makes the cost of salary for the company higher. It is important to perform a detailed calculation of the cost to the employer in each area, including all employer costs (provisions, insurance, benefits, etc.).
  1. Reference to the cost of employment statically instead of dynamically – the level of wages in China increased by 48% in the last 5 years while in Japan, the level of wages in those years increased by only 10%. In 2012, the level of the average wage in China increased by 7%, while in Japan it increased only by 2%. The company must take into account the trend of the relevant wage level and not only the current situation.

 

– Where is it more expensive to employ expatriates?

Many cities can be very inexpensive for local residents and very expensive for foreign residents. For example, rent for expatriates in cities such as Moscow, Beijing and New Delhi can reach $3,000 to $10,000 per month.

 

– Where is it simpler and easier to obtain a work visa?

A company that plans to base its subsidiary’s workforce on Israelis must examine the ability to obtain work permits for them. The process of issuing work permits in countries like Spain and Italy is complex and takes many months, and many companies were forced to change their business plans in these countries due to the delay in the process of issuing work permits.

 

– Where is there a higher quality of life for foreign workers?

Quality of life considerations will determine the Company’s ability to move workers from Israel to the subsidiary at a reasonable price. Israeli workers stationed in Moscow will demand higher compensation for having to deal with issues of personal security. An Israeli family moving to Frankfurt would require funding for the children’s tuition at the International School. Israeli workers being placed in Seoul will face difficulties acclimating in a city where the Jewish and Israeli community is very small.

In summary, any decision concerning the establishment of a subsidiary abroad requires examining issues of human resources. HR professionals are required, therefore, to be real “strategic partners” of the organization and provide the appropriate solutions concerning this issue.