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.

 

 

The “Classic” Relocation Alternatives

Flexible labor mobility: the classical relocation mission alternatives

The familiar relocation method may have quite a few drawbacks, such as the high cost of sending an employee for the company, the employee’s family difficulties and career damage. Recent developments in the global relocation business provide effective alternatives that address tax considerations, salary considerations, length of mission and migration issues.

 

When a company is considering sending a worker for a period of relocation, it usually refers to a common and familiar mission format: sending the employee and his family to a destination for a period of two to five years. This type of relocation is inherently limited due to business or family constraints, and involves quite a few problems in various areas:

  •  High cost: the cost of the mission is usually very high, since it includes the family’s moving expenses, loss of income of spouse, education expenditures for international schools, housing expenses and other specialized areas..
  •  Family difficulties: family relocation creates many family problems such as damage to the career of a spouse, separation from the extended family, damage to the continuity of the schooling of children and more.
  •  Too long: the underlying business need for which the relocation is executed, such as knowledge transfer or locus of control transfer, mobility of workers, etc., is much shorter than the classic mission.
  •  Career damage: a long period of disconnection from the “home base” of the employee might damage his/her career in the company (” Out of sight – out of mind”)
  •  Forcing an employee’s return to Israel: in many cases the interest of the company and employee is to continue the mission beyond the maximum period of a classical mission, but the high cost discourages the company from doing so.

 

The inherent problems of the classical mission have spurred many companies to examine the global market and use new types of relocation. International surveys in recent years indicate that many companies are cutting back on the number of classical missions and developing alternative types of missions.

 

This trend is still not evident in the Israeli market, mostly due to the excessive emphasis placed on the issue of tax exposure: in most cases, there is a preference to go on a mission of over two years to avoid paying income tax in Israel (by severing the center of life). In our experience, this comprehensive approach often causes a loss: the companies somewhat reduces the tax exposure but find themselves bearing the expenditure of hundreds of thousands of dollars. Bear in mind that a reasonable cost of relocation for a mid-level manager, married with two children, to a non English-speaking country for a period of three years – is about half a million to a million dollars. In many cases the company gets itself into this tremendous expense just to minimize potential tax exposure of tens of thousands of dollars (a “penny wise- pound foolish” situation).

 

Here are other possible types of relocation that are on the rise recently in the global market:

Extended business trip: a 3 to 6 month business trip makes it possible, in many cases, to cover the business need (knowledge transfer, the transfer of locus of control, coping with a defined business situation) without resorting to full relocation. The company’s practice is to give employees a special bonus for this trip beyond the per diem payment. In most cases, there is no need to issue a work permit for such a trip, and there is also no tax liability in the host country. However, one must distinguish between a business trip and traveling for work – in order to avoid exposure in relation to the immigration authorities in the host country.

Short-Term Relocation:     This type of mission is for a period of 3 to 18 months. In most cases, the employee goes on a mission without his family and visits his/her homeland frequently. The company preserves the employee’s salary in the country of origin, and gives him a daily allowance (per-diem) and in some cases a special relocation grant.

This type of mission lowers costs drastically, reduces the damage to the spouse’s/partner’s career and the need to disconnect the whole family from their daily routine. The significant cost saving affords the company a great deal of flexibility in compensating the employee for the long separation from his/her family. This mission usually requires an appropriate work permit and tax reporting in the host country (in addition to tax reporting in the home country).

Global Continual Assignment: – In this type of mission, the employee and his family don’t return to the country of origin at the end of the mission, but continue to a relocation mission in a new destination. In many cases, this type of mission is more efficient and cheaper than ending one mission and starting a mission of another employee. An employee who ended a relocation period in one destination gained professional and managerial skills that will enable him/her to function more effectively on next mission.

Also, the employee’s family learned to deal with the challenges of acclimating in a new environment. Problems associated with this type of mission are related to the sense of alienation often created between the employee and the sending company and the need to develop programs that can maintain the continuity of social insurance (health, pension, life and disability) of the worker and his/her family.

Turning an expatriate into a local employee (Localization): More and more companies impose an upper limit for the relocation mission (usually five years). If the employee and the company in the host country wish to continue the contract at the end of this period, the employee goes from expatriate status to local worker status. This transition involves a great loss of relocation benefits, and therefore a transitional period of up to one year is usually required.

Mission initiated by the employee: In many cases there is no critical need for relocation, and the initiative comes from the employee. Such a mission could have some advantages for the company (employee retention, knowledge transfer, improved communication between the different sites of the company) but they do not justify the high cost of relocation. The common solution in such cases is to move the employee with a salary package corresponding to that of a local worker in the host country, while the company funds only the work permit costs and gives the employee a limited transfer budget.

All of the proposed alternatives to the classical relocation mission have their advantages and disadvantages, and no single alternative is comprehensively better than anther. Proper management of relocation policies should take into account a number of alternatives to offer the optimal solution for specific business need, taking into account the personal and family aspects of potential candidates, as well as the issues of cost, tax and immigration laws.

Ways To Reduce Relocation Costs

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:500-bank-notes-bills-2112

  • 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. 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. 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.

Enregistrer

Severance of Employment

Severance of employee – employer relations and its implications on pension plans

In the relocation process the employer-employee relationship between the worker who is sent and the Israeli company that sent him/her is often severed, which could seriously harm the security of the employee’s and his/her family’s pension. Adopting proper policies and employee training can prevent this damage.

Sending an Israeli abroad for a relocation period usually involves dismissing the employee from the company in Israel and severing the employer – employee relationship. This trend, which has been around for many years, has become a standard pattern over the past decade. According to a survey conducted by ORI In 2010, nine out of ten workers sent for relocation are dismissed from the Israeli company and employed by a local company in the destination country.

What has changed in the past decade is the tax policy (tax reform of January 2003) which changed the tax base from territorial to personal and so increased both the company’s and the employee’s motivation (influenced heavily by tax consulting on the issue) to establish the destination country as the “center of interest” of the employee and to sever all ties with Israel.

 “Black Holes” in the Pension Insurance

One of the major disadvantages of severing the employer – employee relationship is the pension security of the employee going on a relocation mission. Employee pension security in Israel is acquired through insurance plans and managers’ pension funds and includes three components: pension savings, disability insurance and life insurance. Severing employer – employee ties usually results in ending the employee pension plans in Israel, and that has a number of important implications:

  • Termination of pension savings for several years creates a “black hole” that will eventually harm the employee during retirement. 
  • In the case of work disability during relocation – he/she will not have suitable insurance coverage. While most companies acquire local disability insurance plans for overseas workers, these plans are usually useless, since they require the employee to remain in the country where the insurance was issued in order to be eligible for work disability allowance, while it is clear that the first thing the employee will do in the case of disability is return to Israel (in most cases it would be inevitable due to the visa the worker has). 
  • Another problem with life insurance and work disability insurance issued abroad is that in most policies issued by foreign companies, the insurance company exempts itself from liability if the incident occurred in an area defined as a terror zone. Needless to say, Israel’s classification on this issue definitely falls under that category, and the employee will continue to come to Israel during the relocation – both on business trips and on home visits. 
  • When the employee returns to Israel and wants to open a new pension plan – he will be required to pass medical tests. If tests reveal that during the relocation he developed a chronic disease, it will be excluded from the insurance coverage and the employee will be left without effective life and disability insurance. 

Take Responsibility for the Employee

Given these exposures, the organization and its human resources manager can adopt one of two principle approaches:

The “Opportunistic” approach: “the employee is a grown man who knows what he/she is facing and what his/her options are and he/she can, if he/she so wishes, continue paying into the pension insurance program on their own.” A human resources manager who adopts this approach can stop reading the article at this stage. It is recommended, though, to take into account that not many Israeli companies pass the “widow on the management steps” test – an Israeli company can declare again and again that it is the responsibility of the employee. In practice, most Israeli companies cannot afford to abandon an employee in a catastrophe.

The “committed” approach: “It’s true that we fired the employee – but we didn’t really dismiss him …” This approach acknowledges the reality that any significant problem that arises regarding the Israeli worker – comes back to the sending company.

If the company adopts this approach it is recommended to consider the following steps:

  • Professional advice – to provide professional advice regarding the employee’s pension insurance during his/her relocation abroad. It has been our experience that such advice increases the confidence of the employee with regard to the relocation abroad and significantly increases the chances that he will take the right steps regarding this issue. 
  • Adjusting the insurance basket – to adapt the “insurance basket” of the employee to the special needs of employees on a relocation mission. Most companies run their local Israeli employee company in the destination country without checking what the benefits of local pension insurance are and without trying to adapt them to the fact that the Israeli worker has special needs on this issue. For example, in many cases you can find disability insurance policy coverage even if the employee does not stay in the country where the insurance was issued. 
  • Alternative social savings {voluntary) – encourage the employee to maintain an alternative social savings plan during the period of relocation. In many countries there are local plans of voluntary pension savings (as a –the 401 (K) plan in the US, a UK pension plan and the CPF plan in Singapore). Savings in such plans can compensate, somewhat, for the lack of continuity of pension savings in Israel. 
  • Alternative social savings (statutory) – inform the employee of his rights in statutory pension savings in the destination country. In many countries there are local statutory pension savings plans (such as the Superannuation plan in Australia, the pension insurance plan in Germany, the provident fund in India, US Social Security). The employee should be aware of accumulated rights in these plans and of the options to utilize them. 
  • Saving the “risk”– instruct the employee to keep the “risk” framework (life insurance and disability insurance) of the directors insurance (possible, in most cases, for a period of four years) and/or the pension fund (limited period of two years.) It’s true that such a case weakens the claim of the employee’s severance from Israel. On the other hand, to this day there has not been even one case of an Israeli expatriate who was required to pay taxes on the period of residence abroad because he maintained his life insurance and his work capacity insurance in Israel.

Employee Relocation Retention

Lost Employees: How To Retain Employees on Relocation

Lost relocation employee

During the employee’s relocation abroad he is gaining knowledge and skills of great value for the company that sent him, but upon his return to Israel – integration difficulties could make him leave after a short period of time. Proper planning and investment of resources in employee retention will help retain him at the company.

 Many organizations, especially high-tech ones, invest considerable energy and managerial resources in order to retain the “key” employees of the organization – those employees who are considered significant to the success of the organization and its development in the future. Therefore, it is surprising that most Israeli companies have no structured process for retaining employees who went on relocation abroad (expatriates), so at the end of the period of relocation they will fit back in the company.

In a survey conducted by O.R.I. in 2010, less than 20% of companies reported having processes in place for retaining workers on relocation. Furthermore, over 70% of companies do not monitor the resignation of these employees from the company, and were not able to report on the rate of resignation during relocation and 1-2 years later.

Lack of investment in maintaining the expatriates contradict the following organizational facts:

1. In most cases, employees selected for relocation belong to the group of key employees of the company. This usually means managers in key positions or outstanding employees in technical positions, in whose recruitment and training the company has invested many resources.

2. During the relocation period workers usually accumulate knowledge and skills of great importance to the company, such as immediate familiarity with the local market or the destination area market, direct acquaintance with customers and experience working with employees in the destination country.

Lack of investment in retaining expatriates does not cause a high percentage of resignation during the relocation. The reason for this lies in the fact that the worker actually doesn’t have a real option to resign from the company at this time (usually the work visa does not allow him to work in another company overseas and the personal and family price of going back to Israel before the end of relocation is too high).

But the picture changes significantly during the first two years after the return from relocation. Global data from surveys conducted by global human resources companies GMAC, NFTC, and SHRM indicate resignation rates of up to 40% (!) of the population of expatriates during the two years following relocation. Since most companies in Israel do not keep track of that data, there is no organized information on this subject. However, accumulated experience and evidence regarding human resource managers indicate a similar trend in Israel.

What can be done to reduce the resignation rate of expatriates? There is no need to reinvent the wheel here. Regular employee retention practices customary in organizations apply here as well, with necessary adjustments for the situation of relocation:

Keeping in touch with employees during relocation

No need for studies and public opinion surveys to understand that employees who don’t receive adequate management attention are more exposed to job offers and opportunities from other companies. Keeping in touch with the expatriate is surely more difficult and challenging, but for that very reason it is recommended not adopt an “out of sight – out of mind” mentality and to use structured mechanisms for maintaining contact:

  • Appointment of an “executive escort” by the Israeli organization throughout the relocation.
  • Maintaining contact between the Israeli HR organization and the employee during the relocation period (periodic interviews and conversations, greetings at holidays, etc.).
  • Active participation of the Israeli company in the employee evaluation process abroad.
  • Requiring a worker to be present for several days at the company offices in Israel during his home leave.

Making the relocation period relevant to the employee’s career development

A relocation period that is not significant for the employee’s career “invites” his resignation from the company (just like any worker who does not see a promotion in his future in the company will look for a career development opportunity outside the company). The career development process of an expatriate sent for a relocation period should start before relocation, maintained during relocation and continue to be maintained after relocation:

  • before relocation it is recommended to maintain a career development process with the following participants: the employee, the Israeli executive escort, manager in the destination country, accompanied by the director of human resources in the home and destination countries. The process will define the relocation objectives, their relevance to the career development of the employee and the fields or jobs that can be relevant at the time of his return to the organization in Israel.
  • during relocation It is recommended to examine the career development goals of the worker periodically and their suitability to changes in the organization abroad and in Israel and the employee’s aspirations and plans.
  • before return of Israel – it is recommended to start the preparations for the integration of the employee in the Israeli organization about six months before the date of his return. Preparations should include assessment of the possible options and the relevant positions upon his return and his future development path in the Israeli organization.

 

Close monitoring after relocation

Just as the first year of a new employee in the organization is critical to his success and retention – the same is true for an employee returning from relocation. The returning employee feels, in many cases, like a stranger to the organization in Israel since many do not know him in person or at all, whereas he acquired experience and many skills during relocation that the organization should recognize. His old / new workplace, however, requires the “burden of proof” and is not willing to credit him for his experience abroad without supportive evidence. To overcome this structured gap there is a need for close support on the part of all relevant levels of management and the director of human resources.

Retention Incentives (Retention Incentive / Bonus)

Many companies provide the expatriate on relocation with a loan that turns into a grant at the end of the relocation period, but very few companies provide any material incentive to maintain employment with the company after his return to Israel. It is recommended to examine the possibility of using retention incentives (a standing loan, repatriation grant conditional to staying in the company for a few years, shares / stock options, etc.).

Relocation Assignment Checklist

Evaluating Candidates For Relocation

Both Professional and Personal: Assessment of Candidates for Missions Overseas

Many companies locate candidates for relocation based on professional abilities, ignoring personal and family variables – which have a great impact on the success of the mission and the employee’s successful integration into the company upon his/her return to Israel.

Selecting candidates for relocation is usually performed based on business and professional considerations – (such as technical skills, professional knowledge, role in the organization, etc.), ignoring personal considerations – behavioral and family, which may be significant to the employee selection process for a global mission.

ORI’s accumulated experience in the field indicates the great importance of considerations other than business considerations to the professional success of the mission, and the main ones are:

Personal considerations – behavioral:

  • Ability to adapt to a new environment, fitness and dealing with unfamiliar situations
  • Degree of personality flexibility
  • Tolerance to ambiguous situations
  • Ability and experience to function in a culturally heterogeneous environment
  • Coping with crises
  • Personality and functional independence
  • Interpersonal communication – (those who don’t excel in communication in “ordinary” situations are doomed to fail in the complex situations of functioning in a new cultural environment)

Family related considerations:

  • The career of spouse / partner
  • Stability of the spousal relationship (marital life crisis is not resolved during the mission, but may worsen)
  • Developmental or learning difficulties of children (a child with developmental disabilities / learning difficulties will be susceptible to further pressure in his/her adaptation to a new cultural environment ).
  • A child who must remain in Israel (due to school / military service)
  • The family opposition to the mission
  • Elderly parent care problems (dysfunction, chronic diseases)

In many cases the director of human resources gets the mission candidate as a done deal and is asked to address issues of wages, benefits and assistance with the transition process. Attempts to convince the organization of the importance of the “soft” aspects encounter raised eyebrows (at best) or are simply ignored (at worst).

The main reason for ignoring the personal variables is the fact that the percentage of missions ending in an obvious failure (i.e. termination initiated by the organization or employee) is relatively small. Surveys on this subject indicate that on average, about 7% of missions end in failure (i.e. only one mission out of every 14 missions ends in failure).

Not admitting failure

Closer examination of the data raises many questions regarding the “impressive” success rates. For both parties (employee and organization) there is a clear interest in the mission not ending in failure. The employee and his family paid a high price for the transition (spouse’s job, children’s schooling, separation from their family and social circle) and are unwilling to admit the failure of the move (not to mention that ending the mission involves many practical problems such as children’s studies, breakingleases, etc), The organization also invested resources (financial and management) and will not give up so easily on its investment. In many cases the organization will deter termination of the mission, since most managers do not have the required managerial courage to make a move meant to hurt employees’ families.

Since most missions are for a fixed term of a few years, the tendency of both sides will be to “bear” the mission to the end. This situation is analogous to the phenomenon known in professional literature as “hidden turnover” (“latent retirement”): the employee is ready to resign and leave the organization, but since there is no real alternative they remain in the organization faute de mieux. The real situation is revealed in most cases only after the mission ends. All the surveys show the highest rate of turnover two years after the end of the mission. For example, a survey by SHRM (Society of HR Management) shows 41% resignation from the company during the two years after the mission.

 

Coping

The organization’s unwillingness to recognize the personality, personal and family considerations does not absolve the director of human resources from trying to raise awareness of these aspects and to deal with them. There are several processes that an HR director can initiate to help the organization deal with the issue:

  • Clarifying relevant aspects to the employee’s family before the mission
  • Meeting with spouse / partner and children over the age of 14
  • Examining the successes and failures of the employee at the organization in order to try to distinguish patterns of behavior relevant to the mission
  • Analyzing the employee’s professional experience
  • Working out problems and challenges with the employee and his family
  • Personal, family and cultural preparation for the employee and his family in preparation for the mission

Correct preparation of the organization in testing of candidates for relocation, will help the employee and his family sail through the period more easily, contribute to the effectiveness of the mission and increase the chances that at the end of the mission – upon his/her return, the employee will fit back in the company of origin.

Relocation Policy

Israel vs the world: Relocation Policy Differences

The Israeli relocation policy is significantly different from the policy in the US, Europe and Asia. This could lead to organizational tensions and dissatisfaction among candidates for relocation. How to bridge the gaps?

 

Relocation policies of Israeli companies are radically different from the policy of US, European and Asian companies. According to surveys conducted by ORI, these differences touch all significant areas of relocation policies and make global Israeli companies a unique phenomenon among global companies worldwide.

 

This fact could have remained an interesting local story (or a sociological research), as long as Israeli companies focused on the relocation of Israeli workers abroad. The issue has become more problematic in recent years, with Israeli companies moving workers from different countries: an American worker to Australia, an English worker to Singapore, a Spanish worker to Argentina and so on. These workers’ willingness to relocate under the exceptional policy is very limited, creating tensions and organizational and operational difficulties. However, by understanding the differences and the nature of the differences, you can find ways to cope that will facilitate the process for both the employees and the organization.

 

Israel vs ROW (Rest Of the World) – The Main Differences

Status of employment: 86% of Israeli companies sever their employee – employer relations in the home country company and transfer the employee to the Company in the host country(). In contrast, the percentage of the ROW companies that sever employee – employer relations in the home country is only 18%, while the rest of the companies keep the employee on the home country payroll.

Wage-setting method: 91% of Israeli companies match the employee’s salary and wage package to the customary salary packages in the host country (Host Based Method) in the ROW however, 80% of the companies match the level of the employee’s disposable income in the host country to that of his disposable income level in the home country (Home Based Method).

Tax: 80% of global companies in ROW “protect” the employee from excessive taxation during relocation (Tax Protection) or make the level of taxation during the relocation equal to to that which the employee was exposed to before the relocation (tax equalization). In contrast, only 3% of Israeli companies take any responsibility for the taxation of the employee during the relocation. Other Israeli companies adopt a laissez-faire policy (or, to put it bluntly: That’s their problem, not ours …)

Pension: Only 9% of the Israeli companies continue contributing to the employee’s pension savings (insurance or pension fund) during relocation. In contrast, more than 80% ROW companies continue the employee’s pension savings in the home country at least at the same level as before the relocation.

Cost of living: about 95% of ROW companies provide a cost of living allowance (COLA Cost of Living Adjustment) calculated in accordance with the cost of living at the host country. In contrast, less than 10% of the Israeli companies provide such an allowance.

The level of difficulty of the host country: 57% from the ROW grant workers compensation benefits for the level of difficulty in the host country (Hardship Allowance), calculated according to the quality of life in the host country. This compensation system is not customary in Israeli companies (although in many cases there is informal compensation for lower quality of life in the host country)

Israel vs the ROW – Coping

The first and simplest advice for an Israeli company transferring an employee from one country to another is to study the relocation policies practiced in the home country of the employee. An English worker transferred to Singapore will examine the proposed relocation with English eyes, looking for comparative information at British companies, and will approach other British employees who were (or still are) on relocation. Even if the non-Israeli worker does not do his homework before his relocation, the odds are that during relocation, his social circle and reference point will be composed of other British citizens who are on relocation in Singapore.

After the “learning phase”, there are four alternative ways of coping for the Israeli company:

Think Local, Act Global:

Israeli relocation policies apply to all employees on relocation. The advantages of this approach are its consistency, its ease of operation and its compatibility with the “Israeli method”. Its main drawback is that it will be rejected (or accepted with reservations) by non-Israeli employees of the company. Even if the non- Israeli employee went on relocation, he is likely to feel that the company treats him unfairly relative to employees on relocation from other companies in the same host country. This method can be adapted by Israeli companies if the vast the majority of its expatriates are Israelis.

Think Local, Act Global:Practicing a differential relocation policy in which the relocation policy of “Israel” will be applied for Israeli workers, while for the remaining employees the “global” relocation policy will be applied. The advantage of this method is its relative fairness to the workers, but the problem lies in its operational complexity and a sense of non-equality between the Israeli workers and the rest of the employees.

Think Local, Act GlobalImplementation of a “global” relocation policy for all employees. This method will prevent the feeling of inequality between the Israeli workers and other employees it will place the Israeli company on a par with the majority of global companies. However, the method will be difficult for Israeli workers to digest and difficult to operate for the company’s headquarters in Israel. This method is especially suitable for an Israeli company if the vast majority of its expatriates are not Israeli.

Net-to-Net equalization:the Israeli workforce under the relocation policy of “Israel” and other employees under the “global” policy, with the disposable income of all expatriates in the specific destination being equal. This method has obvious advantages, but it can significantly increase the company’s relocation expenses, and in all cases it elevates the level of operational complexity.

 

In summary, there are quite a few ways to deal with the differences between relocation policies used in Israel and those used in the rest of the world. However, each company should examine the most appropriate method, taking into all the considerations into account: the welfare of the workers, the company’s interests and the costs associated with any policy it adopts.