Global Economics

Will Hardship Pay Survive the Downturn?


Emerging markets that still show growth will continue to require talented managers who deserve hardship pay, even if they're not from the U.S. or Europe

During hard times, a tempting target for cost cutters at multinational corporations might be hardship payments. Multinationals for years have paid these bonuses to managers who accept overseas assignments in difficult countries, usually in developing nations in Asia, Africa, Latin America, and the Middle East. Companies have calculated that, in order to have talented people in key locations, they need to sweeten the terms, with payments ranging from 5% to 30% of a manager's salary.

Despite the need to cut costs now, executives at the consultants that help companies calculate hardship bonuses argue companies are still going to pay managers extra for taking difficult posts. Cathy Loose, Asia-Pacific mobility leader for Mercer, the HR consulting firm that is part of the New York-based Marsh & McLennan Cos. (MMC), expects demand for hardship payments to go up. "As companies expand into emerging markets, hardship allowances are actually still relevant," she says.

Emerging Markets Still Require Expats

Economic growth continues in the big emerging markets, which will maintain their appeal to companies looking for new opportunities. With the shortage of experienced managerial talent in many of the emerging markets, multinationals will still need to find sweeteners for expatriates, says Robert Freedman, chief executive officer of ORC Worldwide, a New York-based human resources firm. "Companies are trying to pare back where they can on some payments, but they absolutely need expats," he says. "We see the premiums for these difficult places continuing."

Even the fastest-growing emerging markets are suffering at the moment, though. Growth in India slumped to an annualized rate of 5.3% in the fourth quarter, compared to 7.6% in the previous quarter. slumped to an annualized rate of 5.3% in the fourth quarter, compared to 7.6% in the previous quarter. is struggling, too, with exporters hurting and gross domestic product growth well below the 8% threshold that many economists believe is necessary for the country to create enough jobs to absorb new workers entering the labor pool.

Beijing unveiled a $585 stimulus billion plan last November and Chinese Premier Wen Jiabao is likely to increase that amount when he opens the annual session of China's National People's Congress on Mar. 5, a former top official said in Beijing on Mar. 4. The expats won't necessarily be coming from the U.S., Canada, or Western Europe. Companies now are trying to find managers from the same part of the world, finding someone from Singapore, for instance, to take a post in China. There are obvious cultural and language advantages to that strategy, and the costs can sometimes be lower.

Cities Can Lose the Hardship Tag

HR experts don't recommend companies respond by phasing out hardship pay. The problems that make a city a hardship post—heavy pollution, risk of disease, high crime, poor sanitation, inadequate infrastructure—are the same for a manager from North America as they are for a manager from Asia, says Geoff Latta, ORC's executive vice-president. "Companies would be ill-advised to differentiate and say, 'You don't need a payment because you come from a terrible place in the first place.'"

Another way to cut costs is for a city to lose its status as a hardship post. For instance, both Prague and Budapest have fallen off ORC's list, a reflection of the improved quality of life in the former Soviet-bloc cities over the past decade.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau.

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