How do I create a housing allowance policy from scratch ?

How do I create a housing allowance policy from scratch

“We don’t have a housing allowance policy in place. My company has around 50 employees, and we currently negotiate on a case-by-case basis. The negotiation is based on the person, not the position, so 2 employees in similar roles may have different housing payments, based on how they negotiated. How do I create a housing policy from scratch?”

Since I started consulting in Compensation & Benefits in 2013, this is something which I’ve observed in the smaller companies in the GCC. They set up shop, start growing, and in the beginning, everything HR is done on an ad-hoc basis.

Then, getting to 50 employees, the company starts to realise that there could be some benefit in putting in place some rules, some basics of how to manage new hires :

  • Maybe a candidate is a bit more savvy than previous recruits as he already has experience in the country, and raises questions to which the hiring manager has no answer.
  • Maybe the GM realises that compensating employees differently, simply because of the influence of their date of hire, is not a sustainable approach.
  • Maybe the HR person wants to rationalise things in order to be more efficient, and save time to introduce more value-adding HR activities.

No matter the reason, it’s time to create that housing allowance policy.

So how do you get there ?

Step 1 – To create your housing allowance policy, start by gathering information

You can :

  • Collect the actual rent paid by your employees in the different areas where they live,
  • Scour newspapers online for articles about the price of rent, such as this piece from The National on rent increases in Abu Dhabi for example,
  • Or visit property websites to find info about rental prices. For instance, trovit has some interesting statistics on rental prices across the Emirates.

However, these methods are not very valid from a statistics point of view so you need to take them with a pinch of salt :

  • For example, your current employees may have chosen to live in a fancy area of New Dubai, but now that you are expanding and recruiting more junior staff, these new employees may want to live in cheaper areas.
  • Or, the numbers from the rental website is based only on the properties in their own database – which does not necessarily represent the entire spectrum of locations.

So, on to the paid information :

You will find in-depth, relevant information from the big salary survey providers (Hay (now KornFerry), Mercer, AonHewitt). These companies collect not only salary information, but also the amounts that are paid by companies to their staff for the various allowances, as well as policy information. This is as good as it gets !

But, the challenge for a small organisation is that you need to participate in the survey, and it is usually quite costly.

The other challenge is that the data reported is that of allowances from other organisations. Companies which participate in these surveys tend to be the larger ones, and their pay policies and allowance levels may be somewhat more generous than what an SME budget can afford.

There is a cheaper alternative.

You can buy the Cost of Living report for Egypt, Iran or your GCC country of choice, produced by my good friends at Bridge the Data. For instance, the UAE Cost of Living report is here. This report will include a multitude of information, including not only detailed rental prices per area and type of property, but also healthcare costs, education costs, utilities etc.

It’s a great source of information, actualised on a regular basis, and also includes some salary info. Perfect for creating your housing allowance, based on the reality of costs faced by your employees, not on what other companies, which might not be relevant to you, are paying.

Step 2 – To create your housing allowance policy, establish the parameters which will frame your policy

Now, it’s time to think of the features of your housing allowance policy :

You need to decide whether you will differentiate your housing allowance levels, and if so, based on which criteria, or combination of criteria ?

In the past, companies had very complex rules for determining the amount of housing allowance that each employee was eligible to :

Housing allowance policy linked to family status ?

For example, a criteria widely applied up to a few years ago was family status. Should you consider family status as one of the drivers for your own policy ? Will you pay different amounts for single, married, married + children ? If so, how will you club these categories ? single+ married no kids, married + up to 2 kids, married +3 or more kids ?

Nowadays, this is not really a trendy approach any longer, as it requires a lot of follow-up, administration and updating on the part of HR, along with changes in life situations for the employees.

Also, as companies tend to rationalise their C&B policies, a new consideration has emerged : if you are paying people for performing a job, pay should not be linked to their family status.

Housing allowance linked to nationality ?

Over the years, I’ve seen a move away from nationality-driven housing allowances. It used to be quite common to see housing levels highest for local Nationals in the GCC, then lower levels for Westerners, then lower levels stills for Arabs and the lowest levels for Asians.

This is something which has almost disappeared,

Nowadays, only 14% of UAE companies differentiate housing allowance levels between Nationals and expats. In my experience, most of these are semi-governmental organisations with large numbers of Nationals, who all compete for the same small pool of employees and have suffered from inflation in these allowance levels.

Housing allowance linked to job grade or level ?

In most companies, job grade/ level is the main consideration driving the decision on the amount for the housing allowance.

A small organisation would probably be better served by creating allowances for broad category of jobs such as blue collar / staff / managers / executives. Keep it simple so that you don’t burden yourself with too much administration and maintenance, but also so that you don’t create a feeling of inequity amongst your employees.

Payment of the housing allowance

Here’s another tricky decision : how will you actually pay the housing allowance ?

First, do you consider it part of the cash compensation of the employees, or as a benefit ?

An allowance would be paid irrespective of how much the employee actually spends on rent.

But, some companies consider that it’s more of a way-of-life benefit, and will reimburse the rent up to a certain maximum.

While it may help contain cash costs, especially if employees don’t use up the whole amount, in reality, there should be only minimal saving for the company : such an approach does not encourage employees to spend less on their rent, but on the contrary, they will try maximize the amount you give them. Some may rent a bigger place, or settle in a more upmarket area, in order to get the most “bang for their buck”.

As I teach in my Essentials of Compensation training, this expectancy theory is one of the fundamental behavioural principles that need to be taken into account when designing Performance & Reward programs.

Other things to decide include :

  • Will you pay the amount as an annual advance (one payment per year), or pay it twice a year or even quarterly ? Although the vast majority of companies pay the allowance as an annual lump sum, it might be relevant if your employees live in areas where paying with 2, 3 or even 4 cheques is now the norm.
  • Will you require a p8roof of rent ? For instance, for government and semi-government entities in Abu Dhabi, there is a legal requirement that housing allowance is paid only to employees who rent in the emirate of Abu Dhabi. If these employees elect to live in another Emirate, they’re not eligible to the housing allowance – and lose a major part of their compensation.
  • Will you pay the rent directly, in the name of the company ? Until a few years ago, landlords were willing to reduce the rent if it was paid directly by the employer, as it was deemed a safer option for them.

Finally, consider how you will name that new policy.

In recent years, we’ve started to see a shift in the naming of allowances, especially as employers payments may not have followed closely the rise and fall of rent amounts.

So, naming it a contribution implies the possibility that the amount paid to the employee may not cover the whole expense. There’s a similar trend regarding education costs, as the price of sending kids to school has risen dramatically in the past few years, but the amounts paid by employers may not have risen at the same rate.

Step 3 – To create your housing allowance policy, think of the practical aspects of deployment and implementation

And now to the truly nitty gritty !

Potential impact of creating a housing allowance policy on End of Service calculations

If you used to pay a monthly lump salary with no allowances, implementing a housing allowance may have an impact on your End of Service accruals : you will now have a base or basic salary, as well as an allowance.

Maybe that base salary is different from the theoretical amount that you used until now for accruing gratuity amounts.

Or, if you were calculating End of Service on the full monthly amount, maybe you’ll want to communicate to your employees that you will continue to do so in the new system, so that they’re not losing out.

Controlling the cost of implementing the housing allowance policy

Depending on your approach and on how much you were actually paying to your employees, it could be that the new allowance will, on average, be a bit more generous to employees than the amounts they had individually negotiated in the past. For example, this could happen if you did not revise these amounts since people we hired.

Run your cost estimates, and, if the amounts are high and it’s necessary, you may want to take the extra cost out of your salary increase budget, so that you maintain control over your labour costs.

Managing employees who are impacted by the new housing allowance policy

Case 1 : employees who see a huge jump in their housing amount.

You will see a marked increase in labour cost for them. Well, the good news is, as a company, you saved on their housing costs up until now J. If it’s a few employees, I’d say, swallow the cost.

If there is a large number of employees in that situation, you may consider :

  • To gradually increase the housing allowance level over 2 or 3 years up to its intended amount
  • Or, to move them up to the new housing amount at once, but freeze basic pay. Maybe include an exception for your top performers or people being promoted.

Case 2 : employees who see a decrease in the amount of housing they’re eligible to.

You can’t decrease their income, so how do you mange the situation ?

Some options to consider are :

  • If their basic pay was low, pay them the new housing amount, and transfer all or part of the “extra” housing they used to receive to their basic pay. It will impact their End of Service eligibility, but this will be a marginal cost to you.
  • If their basic pay was aligned to your pay philosophy and their performance, then apply the normal housing allowance, and separate the extra they were receive to something like “temporary housing amount”. Over the next one or two years, offset part of their individual salary increase against that amount, so that their base pay increases, their “temporary housing amount” decreases, yet the total income increases slightly.

For example, temporary housing is 75, individual salary increase should be 200 > increase basic by 150, transfer 50 from temporary housing to basic : the new basic is increased by 200, the new temporary housing is now 25 and total increase is 150.

A recap

So in short, to create a housing allowance policy from scratch :

  1. gather market information, either available for free (but don’t trust 100%), or paid information from specialist data providers
  2. decide the factors that will determine the allowance amounts, how you will pay the allowance and what you will name it
  3. and anticipate the cost-related aspects of implementing the new policy.

Don’t hesitate to print this post to use as reference… or contact me to get some support if you need to create the policy for your organisation 🙂

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Comments

  1. As usual Sandrine offers practical advice. Experience outside the GCC shows that the prevalence of and magnitude of housing allowances varies considerably.
    When benchmarking your pay, always include the values of allowances and make at least one of your comparisons at total fixed cash pay.
    You may decide to introduce housing allowances because it is common (cultural) practice but it may not be BEST practice for you. Do not rely on its current value to be maintained as taxability can change and it may, like in Nigeria, be included in pensionable pay.

  2. Betzi Miriyam Kuriakose says:

    Excellent insight into how to manage the costs of implementation and to an extent employee expectations.

  3. Deepak Venugopal says:

    Hi Sandrine,

    Excellent article. Please share your thoughts about formulating the housing allowance as a percentage of Basic Salary between different levels or grades.

    Regards,

    Deepak

  4. Anju Sharma says:

    Exclellent summarisation to decide such policy.
    Besides all the above mentioned points
    ” We may consider the employees willingness/requirment to decide the maximum amount of housed rent. Best is to decide a particular percentage as part of salary or take few proprties to be affered as accomodation”. Then the employees themselves decide the quality of allowance paid in case or otherwise.
    In fact it can one of the best retention tool.

  5. Anna Addei says:

    Hi Sandrine,

    What’s the recommended way of administering housing allowances to couples who are both employed by your company. Are they both entitled to an allowance considering they are most likely living together?

    Anna.

  6. Philip Mathew says:

    Excellent and a very practical way to approach.
    Thank you Sandrine.

  7. Hi Sandrine,

    Thank you for the article.

    How would you treat the housing allowances for employees who decide to buy an apartment/ house?

    Glenn

    • Hi Glenn,

      When you transfer employees to another country, or hire them in the GCC, the housing allowance is calculated on the basis of rental because the person is expected to have a short-ish expected lifespan in the country.

      If the employee decides to buy, it is their own decision. I don’t see why this employee should be treated differently from the rest of employees in the country, so he should be eligible to the same allowance as anyone else. They can use that money to help them repay their mortgage, instead of paying a rent.

      If your company decides to support employees who want to buy their main residence, you might decide to put in place an employee loan policy – it’s better than changing the housing allowance. But in my view that should apply to employees in all countries, including the company’s HQ/”origin” country.

      When I was working for large corporations, most of them were actually actively promoting for employees to rent, not buy, when they were going to work abroad, as there are many risks and costs associated with home ownership, especially outside of one’s home country :
      * administrative costs such as paying notary fees, stamps etc upon both buying and selling the property
      * not really knowing market prices that are fair in that area, the volatility of these prices, and the laws and obligations of home owners etc
      * potential negative impact on future mobility as the employe might refuse a transfer because of a potential loss of value on the house sale, or delay the transfer because they can’t sell their house quickly and reimburse the company loan (if you put one in place) etc…

      I hope this helps,
      Sandrine

  8. Dear Sandrine,

    Very much detailed and useful article. Thank you for sharing.

    As major SME companies may not participate to the C & B Market Survey research(due to cost reasons), they may come-up with either Company provided house (or) Housing Allowance as per Level / Grades. I feel that the sources of Housing Allowance amount could be from:
    – Candidates input during interview
    – Media sources
    – HR Management experience

    Thank you again..

    Nellaiappan (Raja) Pillai

    • Hi Raja,

      I agree. When statistically-valid sources of information are not available, companies can and should look to other sources of info in order to validate and/or update their scales. But, one cannot ignore statistics for too long – every once in a while, it is important to validate info through a survey. Otherwise, the company runs the risk of becoming disconnected from the market : using anecdotal sources may not represent what the prevalent practice is in the market.

  9. Is housing allawonce compulsory from companies/employers/mines to their employees???and should every employee receive housing allawonce wheter they still live with their parents..once u have receive housing allawonce is it lawfull to cut your h.allawonce from your employer with any satisfied reason..???

    • Ok – so I don’t know which country you are referring to. In the GCC, housing allowance is not mandatory by law but it is market practice and all the companies I’ve met offered some form of accommodation support : either a housing allowance, or housing per se (for example in airlines and hospitality this usually extends beyond the usual accommodation provided to labourers or retail staff), or as part of a “living contribution” which includes housing, transportation etc.

      A company can have its own rule that if a young employee is living with their parents, they would not be eligible to the allowance. This could also be the case of the housing allowance is provided as reimbursement upon providing a rental contract, for example.

      I’m not aware of companies cutting the housing allowance without reason, but sometimes companies change the way they handle packages, for example they may integrate all or part of an allowance into basic part, or “merge” multiple allowances into one.

      If you have been paid a housing allowance and it was taken away from your package and not replaced by, say, company accommodation, I suggest you find a lawyer in your country to investigate what you may or may not be able to do. Sometimes, governments also set up services that provide advice to employees in their relations with employers. Each country has their own laws and each case is particular and I unfortunately cannot provide you any legal advice.

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