What Is Hardship Premium & How Do You Manage It?

When employees are assigned abroad, they typically experience a hardship due to the conditions at their host location. The hardship premium is an allowance that recognizes those difficult conditions and provides employees with extra pay to compensate them.

1.0 What is hardship premium?

A hardship premium (also known as mobility or hardship allowance) for expatriates is an additional payment that does not relate to an employee’s performance. The allowance recognizes the conditions in the employee’s host country and compensates them.

Term	HR meaning
Hardship premium	Extra pay for difficult host location conditions
Hardship allowance	Similar hardship related pay
Location allowance	Pay for adjustment difficulty
Danger allowance	Pay linked to direct security risk
Cost of living allowance	Pay for price differences

1.1 How is hardship premium different from hardship allowance and location allowance?

These two terms are often used together in HR departments. A hardship allowance focuses on the difficult conditions of the host country. A location allowance is determined by the quality of the employee’s home and host location.

1.2 How does hardship premium fit into expatriate compensation?

Expatriate pay includes this allowance in the same way that other allowances do. Base pay, housing, tax, relocation, school, and cost of living allowances are provided for expatriates in the same way that this payment is.

2.0 When should HR use hardship premium?

When the host country’s conditions are worse than those at the employee’s home location, HR should provide a hardship allowance. These include countries that are a site for an internal remote facility, high risk for the employee, limited services in place for expatriates, and poor environments for the employee and their family.

Use case	HR review point
Remote site	Isolation, infrastructure, travel access
High risk city	Security risk and political instability
Limited services	Medical care, schools, housing
Poor environment	Pollution and air quality
Family move	Expatriate family impact

2.1 How does the host location affect hardship premium?

The host location has a direct impact on the hardship allowance. Each location in the world has different conditions. These should not be overlooked in determining a hardship allowance.

2.2 What quality of living and living conditions should HR review?

The quality of living conditions for employees in the host country should be reviewed. These can include, but are not limited to, safety, health care availability, housing availability, public services, transport, sanitation, schools, banking, social life, and pollution of the area. Mercer uses 39 qualities of living factors to determine an allowance for expatriates.

3.0 How do you calculate hardship premium?

Determine the hardship allowance for expatriates using the following four steps:

1. Identify the Location Rate

   Determine the percentage for hardship for the specific location. This number is usually between 5% and 35%. Organizations can use the U.S. Department of State’s DSSR tables to determine this percentage. The percentage considers factors such as crime in the location, pollution in the area, isolation of the location, the availability of medical care in the location, and the living conditions in the location in comparison to the home country of the expatriate.

   These rates are based on factors such as:

   Factor	Description
   Crime	Safety and security risks in the location
   Pollution	Air quality, environmental risks, and health concerns
   Isolation	Distance from major cities, services, or family support
   Medical care	Access to reliable hospitals and healthcare
   Living conditions	Overall quality of life compared with the home country

2. Determine the Base Salary

   The employee’s base salary should be determined. This salary does not include bonuses, overtime, or other salaries.

3. Apply the Formula

   Multiply the employee’s base salary by the percentage of hardship for their location.

   Formula:

   Base Salary x Hardship Percentage = Annual Hardship Premium

   Example:

   If an employee earns a base salary of $100,000 and the percentage of hardship at their host location is 20%, their hardship premium is calculated as $100,000 x 20% = $20,000.

   To calculate hardship premium fairly, HR teams need a reliable base salary before applying the location percentage. CompAnalyst® Market Data can help organizations benchmark roles using trusted compensation data, compare market rates, and support more accurate expatriate pay decisions.

4. Divide by Pay Periods

   Determine how many times a company pays for each employee. This could be monthly, bi-weekly, or weekly. Divide the total hardship premium by the number of pay periods in a year (52 weeks) to determine each paycheck.

Pay Frequency	Calculation	Example Using $20,000 Annual Premium
Monthly	Annual premium ÷ 12	$20,000 ÷ 12 = $1,666.67 per month
Biweekly	Annual premium ÷ 26	$20,000 ÷ 26 = $769.23 per pay period
Weekly	Annual premium ÷ 52	$20,000 ÷ 52 = $384.62 per week

3.1 How does location rating support a premium recommendation?

The location rating supports the establishment of a hardship allowance for expatriates by providing an explanation of the conditions of the host country that will be reviewed. Using these ratings, HR can provide a justification for any hardships that will be faced by expatriates and why certain locations receive a higher hardship allowance than others.

This is helpful in cases where expatriates are moving from different locations at home to the same host location.

3.2 How does base salary percentage apply to hardship premium?

Many companies use a percentage of the expatriate’s base salary to calculate the hardship allowance. The higher the percentage, the more severe the hardships for the expatriate. These percentages can be based on the employee’s salary at home, their salary during the assignment, or the maximum salary that the expatriate could earn at their host location.

4.0 How do you manage hardship premium fairly?

To manage hardship allowances for expatriates, there are four main aspects to focus on.

• Use objective third-party data to determine hardship allowances for locations. These should be between 5% and 30% of the expatriate’s base salary.
• Apply the percentage to a maximum salary for expatriates to limit the payment that should be made to those with higher salaries.
• Review the conditions in the expatriate host location annually. If the location improves, the percentage can be reduced.
• Determine what is considered a hardship as compared to a danger pay situation for expatriates.

Managing hardship premium requires consistent rules, accurate salary structures, and clear compensation governance. CompAnalyst can help HR teams price jobs, build pay ranges, model different pay scenarios, and make more consistent compensation decisions across locations.

4.1 How should global mobility policy define hardship premium?

The policy should define the hardship allowance as the additional pay that is given to expatriates because of the hardships of their host location. The policy should state the length of time that they will receive the hardship allowance, how the location is to be reviewed for quality of living, and whether their expatriate family will be affected by the policy. It should also separate this payment from the determination of whether they will receive a danger allowance or a cost-of-living allowance.

Hardship allowance policies should be clear, consistent, and aligned with the company’s broader compensation strategy. Consultants can help organizations review pay practices, design salary structures, and build compensation policies that support fair and defensible decisions for global assignments.

4.2 How can compensation governance support equity and consistency?

Compensation governance will ensure that every assignment has the same data and review calendars. Each department in the company, from finance and HR to taxation, legal, and global mobility, should have their role defined within determining an expatriate’s hardship allowance. Any changes to the quality of living can be reviewed by the company to adjust the hardship allowance for that expatriate.

5.0 FAQs

Here are the frequent questions about the topic:

5.1 Is hardship premium paid monthly or as a lump sum?

A company can choose to pay hardship allowance for expatriates as a lump sum or as an additional payment each month to the expatriate’s paycheck. Making it a monthly payment makes it easier to remove that payment if the expatriate host location changes or receives a new location rating.

5.2 Is hardship premium taxable for employees?

In the United States, any allowance or benefit paid to an employee is taxable for the employee unless specifically excluded by law. Payroll and taxation departments must review this before expatriates begin to receive their premium payments.

5.3 Can hardship premium change during an employee’s assignment?

Yes. The hardship allowance can change if the expatriate host country changes in any way. It can be for any reason, but each company should have a policy regarding how often their hardship allowance will be reviewed for changes.

5.4 Who decides the hardship premium rate in a company?

The hardship allowance rate in expatriate compensation is typically recommended by the global mobility or compensation department. However, the finance and tax departments should review it. Compensation of governance will approve the rate for expatriates.

5.5 Should hardship premium continue after the employee returns home?

No. When the expatriate returns to their home location, the hardship allowance should end as well. Since it is tied to their international assignment, not their regular employment with the company, it should cease upon their return.