Fluctuations in currency exchange rates can reduce the value of expatriate employees’ pay so what steps can employers take to protect them – and should they? Debbie Lovewell reports
If you read nothing else, read this…
– Exchange rate fluctuations have seen the pound fall against other major currencies, such as the euro and US dollar, but it has begun to rise again.
– This has ramifications for expats’ salaries, particularly if paid in their local currency.
– Employers should consider what impact this will have on employee morale, productivity and retention.
– Some employers may decide not to act because exchange rates naturally fluctuate and it may not be long before staff begin to benefit again.
Anyone who has looked at booking a holiday outside the UK in the past year will have noticed their money doesn’t go as far as it used to in some parts of the world, particularly in Europe and the US. For most people, this will be little more than an annoyance and will simply require a hard think about their choice of destination. But for UK organisations with expatriate employees, the ramifications of the pound’s falling value against other major currencies are a little more serious.
Any fluctuations in exchange rates will inevitably impact on expatriate staff, regardless of whether they are paid in their home or local currency. In both instances, employers should take the cost of living into consideration to ensure employees can afford to maintain an acceptable lifestyle if the value of their take-home pay has fallen once converted into local currency.
James Berkeley, director of Berkeley Burke, says employers should try to determine how serious the implications of currency fluctuation will be for their business, for example its likely effect on employee productivity, morale and retention. “Will a change impact on employees’ desired behaviour?” he adds.
Employers should then consider the impact it will have, if any, on customer service and business objectives. This should include identifying how many staff are affected. “If it is only a minority, employers may be less likely to take action,” says Berkeley. “Is currency fluctuation a compensation issue, and should it be?” Armed with these facts, employers will be able to decide what action to take. Some may think none is necessary because the pound’s value against other currencies will, inevitably, rise over time and the situation will even itself out in the long term. Michael Rose, director of Rewards Consulting, explains: “Currencies always change, so employers can only ever do a small amount. It is a question of swings and roundabouts. Typically, employers will not compensate employees for currency fluctuations because they are always going up and down.”
Whatever action employers decide upon, they should bear in mind that pay can be an emotive issue for staff. “Is the possible loss a tangible amount, or is [the employees’ reaction] only ego-based?” says Berkeley.
Employers that do want to take steps to counteract exchange rate fluctuations have several options.
According to Mercer’s report Managing expatriate compensation – the currency and inflation challenge, published in March this year, employers should monitor inflation and market exchange rates regularly. Where they offer a cost-of-living allowance, organisations could put trigger points in place at which this and any other cash expatriate allowances, such as hardship and mobility premiums, are recalculated. For example, the trigger could be when inflation in an expatriate’s host country reaches 10% or when the exchange rate fluctuation reaches a certain threshold.
But employers should ensure these points are set at such a level that they do not rush into recalculating their cost-of-living allowance for minor fluctuations in the exchange rate. Mercer’s report states: “”Expatriate compensation adjustment should occur only after a change to the home base salary, a change in family situation or significant exchange rate and price fluctuations. Systematic updating [of the cost-of-living allowance] at mid-year may result in unnecessary communication issues.
“Periodic checks, such as a mid-year review, should only aim to correct for a significant exchange rate fluctuation or substantial price increases in the host country. Apart from these exceptional situations, the cost-of-living allowance should only be recalculated in conjunction with an annual home country salary review.”
Employers could also review the currencies in which they pay expatriate employees. For example, they could pass the risk to staff by offering two base currencies, with employees choosing which to be paid in, knowing the employer will not compensate them for fluctuations. Employers could also take a similar approach but with a much wider selection of currencies, says Berkeley.
However, when deciding which approach is best for their organisation, employers must take a long-term view. After all, employees may expect to be compensated for the falling value of the pound now, but will they be quite so willing to reciprocate when it begins to rise again?