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Fall from Grace
As the U.S. dollar continues to devalue compared to the euro, employers are taking steps to protect their expatriates. As the dollar devalues, the cost-of-living differential must increase, experts say.
As the U.S. dollar continued falling precipitously during the first few months of 2007, Americans traveling in Europe found their purchasing power eroding by leaps and bounds. In mid-June, it cost $1.33 in U.S. currency to buy one euro. By early November, that figure had risen to $1.46. And the fall appears to be continuing. For Americans vacationing overseas, that translates to extra-costly hotel bills and less-extravagant shopping sprees, as they are forced to reel in the purse strings. But just how is the decline impacting American expatriates on assignment for three to five years in a location where their home-country currency is increasingly worth less? For the expats themselves, the impact has been minimal, as the majority of employers have kept abreast of fluctuations in the exchange rate and taken appropriate actions to insulate assignees from the predicament. That's not to suggest, however, that expats haven't been deluging their HR departments with phone calls and e-mails in attempts to find out how the decline in the dollar will affect them personally. "There are, indeed, a lot of complaints coming back, but to the extent that the company responds to the changes in exchange rates by updating their compensation packages, they can make sure that assignees are protected from the impact of the decline," says Geoff Latta, executive vice president of ORC Worldwide in New York. "The way they do it, however, ends up costing the company more money, however, so they end up taking quite a hit." Latta says most American-based companies send assignees to Europe on a U.S. dollar-denominated salary, supplemented with allowances for housing and cost of living, also paid to them in U.S. currency. As the exchange rate fluctuates, those allowances must be adjusted to reflect the additional dollars it will cost to purchase the same "market basket of goods." "As the dollar devalues, the cost-of-living differential must increase because the difference between how much it costs to buy those goods in the United States and how much it costs to buy those goods in (the host country) is growing," says Rachel Halpert, a partner in the human capital practice of New York-based Ernst & Young LLP. "That's crucial in being able to make up to that person the difference in what they could afford with their dollars before and what they need to spend in euros now." In terms of how often that differential should be adjusted, there's no one rule of thumb, according to Frank Bodengraven, senior manager at AIRINC, a Cambridge, Mass.-based company that provides cost-of-living data to more than 900 companies, many with operations in Europe. Generally speaking, companies "run the gamut from monthly to annually," with the most common frequency of adjustment being quarterly or semi-annually. Then there are those who choose to do it much more often. "We have some clients that update monthly, but that's pretty rare," says Bodengraven. "I can count them on one hand."
Frequent Adjustments Count Detroit-based General Motors Corp. among those organizations taking the approach that the more frequent the adjustment, the better. At any one time, the automaker has more than 1,500 expats on assignment in more than 50 countries worldwide. Roughly one-third of them are stationed in Europe. For as long as she is aware, Director of International Assignment Services Sally Wicks says GM has been adjusting expats' cost-of-living allowances on a monthly basis. While she concedes the majority of employers adjust the allowance quarterly at best, GM's practice of monthly adjustments not only protects expats from unnecessary financial hardships, but has also helped prevent "a groundswell of concern from folks," she says. "Doing it monthly keeps us fairly close to what's actually happening in the relative economies," says Wicks. "That's probably a little more reassuring for our employees. They know we are doing our best to try to safeguard them and their families. And in terms of any risk to the employee, relative to not being able to afford things, there isn't a problem." Although she stresses that there hasn't been a "deluge of calls," Wicks admits her department has fielded more phone calls than usual from people on assignment in Europe, expressing concerns over how the exchange rate could affect their personal purchasing power. She is quick to note that any fears can easily be quelled by walking the employee through the pay structure and explaining how adjustments are made. Latta believes it's possible for an employer to get too exuberant, making adjustments every pay period, for example (a practice he calls "extreme"). At the same time, he feels those organizations that allow lengthy periods of time to pass between adjustments are destined to pay the price in the form of increased complaints from workers abroad who are feeling the pain of the declining dollar. "Companies that've either gotten lazy or just decided it's administratively easier to lengthen the period of time between updates are the ones where the expats are really screaming because they are losing out," says Latta. "If you had your package adjusted in January, only to watch the exchange rate fall all year, knowing that you're not going to get adjusted again until the next January, there's no doubt in your mind that you're really getting hit." Regardless of how often a company opts to adjust the cost-of-living differential, it's "always a little after the fact," according to Rebecca Powers, a principal and senior consultant with Mercer Human Resource Consulting in New York. When the exchange rate is moving rapidly in one direction or the other, significant changes in currency value may occur over the course of mere days. Therefore, even monthly adjustments may fall short when it comes to keeping expat spending power equivalent to that which they would have at home. That means employers are always playing catch-up when making adjustments to the cost-of-living differential because they are not doing so each time the exchange rate fluctuates. That said, Powers concedes, "expats aren't necessarily expecting a crystal ball," and are willing to forgive slight variances that occur before the next scheduled adjustment. Because organizations cannot accurately predict exchange-rate fluctuations, some employers have taken to giving expats retroactive lump-sum payments as a means of making up for purchasing power lost between adjustments. Administratively, Bodengraven says, this approach is easier because the company need only update allowances once a year. Because it requires employees to bear out-of-pocket costs for up to 11 months, however, retroactive payments can lead to an employee-relations disaster, says Bodengraven, particularly if the situation has already reached the "boiling point" by the time reimbursements are issued.
Balancing Act Much more common is the practice of split-pay, whereby the expatriate's salary is paid in the home-country denomination, while the cost-of-living allowance and (sometimes) housing costs are paid in the local currency. According to ORC Worldwide's 2006 Worldwide Survey of International Assignment Policies and Practices, 44 percent of companies with expats stationed in Europe and the Middle East deliver expatriate remuneration via split-pay. This practice is becoming increasingly popular, according to Thomas Shelton, founder and president of Atlanta-based HRToolbox Inc., a provider of Web-based HR management solutions, primarily because the amount the employee sees remains the same, regardless of how much the exchange rate fluctuates. If an expat on assignment in Europe is granted a monthly cost-of-living allowance of 1,000 euros, he or she will continue to receive 1,000 euros each month regardless of how far the dollar falls by comparison. At the same time, the employer will find itself spending an increasing amount of American currency to provide its expats with that 1,000 euro allowance. For all practical purposes, the expat remains oblivious to that fact because the amount received -- and, thus, the spending power -- remains the same. "In effect, I'm giving you more dollars, but you are not aware of that because the amount you receive in Euros does not change," says Shelton. "It's psychological." Abbott Laboratories in Abbott Park, Ill., has begun moving to a split payroll for its 300-member expat population. The action was undertaken not as a means of insulating expats from ever-changing exchange rates, however, but in order to maintain employees on their home-country benefits programs. According to LeRoy Farr, director of global assignments, Abbott's expats were always confident the company was taking care of them by adjusting their payroll every month to account for changes in the exchange rate. It's become clear, however, that they prefer the split-pay approach because it affords them more financial certainty. "They knew they were protected because the amount they received fluctuated each month, but they didn't like the fact that they never knew how much was going to go into their host-country bank account during any given month," says Farr. "By splitting it, their net pay stays fixed every month, so they know what's going into their home-country bank account and their host-country bank account. We've had fewer complaints with the split payroll because it remains fixed each month." Faced with such a ghastly exchange rate, the question becomes whether it would be wiser to simply put the expatriate on the host-country payroll and pay him or her exclusively in host-country currency Euros, for example. If the assignment is open-ended that is, there is no designated return date companies may wish to consider putting assignees on the local pay structure, according to Latta. If the intent is to return the employee to the United States after the assignment has been completed, however, there are powerful reasons to maintain a U.S. dollar salary. "Paying an expat a local-peer salary tends to drive up compensation because, while they were gone, the host-country currency grew in value compared to the U.S. dollar," says Halpert. "If they were making $150,000 when they left the United States, which translated to 120,000 euros when they began their assignment, chances are they were making at least $170,000 by the time they returned. They now think of themselves as a $170,000 or $180,000 person, and they won't accept their original salary." With expats already viewed as "pampered" in many circles, HR could face another compensation nightmare that threatens to rear its ugly head in response to the dollar's devaluation. As other employees hear how much it's costing the organization to keep expats afloat, they may feel cheated and mistakenly believe the company owes them a "raise," too. Farr says that issue has come up at Abbott, although it hasn't occurred very often and it's typically easily resolved through good communication. "Typically, it comes up when people don't understand the concept of trying to keep someone reasonably whole to their home country," says Farr. "Once we explain that we're not trying to enrich them at all, they understand that it's not a windfall." That said, there's no denying that the rapidly devaluing dollar is resulting in higher costs for organizations that are sending Americans on assignment in Europe. As a result, employers are starting to ask themselves if it's an economically wise choice to send an American on assignment, especially when there are equally qualified people from countries with a lower standard of living and a stronger currency. "Sending Americans abroad has always been an expensive proposition for tax reasons and for the presumed protection-of-lifestyle reasons and now, currency has become another element of that," says Powers. "Companies are starting to ask themselves whether U.S. folks are always the right people to send. The paradigm of 'You always send somebody from the United States' is a mind-set that needs to be looked at."
January 1, 2008 Copyright 2008© LRP Publications |
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