How can an employer handle currency fluctuation affecting the compensation of employees on international assignments?
Author: David Remedios
An employer that uses international assignments should ensure that it has a clear exchange rate policy in place. The aim of an exchange rate policy is to protect employees on international assignments from currency fluctuation negatively impacting their compensation. An employer's chosen exchange rate plan should fit well with its compensation philosophy, payroll capability and administrative resources, as well as any potential currency restrictions in host locations.
An employer has several options for providing exchange rate protection:
- Split pay: The employer pays a portion of the assignment package in home currency and the remainder in host currency. The amount paid in host currency is paid at a guaranteed exchange rate, which is typically the same rate used to set the salary at the start of the assignment. This guaranteed rate is then reviewed every year with the annual salary review.
- Host currency: The employer pays the whole package in host currency, using a guaranteed exchange rate for funds transferred, based on a percentage of salary or on the actual amount transferred. Again, the guaranteed rate is reviewed every year.
- Exchange rate monitoring: This option is most often implemented by employers that are prepared to make more frequent cost of living adjustment (COLA) updates. Generally, if the exchange rate goes up or down by 10 percent or more, the employer makes an interim COLA update. This can be to the employee's advantage or disadvantage, with the underlying expectation that the employer is not overpaying or underpaying the employee for an extended period.
- Retroactive adjustments: The employer and the employee agree on the proportion of salary to be protected by exchange rates. At an agreed upon date (e.g., quarterly, biannually or at the annual salary review), the employee receives a retroactive adjustment in the form of a lump sum payment.
If an employer does not offer exchange rate protection, this should be made clear to employees.