A New coming to Expatriate compensation in 2009

The challenges of ensuring expatriates are paid fair salaries over dissimilar countries in the current economic climate of the credit crisis together with rapid currency and inflation fluctuations are increasingly complex. The current economic climate has made it critical to constantly communicate expatriate salaries. Rapidly fluctuating replacement rates and inflation can increase or decrease the number of salary paid and significantly impact purchasing power both legitimately and negatively in a very short duration of time. The approach many organizations have taken is to convert a spendable division (typically 60%) of the expatriate's salary into the host country currency on a monthly basis and to furnish non-cash benefits such as accommodation, transport, education of children etc. This can effect in employers paying too much or too minute salary in these volatile times.

Too Much: The expatriate experiences short-term upside as a effect of a convert in the replacement rate. A fall in the value of the host country currency against the home country currency without an increase in the prices of goods and services in the host country results in the expatriate having increased purchasing power. It may appear for a while that all is well. The expatriate has an unexpected windfall. A wise expatriate will save this windfall knowing that the situation will not be permanent. Whether the replacement rate will adjust back to where it was or prices and inflation will begin to increase until economic equilibrium is achieved. The reality is that in the short-term the boss will be faced with increased whole salary costs, and will at last have to deal with disappointed expatriates when the trend inevitably reverses itself and their purchasing power drops again to realistic levels.

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Too Little: The expatriate experiences short-term downside as a effect of a convert in the replacement rate. An increase in the value of the host country currency against the home country currency without a decrease in the prices of goods and services in the host country results in the expatriate having reduced purchasing power. This is when the boss faces complaints from expatriates unable to make ends meet. Prices of goods and services have remained the same in the host country but as a effect of the convert in the replacement rate, the expatriate receives less salary in local currency. In the long term Whether the replacement rate will adjust back to where it was or prices and inflation will begin to decrease until economic equilibrium is achieved. The reality is that in the short-term the boss will be faced with decreased whole salary costs and will have to deal fast with unhappy expatriates.

Clearly the approach on converting a measure of the salary into host country currency on a monthly basis does not work any more.

The expatriate recompense questions that employers must consider:

-What number of salary will ensure that the expatriate will have the same purchasing power overseas as they have at home?

-What process / tool will be used to ensure the salary retains its purchasing power when inflation and replacement rates change?

New Approach: The ideal approach is for the boss to settle on a process / tool that establishes and maintains the expatriate's salary purchasing power. The salary Purchasing Power Parity (Sppp) approach is one such approach and involves the following steps:

-Committed Salary: settle what number / measure of the current salary (in home currency) will remain in the home country to meet committed expenses such as mortgage commitments, seclusion funding, savings etc.

-Home Gross Spendable Salary: build what number / measure of the current salary (in home currency) is spent in maintaining the expatriates current acceptable of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the expatriate pay rent, will healthcare be provided etc.

-Home Net Spendable Salary: build the net spendable salary by deducting the number of tax, social contributions and any other statutory deductions applicable in the home country to the Home Gross Spendable Salary.

-Host Net Spendable Salary: Use the established number of Home Net Spendable salary in home currency to infer the number of Host Net Spendable salary required in the host country in order for the expatriate to have the same number of purchasing power as they have in their home country. The calculation comprises 4 factors:

1) The difference in the cost of living index for the same basket of goods and services between the home and host country applicable for the spendable salary.
2) The difference in hardship that the expatriate and their house are likely to experience.
3) The replacement rate between the home and host country.
4) The Net Spendable Salary

-Host Gross Salary: The Host Net Spendable salary is "grossed up" by the number of tax, social contributions and any other statutory deductions applicable in the host country to build the host gross salary that will furnish the expatriate with the same acceptable of living as they had in their home country.

The Host Gross salary is established in local host currency. As a effect it is no longer subject to changes in the replacement rate. Over time the salary may be eroded by local inflation which will be reflected in the cost of living indexes. It is recommended that the Host Gross salary be reviewed on a quarterly basis to monitor the impact of any convert in cost of living and the replacement rate.

A New coming to Expatriate compensation in 2009