What options do employers have for dealing with currency fluctuation affecting the compensation of employees on international assignments?
Employers that use international assignments should ensure that they have a clear exchange rate policy in place. The aim of an exchange rate policy is to protect assignees from currency fluctuation having a negative impact on their compensation. Ideally, 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.
There are many ways in which an employer can offer exchange rate protection. A common method is to pay a portion of the assignment package in home currency and the remainder in host currency (split pay). The amount to be 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.
Alternatively, the employer could pay the whole package in the 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 is another option, most often implemented by employers that are prepared to make more frequent cost of living adjustment (COLA) updates. If the exchange rate changes by (usually) 10% or more, up or down, an interim COLA update will be made. This can be to the employee's advantage or disadvantage, of course, with the underlying expectation that the company is not overpaying or underpaying the employee for an extended period.
A less administrative approach would be for the employer to pay retroactive adjustments. The employer and the employee would reach an agreement on the proportion of salary to be protected by exchange rates. At an agreed date, either quarterly, bi-annually or at the annual salary review, the employee will receive a retroactive adjustment in the form of a lump sum payment.
If the employer decides on a policy of not offering exchange rate protection, this should be made clear to employees, for the avoidance of doubt.