Keeping pace - Compensating expatriates in the downturn

In a global financial crisis, it comes as no surprise that changes for international assignees are imminent. Fluctuating currencies have raised expenses for expatriates in some cities while other locations have declined significantly in the cost of living rankings.

There are some conspicuous changes on the lists of most expensive expatriate cities. London, for example, has disappeared from the rankings altogether due to a weakening pound. Angola remains at the top. The scarcity of items representing a ‘standard’ quality of life, (such as LCD televisions) and the high costs of other imports are the key factors behind Angola’s unlikely prominence.

The average multinational company in Singapore sends its staff on assignments to locations which have become more expensive in terms of the Singapore dollar. The strengthening Japanese yen, for example, has placed Tokyo as the most expensive city in Asia (second only to Luanda, Angola in terms of the whole world), while Seoul has dropped due to the weakening Korean won. The US dollar’s recent rebound against other major currencies has also brought a boost to expenses in dollar-pegged locations such as Hong Kong.

The rankings are the work of ECA International, an international HR consultancy. It completes the survey every six months to determine the impact of cost differentials on expatriate employees. Lee Quane, General Manager, ECA International says foreign exchange markets are proving particularly volatile during the economic downturn. This has meant a reduction in the purchasing power of expatriate salaries, particularly where these are paid in home-based currencies. For example, an employee paid in Singapore dollars but based in Japan may see constant changes in the costs of everyday goods as exchange rates move around.

Price differences become more problematic for expatriates when increases in the price of goods occur in the host location but remain unchanged at home. But should this be the employer’s problem? Quane believes so – he says protecting the purchasing power of expatriates is both vital and feasible.

Making adjustments

In order to make sure that salaries are keeping pace with market changes, employers should keep track of expatriate costs of living. Quane says salary reviews should cover not just base pay but also cost of living allowances for staff sent overseas. In addition, he suggests salary reviews be conducted more regularly that common once-yearly approach. “If companies review salaries once every six months, they can try and ensure that salaries are not so affected rather than wait a year and play catch-up then,” he says. This is a common and widely-practiced approach which requires companies to be on their feet in processing information about salary fluctuations.  

Another suggestion is a split-pay approach, whereby companies pay half of expatriates’ salaries in their home currency and the remaining amount in the host location’s currency at a fixed exchange rate. The employer should keep in mind that expatriates might use some of their salary on commitments in their home location, such as house payments or contributions to elderly parents. Such an employee cannot afford to have purchasing power change along with currency fluctuations and may leave a job if they are significantly affected. And an early departure could cost the organisation much more in the long run.

“If companies commit to delivering expatriate salaries through a split-pay approach, workers should not be affected by currency fluctuations and are guaranteed purchasing power,” says Quane. This approach is practiced by about one-third of companies in Singapore, while the more common approach is to increase the frequency of salary reviews.

Beyond the downturn

Although recent currency fluctuations have been abnormal, Quane advises organisations to implement salary protections even when the economy eventually stabilises. “This is a long-term issue. He also warns companies against being complacent with monetary retention strategies. Widespread recessions may mean many employees are grateful just to have a job and are less likely to complain or leave if exchange rates hit their personal budgets but it is a company’s responsibility to ensure they maintain purchasing power. “Employers may get away with evading responsibilities in the short-term but in the long run, they will suffer from a lack of employee loyalty.”

If companies are negligent now, then when the economy picks up, employees may seek opportunities elsewhere. Such a trend was seen during the 2001 recession when employers scaled down packages and benefits for employees. When the economy began to chart steady growths again, companies that cautiously maintained these smaller remuneration packages began losing employees to others who paid more.

If cuts are necessary, Quane says that employers who take away during a recession should prepare to become more generous later. If it is absolutely necessary to reduce salary and benefits packages, then companies should be quick to re-instigate allowances and benefits the moment the economy stabilises again.

Regardless of the problem and its severity, surviving a crisis is about maintaining equilibrium and recognising that the situation is temporary. Employers must prepare for the ripple effects of each measure they take during times of crisis. Retrenching employees, reducing packages or allowing currency movements to do the cost-cutting might seem like easy fixes but employers must consider the costs of bringing them home.

The most expensive cities

In the world (last year’s ranking):

1. Luanda, Angola (1)
2. Tokyo, Japan (13)
3. Moscow, Russia (3)
4. Abuja, Nigeria (21)
5. Copenhagen, Denmark (5)
6. Oslo, Norway (2)
7. Geneva, Switzerland (9)
8. Kinshasa, Democratic Republic of Congo (6)
9. Libreville, Gabon (8)
10. Caracas, Venezuela (128)

In Asia (world ranking):

1. Tokyo, Japan (2)
2. Beijing, China (31)
3. Hong Kong (33)
4. Taipei, Taiwan (76)
5. Seoul, South Korea (90)
6. Singapore (95)
7. Bangkok, Thailand (177)
8. Hanoi, Vietnam (188)
9. Vientiane, Laos (191)
10. Jakarta, Indonesia (193)

(nb: only the most expensive city in any one country is named)

Source: ECA International