There are many changes and adaptations that an expatriate going on assignment must embrace, such as new social cues and manners that must be accepted to survive in new surroundings—perhaps an entirely new language, new and exotic foods, and a new style of conducting business to adjust to the demands of a new culture. While most of these issues can be addressed and prepared for before the expatriate even leaves American soil, there is one surprise that has come up in recent years that is sure to get them: sticker shock on everything from groceries to housing.

An American expatriate living in Europe most likely will have a jaw-dropping experience on his or her first stroll through the local mall or supermarket. A single can of Coca-Cola will cost him or her more than $2. A new Apple iPod Nano will cost $230 while on assignment, as opposed to the $149 in his or her U.S. hometown. A cab ride to a restaurant may be $50, while the same meal that would cost $60 at home now will cost more than $125 ($12 glasses of house wine not included).

The US dollar is now worth about 24 percent less against the euro than it was in 2005, and Americans abroad are feeling every one of those percentage points. However, while the US dollar has been getting weaker and American business travellers, tourists, and US expatriates are feeling the pinch, American companies headquartered in the United States are seeing an increase in exports. Be¬cause this has been positive for the overall global economy, there appears to be two sides to the depreciating US currency.

The cost of goods

Americans with a taste for foreign-made products, whether it be a German-made BMW or a Swiss-made chocolate bar, are paying more—a lot more—for these products because of the current exchange rates. On the flip side, consumers outside of the states are profiting in a big way from the cheap cost of U.S. exports. US manufacturers are finding their products more competitive abroad, and many are thankful for the current situation.

According to the “IBM Pre¬liminary Profits Beat Estimates, Shares Jump,” from Reuters with additional reporting by Jim Finkle and Phillipp Golner in the online New York Times on January 14, 2008, IBM, Armonk, NY, has said that its unexpected rise in earnings in the fourth quarter of 2007 largely was because of very strong sales overseas. Boeing, Chicago, IL, which sells jets in US dollars around the world, also is seeing a boost in business thanks to the current exchange rates, according to Matthew Benjamin and Vivien Lou Chen in “Weak Dollar Boast Groth Without Fueling Inflation” featured on Bloom¬berg.com on October 8, 2007. Having large, multinational companies such as these thriving with the dollar at its current value is going to expand business on all levels, which is good news for shareholders and expatriates alike. These companies are going to keep boosting their international presence and that includes sending employees overseas into the “global economy.”

In fact, the 2006 “Global Reloca¬tion Trends Survey,” conducted by GMAC Global Relocation Services, Woodridge, IL, in association with the National Foreign Trade Council, Washington, DC, showed that more than two-thirds of multinational corporations surveyed actually had an increase in the number of workers be¬ing sent on international assignments, despite the depreciation of the dollar. That number was up from 2005, when just about half the corporations surveyed had shown an increase. This survey includes US based companies, as well as Euro¬pean based ones. While US companies are seeing a boost be¬cause of the increase in overseas sales, the current situation is allowing Euro¬pean companies to compete more internationally.

Expatriate compensation

An expatriate with experience in cities such as London, United Kingdom; Paris, France; or Berlin, Germany; who perhaps is thinking of retiring abroad, may need to reconsider as the dollar no longer stretches the way it used to. Although his or her post-assignment plans may have to be altered, he or she should not experience too much of an effect while remaining under his or her employer’s assignment policies.
A multinational company has many strategies available to manage its people on assignment, including some that will greatly lessen the effect of any changes in the dollar’s value relative to host currencies.

Dan Bostwick, vice president and corporate sales manager for HSBC Premier, New York, NY, said, “The underlying philosophy of expatriate compensation is that the employee should remain whole, neither gaining nor losing because of exchange rates.”

Keeping this principle in mind, multinational corporations have several options available for handling their expatriates’ salaries and allowances that will cover the many different economic scenarios that can arise. For instance, an employee can be paid solely in host-country currency, in US dollars entirely, or in a percentage between the two.

An expatriate living in Berlin for two years initially may jump at the chance to be paid entirely in euros with the current exchange rate, but he or she will be taxed on a portion of that foreign-earned salary. Pen¬sions or other home country-based costs still will have to be paid in US currency, thus making the adjustments more complicated and not as appealing as they might originally have appeared.
Being paid entirely in US dollars would not be an attractive option at this point either, because a paycheck for $2,500 is going to translate to €1,350 or less. Most relocation experts continue to see a willingness of workers to go overseas, yet they no longer are satisfied with salary paid entirely in US dollars.

Many companies that are new to the international scene, with no soph¬isticated policies in place, may have to get creative to keep their costs down and their employees happy. One option is to offer guaranteed exchange rates or “protection policies” for a certain percentage of the salary.

Another option is to split the salary between home- and host-country currencies, and readjust the split as the need arises. This method has been popular recently with companies bringing workers into the United States. Offering a split paycheck allows the employees to keep a significant portion of their salaries outside of the United States, while they enjoy the less expensive cost-of-living in host countries where the dollar adjustment is favourable. Other companies are going back to the use of the cost-of-living adjustment (COLA) index to manage the differences in the cost of living between the home and host country.

This practice allows an American-based company to pay its employee in US dollars while ensuring that the employee can maintain the lifestyle in the host country that he or she had at home. The COLA index is affected by both exchange rates and inflation, and is based on the changing cost of common items. The index is applied to the expatriate’s spendable income and mostly will make up for the difference in the prices of common goods. As the exchange rates fluctuate, the COLA will be updated and the employee can maintain a status quo in his or her quality of life.

The fluctuation in the COLA index, put out by several information suppliers, including the US Department of State, illustrates how cost of living has changed and, in most cases, increased in the last five years.

Chart 1 illustrates the cost-of-living index, taken from the US Depart¬ment of State, between Washington, DC, and six major world cities, and how it has changed since 2004.

In most cases, the cost-of-living index has increased since 2004; Tokyo, on the other hand, showed a decrease in its cost-of-living index. This is largely because of the low inflation and the weakening of the yen during the past five years. It actually now is cheaper for an American expatriate to live in Tokyo then it has been in more than 30 years; however, the overall trend is that living outside of the United States is becoming increasingly expensive for Americans.

Addressing fluctuations

Although the current value of the dollar is lower than it has been in more than a decade compared to the top 15 most-used currencies, most multinational companies have not seen a significant decrease in the interest of workers to go on both short- and long-term assignments abroad. The policies they have in place minimise the effects of currency fluctuations, such as the ones being experienced now with a weaker US dollar.

Most companies have not had to focus their efforts on major policy changes in response to a weaker dollar, but rather on assuring their employees that their salaries are not actually suffering as much as they might think. Many multinational corporations have had to deal with pushback from the expatriates they manage because employees do not understand the “science” of their pay structure.
Although most policies will have a system to deal with fluctuations such as these, many workers may hear about the weakening of the dollar and assume that their pay is suffering in some way. While this may be frustrating for human resource (HR) professionals dealing with these employees, simply providing information on how the policy operates may be enough to handle any questions or concerns that employees may have.

Depending on the international assignment policies put in place by a multinational corporation, their expatriates may or may not be feeling any effects from the weakening of the dollar. Major corporations have had experience with fluctuations of currency and inflation and, thus, are currently experiencing little to no effect at all in terms of their expatriate programs.

Business travellers, on the other hand, are going to find it very difficult to maintain the same travel budget as 10 years ago. A hotel room that would have cost them around $85 a night in 2002 now is approximately $140. Food, entertainment, and any other business expenses are going to make trips more costly than they have been in years. Even a single movie ticket for a lone traveller in European capitals now will cost as much as $26.

COLA, split pay, and exchange rate guarantees are not going to do anything for the traveller going to Paris for two weeks to meet with new clients. American tourists will also feel a pinch that they have not experienced in years. Europe always has been a pricey destination for American travellers, but the current value of the dollar has forced many to consider a new destination for their holidays this year.

Tourism coming into the United States, however, has increased considerably. As everything in America appears to be “on sale” to tourists coming in, it is not an uncommon sight to see foreign families filling empty suitcases with goodies from their visit to the United States. As evidenced, there was a noticeable increase in both the number of people and foreign languages being spoken on the streets of New York, NY, this past holiday shopping season. This increase in tourism is yet another reason why the weakening of the dollar may not be such a bad thing for the US economy after all.

Global business goes on
According to “Make the World Go Away,” by Nina Easton in the February 2008 issue of Fortune magazine, 79 percent of people polled either said that the United States currently is in a recession or will be facing one within the next 12 months. With this threat of looming recession, it is understandable that Americans are fearful of the weakening of the dollar. Although the dollar currently is weaker than it has been in more than 10 years, this is not the first time it has been this way and certainly will not be the last.

The constant fluctuation of exchange rates, inflation, deflation, and booming economies have forced multinational corporations to adopt policies for their employees that can handle the constant waves of change. The “global economy” always is expanding as technology allows people from opposite sides of the world to come together to do business. The deflation of the US dollar will not stop this, so companies must be able to adapt to current economic situations. Rather than scrambling to design new policies to fix ballooning expatriate salaries, companies may simply need to put more effort into communicating the science behind their pay structures to reassure their assignees.

Adjustments can be made to compensation policies, American tourists can find different low-cost vacation destinations this year, and the global economy can continue to grow with booming US exports and foreign corporations becoming more international. There are two sides to the depreciating US currency, and neither of them is as scary as it may first appear.

Claire Keogh is global HR associate with the National Foreign Trade Council, New York, NY. She can be reached at +1 212 399 7128 or e-mail ckeogh@nftc.org.

Reprinted with permission of MOBILITY Magazine, April 2008.