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September 13, 2016

© ECA International 2016Sep-13-16

Managing expatriate allowances when currencies are fluctuating


WORLDWIDE ERC® WEBINAR

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Today’s Presenters

Michael Witkowski – VP Americas

Sahirah Dixon – Client Relationship Manager


|

Agenda

Latest exchange rate and inflation figures – major movements

Global inflation highlights

Delivery of pay: options and their impact

Methods to protect against exchange rate fluctuations

Using a guaranteed exchange rate

Interim reviews: establishing trigger points

Reconciliation

Questions

Sep-13-16 © ECA International 2016

|

About ECA - What we do

Four service pillars:

© ECA International 2016

Software

Assignment

management

system

Database &

calculations

Reporting

Costing

Data

Subscription

Data reports

Calculator

Bureau Service

Consultancy

Policy review

Accommodation

projects

Benchmarking

Salary & Benefit

surveys

Service

Training

Courses

Webinars

Conferences

Sep-13-16

|

FX rates and inflation in the news


|

Brexit – impact on assignees

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

Performance of USD

GBP EUR

Brexit

US dollar

Performed well

Strengthened or remained stable

against majority of currencies

GB pound

Uncertainty surrounding Brexit

vote

130 currencies strengthened by

5% or more vs GBP in 2016

Euro

Steady against the USD.

Not significantly impacted by

Brexit.


Keep calm and carry on!

|

Global inflation trend

Overall low and decreasing

Regional variation

Current Trend: More countries experiencing inflation above 10% or below 0.5%


0%

2%

4%

6%

8%

10%

12%

14%

16%

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

Annual inflation by region

World

Europe

Asia Pacific

North America

Middle East and Africa

Latin America

Central Asia

Sep-13-16

|

Interim survey locations


South Sudan

Currency plummeted

• Peg removal

• No longer any need for dual

indices

Biannual price increases of 150%

USD 1 = SSP

September 2015 3.15

December 2015 18.7

March 2016 30

June 2016 39

Venezuela

New exchange rate system

• New DICOM rate allowed to float

• Now only publishing rate most relevant to assignees

Shortages and rampant inflation continue

150

350

550

750

950

1150

USD 1 = VEF…

Simadi/DICOM Black market

Sep-13-16

|

Interim survey locations


Angola

Affected greatly by oil price drop

Kwanza weakened significantly – at all time low against dollar

Biannual price increases measured at nearly 20%

Rising inbound indices

Mozambique

Low pricing in commodities market

Metical lost over 20% against major currencies

between March and June

Rising inflation – biannual price increases

measured at 10%

Lower inbound indices

115

125

135

145

155

165

175

US

D 1

= A

OA

…

Movement vs USD35

40

45

50

55

60

65

US

D 1

= M

ZN

…

Movement vs USD

Sep-13-16

|

Why do exchange rate movements matter?

Assignees may be adversely affected

COLA no longer protecting purchasing power

To remain competitive in the market

Potential cost increases to the company

To keep costs down


|

Question?

What would you consider a big enough exchange rate movement to

trigger a review?

A. 5%

B. 10%

C. 15%

D. 20%


|

Unscheduled reviews


0% 20% 40% 60% 80%

Home countryinflation

New tax rules

Host countryinflation

Exchange ratechanges

What triggers unscheduled reviews?

Host country based/ 'local plus' approach

Home country based build-up approach

13%

57%

14%

16%

Managing exchange rates

Split pay

Specified change triggers review

Monthly spot or guaranteedexchange rate

Price inflation trigger:10% to 15%

per annum

Exchange rate trigger: 10% or 5%

(over 3 to 6 months period)

Sep-13-16

Source: Expatriate Salary Management Survey 2015

|

Delivery options

Managing exchange rate changes: which element do you need to

protect?


100% of assignment

salary paid in home

currency

Protect remittances to

host country

100% of assignment

salary paid in host

currency

Protect remittances to

home country

Split pay

delivery

Both

elements

are

protected

Pay in a third

country

currency

Fluctuations

between third

and home/host

country

currencies

Sep-13-16

|

Currency of delivery


40.2%

19.5%

4.6%

2.4%

15.8%51.2%

39.4%26.8%

Home country based approach Host country based approach

All in home country currency

All in host country currency

In third country currency

Package split between home and host country elements


Sep-13-16

Currency of delivery vs policy approach

|

Currency of delivery – pay elements


Home tax and

social security

Spendable income

Housing and savings

Net

Home

Salary

Notional home salary

Host package

Host tax and

home social security

Assignment benefits:

Accommodation

Education

etc.

Assignment allowance

Location allowance

Spendable income

COLA

Housing and savings Net

Assignment

Salary

Home related

component

Host related

component

Sep-13-16

Currency of delivery by assignment pay elements

|

Currency of delivery (based on March 2016 Fx rate)


|

Delivery via split pay (using Sept 5th Exchange Rate)


March 2016 USD 1 = GBP 0.7068

USD GBP

September 2016 USD 1 = GBP 0.7526USD GBP

September 2015 Fx rate: USD 1 = GBP 0.647716 %

change

|

Delivery in home country currency (using Sept 5th

Exchange Rate)


March 2016 USD 1 = GBP 0.7068 USD GBP

September 2016 USD 1 = GBP 0.7526

|

Delivery in host country currency (using Sept 5th

Exchange Rate)


March 2016 USD 1 = GBP 0.7068 USD GBP

September 2016 USD 1 = GBP 0.7526 USD GBP

|

What rates are used in the calculation?


40%

53%

7%

Prevailing exchange rate at time of calculation

Company/organisation-approved rate

Any other option


Sep-13-16

Most common exchange rate types used by organizations in balance

sheet calculations

|

Methods for protecting against FX rate movements

Guaranteed exchange rate

Low-maintenance version of split-pay

When employee makes currency swap, company uses a fixed exchange

rate

Alternatively, the amount being delivered changes on a monthly basis to

deliver what is needed

Interim reviews

Company sets a “trigger point”

The salary is re-calculated if the trigger is breached

Base salary remains unchanged until normal salary review

Periodic reconciliation

Employer reconciles periodically (every six months or at the end of the year)

Employer will generally allow employee to benefit when movement in his/her

favor


|

Exchange rates – summary

No universal solution! Yours will be unique to:

Your organisation

The countries you have presence in

Your payroll capabilities


|

ECA Insights


It’s a volatile, quick-changing world: keep an eye on exchange rates

and inflation news by signing up to our blog updates.

www.eca-international.com

[email protected]

[email protected]

http://www.eca-international.com/



|

Questions & Answers


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