Assignment allowances, such as cost-of-living, housing or transportation allowances are provided to employees to compensate for additional costs that result from their international assignment. Obviously, currency values fluctuate over time and therefore impact the value of expatriate assignment allowances. When the rates change dramatically, expatriate compensation will be impacted, sometimes positively and sometimes negatively. In cases where these assignment allowance amounts are larger, the impact is greater, and expats should let mobility departments know anytime there is a negative impact.
Most global mobility programs attempt to minimize the currency volatility issue for expatriates on assignment. Let's look at an example. When it comes to dealing with providing an expatriate a housing allowance, most companies will look to make the payment directly to the landlord in the host country currency, bypassing the need for the employee to be paid directly. In some cases, that may not be an option. So, when that is not an option, the housing allowance can be set and delivered in the host country currency either through a split payroll arrangement where the host country payroll makes the payment into the expatriate's host country bank account or a relocation management company can wire funds to the employee's host country bank account.
The reality is that a change in a currency's value has an instant impact on an expats life if they are earning in one currency and spending in another. If the allowance is set in the home country currency and paid to the employee's home country bank account, then the expat will have to transfer funds from the home country to the host country to ultimately make the necessary payments and this is when the employee gets impacted by the exchange rates.
Most all expatriate mobility programs have a solid approach and methodology for delivering cost-of-living allowances where the allowances get updated throughout the assignment. They partner with data companies like AIRINC, Mercer and ECA to monitor exchange rate volatility and those data providers will notify companies when specific rates fluctuate 5% or more as determined by the policy. Then, off-schedule adjustments can be made as warranted, keeping the noise in the program to a minimum.
When setting your expat allowance payment policy, you have to take into account country laws and currency transfer restrictions. As with many expatriation issues, there is no perfect solution that will fit all situations. However, a clearly defined policy will reassure your employees and make your job easier.
For further thoughts, check out our Think Outside The Global Comp Box whitepaper.
The following country combinations have had significant exchange rate fluctuations of 5% or greater in the past two months. UK to/from US UK to/from Brazil Euro Countries to/from Brazil UK to/from Middle East Canada to/from US It's important to monitor exchange rate volatility for all your assignees' country combinations and update their allowances accordingly. In the past two months, the above country routes have had significant exchange rate fluctuations of 5% or greater, a threshold AIRINC feels is significant enough to warrant cost-of-living allowance updates! If you have expatriates on these routes, we recommend you adjust their allowances as soon as possible.