If your business has international operations, you’re likely all too familiar with the uncertainties of the exchange rate. Today, the exchange might be high, but tomorrow, it might take a tumble. Your buying power can increase and decrease at the drop of a hat.
Managing these currency fluctuations is particularly important when it comes to paying your international employees. Here are a few tips you can use to manage these changes in the value of currency as you continue to employ and pay people in international markets.
1. Consider Paying in the Local Currency
One issue employers sometimes face is the question of which currency to pay in. Many favour paying in their own currency versus the local currency. This is often the case for employers backed by a relatively stable currency, such as the US dollar.
Almost every other currency experiences volatility, although to varying degrees. The Canadian dollar, for example, has been weak against the US dollar for some time now, although there was a period when Canadian currency achieved parity with the US dollar. The euro is traditionally very strong, but economic crises in Greece, Italy, and other EU countries have affected the exchange rate. Brexit has been predicted to cause fluctuations in the pound and the euro alike.
Paying in the local currency often isn’t attractive for the employer because its value against the home currency may increase or decrease. Nonetheless, it keeps your employees’ wages stable against these changes.
In some countries, you’ll be obligated to pay in the local currency by law. Always check the regulations to ensure compliance. Even if you’re allowed to pay in another currency, it’s sometimes a better idea to pay in the local currency.
2. Keep an Eye on Inflation
Inflation erodes the buying power of currency within its home economy. Argentina in 2018 provides an excellent example. Consumer prices increased over 47 percent.
What does that mean? If you paid your employees one Argentine peso, they could buy 47.6 percent less with it in 2018 than they could in 2017. Their salary is worth less than it is on paper.
One way to deal with this is to issue bonuses or adjustments on a regular basis. You may opt to do this annually or even quarterly to keep pace with inflation. This allows your employees’ wages to maintain their buying power.
3. Work with an Experienced Partner
What else can you do to ensure you’re dealing with currency fluctuations adjustments properly? Perhaps your best option is to work with an experienced partner. This partner is often familiar with the market and the country you’re operating in or looking to expand to. They can advise you on law and compliance, as well as help you monitor matters of currency.
Professional employer organizations have already helped other companies like yours through currency fluctuation adjustments, and they know the best way to handle them.
4. Choose What to Protect
If you offer your employees packages, such as healthcare benefits or assistance with the costs of living, you’ll need to choose what elements of this package to protect.
Protecting salary is usually a good choice. You may decide to let the value of other benefits you’re providing erode in order to keep employees’ salaries in line with inflation.
5. Establish a Guaranteed Exchange Rate
Another thing you can consider doing if you want to protect against currency fluctuation adjustments is to establish a guaranteed exchange rate for your employees. This can protect against small fluctuations in the market, but it poses a larger risk if the currency experiences extremes.
If you’re not sure what your best option is, get in touch with the experts at a professional employer organization in the US or Canada. We can help you evaluate the situation and determine the best solution for your business.