1. SPLIT PAY

First, there is a difference between “split pay” and “split delivery.” Split pay is an arrangement by which funds are paid to an assignee from both home- and host-country payrolls. Split pay is advantageous to the employee because it places much of the exchange rate risk on the employer. Split delivery refers to funds delivered to the assignee in the host country but not necessarily via a host payroll.

Employers choose a split pay method to:

• Protect against exchange rate fluctuations.

• Provide an assignee with a way to manage personal cash flow.

• Maintain compliance with local legal/labor laws, tax withholding requirements, or home-country pension plan obligations.

A variety of methods to apportion the split exist, such as paying some salary as well as host-related spendable income, corresponding COLA, and other allowances through host-country payroll. Some organizations pay a fixed amount in both locations or take a percentage of the assignee’s net compensation and pay via host payroll. There are complexities in administering a split pay system, especially if the home and host country are on different payroll schedules.

Some countries mandate a certain amount of the salary must be paid locally, as in Brazil and The Russian Federation, and often the salary must align with local wage laws. “Shadow payroll” may be set up when the assignee is fully paid by the home country, as the company mirrors the pay to calculate, remit, and report on host country taxes. Shadow payroll is also used to maintain home country pension or social security plans.

2. COLA

The COLA calculation supplied by data providers evaluates the price of goods, inflation, and exchange rates between the home and host locations. COLA can help mitigate currency fluctuations only if it is continually updated. Reviewing COLA more frequently, rather than on an annual or biannual basis, can capture more immediate changes in the exchange rate for locations experiencing flux. COLA is based on the Home Goods & Services Spendable (Home G&S), which is the base salary amount the assignee would spend on home country goods and services and is expected to spend in the host country. COLA adjusts the gap between the Home G&S and what the assignee needs in the host location. As the exchange rate fluctuates, the assignee receives more or less in the host currency for daily living expenses in his/her salary because COLA flexes to accommodate gaps.

When the U.S. dollar decreases in value against the local currency, the organization’s global accounting firm may recommend discounting the exchange rate used by the data provider, which will essentially increase the actual amount of the COLA payment, as shown in Figure 1.2

FIGURE 1: U.S. DOLLAR (USD) TO QATARI RIYAL (QAR)

STANDARD

RATE

DISCOUNTED

RATE

1 USD QAR 3.64 QAR 3.57 Exchange rate

QAR 1,000 QAR 1,000 Host country goods and services spending in local currency

QAR 1,000/3.64

QAR 1,000/3.57

= USD 275 = USD 280 COLA needed in home currency

inMOTIONSM: MITIGATING EXCHANGE RATE FLUCTUATIONS FOR ASSIGNEES

1 Sources:• Monique Neijzen. “How the Economic Downturn is Affecting Expatriate Pay,” Expatica. May 28, 2009. • Amy Parrent. “The Basics of Split Pay.” Mobility magazine, June 2010.

2 Laurie Jones. ”How Does the Dollar’s Dive Impact Assignees? Let’s Count the Ways.” KPMG LLP. The Expatriate Administrator, Summer 2008.

The consequences of U.S. dollar fluctuations against other currencies can have a major impact on international assignment costs. Budget-to-actual reporting can be di�cult when host country costs surge while an assignee’s purchasing power drops. Mobility, payroll, and HR should be concerned with the potential negative impact on the assignee’s productivity and focus if personal finances are disrupted. Globally active companies employ di�erent methods to help alleviate the e�ects of currency volatility.1

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3. DIRECT PAYMENT OF SOME LOCAL ALLOWANCES

This option has the employer responsible for the direct payment of some local allowances such as education fees or rent paid to the school or landlord. Payments are generated by local accounts payable or through the company’s Relocation Management Company (RMC).

This solution places the onus of absorbing exchange rate fluctuations on the employer versus the assignee.

4. TRUE-UP

At the start of an assignment some companies will set an exchange rate for money transfers and conversion of compensation. The rate will be reviewed annually, semi-annually, or more frequently in particularly volatile locations. If the difference in the average exchange rate over the review period is more than a certain percentage, the assignment exchange rate will be adjusted. The employer sets the level of compensation protected – for example, a fixed amount or percentage of salary, salary and resource utilized for the exchange rate, as well as the exchange rate period used (i.e., monthly average, quarterly average).

Others will protect against exchange rate fluctuations that may occur via travel and entertainment reimbursements. Net gains are offset by losses, with the net loss reimbursed up to a preset maximum amount. It is the employee’s responsibility to submit copies of expense reports, bank transfer documentation, and a summary of amounts transferred along with the corresponding actual exchange rates.

5. INTERNATIONAL BANKING SERVICES

Before the assignment begins, the assignee should establish a banking relationship with a company able to handle international wire transfers regardless of the methods that may be used by the employer to mitigate exchange rate fluctuations.

Many employers will reimburse a set number of wire transfers per month, and may reimburse direct costs. This requires considerable oversight by the assignee because wire fees are seldom the same and collecting relevant paperwork can be burdensome. A fixed allowance based on an average wire transfer fee may cover most costs in lieu of actuals.

Complex banking regulations, currency controls, and government mandates for nonresidents in the host country are additional reasons why an international banking service may be a good option. These programs facilitate the opening of bank accounts in the host location, establish and set international wire transfer fees, provide access to ATMs worldwide, and may help the assignee establish credit locally.

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TAKE ACTION

• Encourage all assignees to enroll in an international banking service.

• Review pay process for long-term expatriate assignees with other key internal stakeholders and determine if split pay is possible.

• Discuss paying some local expenses via a RMC or local entity accounts payable.

• Determine if there are any locations where a more frequent COLA update schedule is appropriate.

• Decide if a true-up process would be helpful.

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