Recent news headlines such as  'First signs of economic recovery' and 'Shimmers of hope' may be optimistic. However, the economic downturn has already affected and continues to affect people in many ways. Expats in particular are sensitive to these economic changes as they deal with multiple economies and currencies and often receive (elements of) pay in a foreign currency. In these troubled times they have a lot more questions for HR and need extra support in understanding their allowances and how they are changing.

To illustrate the scope of the changes, we can look at Moscow, a major expat location which is currently ranked as the city with the most expensive rental costs in 2009. The Russian ruble has devalued considerably, with the USD-RUB rate having changed by 47 percent in the last year, of which 26 percent has been in the last three months up to April 2009. Moscow also experienced 11 percent inflation over the last year (surveyed expat inflation as opposed to local CPI inflation). As a result of these two factors combined, the Cost of Living (COL) Index for USA to Moscow has dropped by 51 points in one year, and 36 points in the last three months alone. Additionally, the expat rental market has seen a decrease in rents of 30 percent between November 2008 and February 2009.

Not only developing economies have been hit by the downturn; the changes have been felt throughout the world. The British pound and the Australian dollar have devalued considerably. High inflation was measured in Venezuela (30+ percent in 12 months). Rental markets have seen rents go down significantly in the last few months to half a year, in places like Singapore, Hong Kong, New Delhi, Dubai, London and Sydney.

This article deals principally with how HR managers who manage expat pay can respond to fluctuating allowances and minimise the effects on expats. Even though expat allowances always change, these times of economic downturn are extra challenging because of the amplitude and frequency of the fluctuations. With general concerns about job security, impending localisations, and other policy changes, expats are becoming increasingly concerned about their assignments and their compensation.   

The global economic crisis
Simply stated, a process that started in July 2007 with the US subprime mortgage crisis, and continued through the subsequent collapse of the housing bubble and a decline in the capital of many banks, has led to a global credit crunch. This economic crisis has had a strong effect on exchange rates and prices in several ways:

•    Central banks have adjusted their interest rates, influencing rates on loans and deposits.
•    Currency speculation has intensified.
•    Demand for certain currencies has dwindled. For example, China is hardly buying commodities from Australia anymore, which has caused the Australian Dollar to fall.
•    Lower demand for commodities has triggered changes in prices.
•    Import/export prices have fluctuated.
•    Governmental policies have been in flux.

In turn, exchange rates have a strong effect on expat pay. Expats transfer money between their home and host locations, their allowances vary due to exchange rate change and they mentally convert host currency to home currency on a daily basis. Higher prices at home or in the host country also lead to an immediate change in the Cost of Living Allowance  (COLA). Note: A COLA is also called a Goods & Services (G&S) Differential or Commodities & Services (C&S) Differential or Host Country Allowance (HCA) etc.

 
Source: www.oanda.com

The economics of expat pay
There are three primary economic factors affecting the elements of expat pay:

•    Home inflation
•    Host inflation
•    Exchange rate changes

The extent to which these factors influence expat pay depends on the orientation of the compensation system. The three most common orientations are:

•    Home: Home Based or Balance Sheet System
•    Headquarters: HQ Balance Sheet System
•    Host: Host Based or Host Plus System

Under the first two options, the home base salary and fringe benefits are kept the same in the host location (the same base salary for an equivalent position). Possibly a hardship and/or foreign service premium are paid as an incentive. In addition, the so-called 'equalised elements of pay 'are used to keep the expat ' whole 'compared to HQ or home.  These elements include a Cost of Living Allowance (COLA), a Housing & Utilities allowance, tax assistance, dependent education and relocation policies.

Under the Host (Plus) System, relocation policies and dependent education are usually provided. However, all other elements may be offered temporarily (during a transition phase, gradually or as a lump-sum) or not at all.

Exposure to volatility will vary according to the type of compensation system:

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The COLA protects home purchasing power, meaning that the expat is protected against the difference in costs between living in the host location and living in the home location. Any changes in relative prices (at home and host) and/or exchange rates are handled via adjustments to the COLA. This ensures that the expat has sufficient home currency to purchase the appropriate amount of host goods and services in the host currency. Other portions of pay that are not spent at the host location are protected in home currency, such as premiums, savings, and limited goods and services spending at home.

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