Question: How many dollars does it take to make a euro?
Answer: More than it used to. Or less, depending on how far back you go.
That’s the thing with exchange rates, they keep changing. At the time of this blog’s posting, you could swap one euro for $1.13. At various points in 2015, the euro-to-dollar exchange rate dropped below $1.10. Five years ago, however, a euro could get you more than $1.40.
For domestic employees paid in domestic currency (whether that currency is dollars or euros), bouncing-ball exchange rates are meaningless. For instance, let’s say your annual salary is $50,000, and your daily routine includes a Starbucks drink that goes for $4.00. That represents about 10 minutes of work. You’re paid in dollars, the drink you’re buying is priced in dollars, and the only thing that might change is what Starbucks charges for your favorite beverage.
Move the whole scenario to a European city such as Berlin, and you begin to see where currency differences can have an impact. First of all, your $50,000 salary translates to 44,248 euros when factoring in exchange rates, and a price of 4 euros would translate to about $4.50. Now your favorite drink represents closer to 13 minutes of work.
Jump backward to 2011, and the exchange rate’s impact becomes more pronounced. Your $50,000 salary is worth about 35,714 euros, and paying for a 4 euro drink with U.S. dollars would cost about $5.60. That means you’d be working about 20 minutes to cover the cost of the same drink.
And guess what, you can’t live on coffee alone, even in Berlin! You’ll probably buy real food, take the metro (or the U-Bahn, as Berliners call it) or spend an evening at the Salon zur Wilden Renate (Alt-Stralau 70 10245, the next time you’re in Berlin). You’ll have a lot fewer of those nights out at an exchange rate of 1 euro to $1.40 than a rate of 1 euro to $1.13.
Employers, of course, are aware of all this and understand that a loss in spending power will not make for a happy expatriate employee. They have various methods of addressing the issue.
For instance, employers can peg the exchange rate at a certain value so currency conversions don’t fluctuate for the employee. With the exchange rate locked in, the employee’s dollars will buy the same amount of euros at all times, and the employer will absorb any gains or losses that occur from changes in currency valuation.
Alternatively, employers can pay employees in host country currency. With a salary of 52,000 euros, for example, the employee would receive 1,000 euros every week, even if the cost in U.S. dollars changes from week to week because of variations in the exchange rate.
A third alternative is to pay expat employees in dollars and award bonuses to offset any disadvantageous currency fluctuations. The calculation of bonuses needed to cover changes in exchange rates can occur periodically
(monthly, semiannually), or the bonus process can be triggered whenever a disadvantageous currency fluctuation hits a certain mark, such as a drop of 5 percent.
Any of these will make your expat employees feel more financially secure and help prevent money worries from affecting their performance.
Bloomberg BNA’s International HR Decision Support Network provides resources, including labor and employment law primers on more than 70 countries, to help you stay compliant and develop policies for your international operations. Start your free trial today.
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