By mid-September the US dollar had slid to a 3-year low against the Japanese yen of Y108:$1, continuing an irregular decline since its peak above Y140:$1 last summer. Since accurate expatriate allow-ances move inversely – but not equally – with exchange rates (see chart, p. 7), your company’s expat pay packages could be too fat and too thin – or both.

Most companies want their expatriate allowances to be fit and trim, but in a floating exchange rate world they can get out of shape quickly.

Consider 4 scenarios:

1. US expatriates, working in Tokyo and paid 100% in dollars. The rise in the yen means that their dollars are losing purchasing power in the marketplace (which they will be sure to tell you, if they haven’t already).

2. Japanese inpatriates working in the US and paid on a yen basis. By the same token, they may be overpaid. For either of these groups of expats, a recalculation of their allowances using a more current exchange rate may be warranted.

(Of course, no one knows – and currency analysts are divided – whether the dollar will continue its fall, or possibly turn around and strengthen against the yen. If that were to happen, the reverse would then occur: if you adjust those expat packages to today’s exchange rate, a stronger dollar 2-3 months from now would result in overpayment for the US expats in Japan and underpayment for the Japanese in the US.)

3. Multiple nationalities of expatri-ates – as so many companies have these days – make the situation more complicated, possibly geometrically so. As the recovery in Asia has led to the strengthen-ing of some Asian currencies against the dollar, for example, but not so much against the yen or each other, the purchasing power of each nationality in each host country differs.

Thus, if you have several nationalities of expatriates working abroad in different countries, you need to review each home-host combination in light of currency movements to see if your expat allowances are “fit.”

4. Multiple nationalities of expatriates in one location. This is most likely to happen in a regional headquarters type of operation. The change in COLA will be different for each of those nationalities, potentially causing friction or resentment. Third country nationals may feel they are being treated like second-class citizens.

The Bigger Picture

As with so much of expatriate compensation, from the details to the total design, the major dilemma centers around the contradiction (yes, contradiction) between accuracy and simplicity. And a major corollary issue lies in communication to, and under-standing by, the expatriate community.

The “simple” answer to exchange rate complications in expat pay is to deliver money where the expat is expected to spend it. Total housing costs and total spendable income, under this scenario, are delivered in host location currency. Hypothetical tax is deducted at source, and the remainder is paid in home country currency.

This does indeed largely eliminate currency fluctuation problems, because the expatriate is converting a minimum, if any, currency. Many companies, however, find this method impractical for a variety of reasons, and many expats do not spend their money in precisely those proportions, and so end up converting money anyway. Too, many expats simply feel more comfortable with dollars.

So expat managers face the policy issue of adjusting expat pay packages for currency movements. The essential problem is that the longer the exchange rate differs from the rate at which the allowances were calculated, the greater the cumulative variance, either plus or minus for the expat (and the reverse for the company). Similarly, the wider the difference in rates, the greater the variance.

Companies use a wide variety of currency adjustment policies. 3 main types are based on:

Time, e.g., every 3 months, or more frequently for countries with volatile currencies

* Size of the currency movement, e.g., plus or minus 5%

* Combination of both, e.g., ORC issues currency-adjusted tables (or indexes) when the movement equals (and is sustained at) 3% over 4 weeks, or 6% over 2 weeks.

An individual company’s solution is of necessity a compromise between greater accuracy and greater simplicity. The most “fit” allowances strike a balance appropriate for the company’s culture, with great attention to ensuring that the expats understand how currencies affect their pay.

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