Recent foreign exchange fluctuations – most notably the rapid decline of the US dollar – affect all elements of compensation, and consequently the attraction and retention of key employees. However, most multinational organizations have not implemented solutions for mitigating the impact of currency fluctuations on current compensation programs for overseas employees, according to Mercer’s Impact of Weakening US Dollar on Compensation in Multinational Companies SnapShot™ Survey
Nearly half of responding multinational companies (47 percent) say the depreciating value of the US dollar has had a moderate to significant impact on their compensation programs.
“Foreign exchange fluctuations can have a substantial impact on compensation programs and policies,” said Rebecca Powers, principal at Mercer. “As the war for talent becomes worldwide, specifically for high-performing executives, organizations need a competitive compensation strategy that appropriately responds to shifts in currency for key employees around the globe.”
Mercer’s Impact of Weakening US Dollar on Compensation in Multinational Companies SnapShot™ Survey, examines the effect of currency changes on compensation programs. It includes responses from more than 60 multinational organizations, the majority of which have headquarters in North America and more than 20,000 employees.
Global pay rates
According to Mercer’s survey, equity-based long-term incentive plans, base salary and global mobility policies are the compensation components most impacted by currency fluctuations, specifically the declining value of the US dollar.
Significantly, the majority of respondents (70 percent) do not use US pay levels and dollar parity as a reference when determining pay rates for non-US based jobs.
“Too great a focus on US pay levels and dollar parity may result in executive pay that is no longer competitive in the changing global market,” said Laurent Papaix, principal at Mercer. “Most companies use local market peer groups for determining pay for non US-based executives.”
Of the pay components affected by the depreciating dollar, equity-based long-term incentive plans are impacted the most. Nearly three-quarters of responding organizations (72 percent) report long-term incentive plans denominated in US shares. Moreover, 86 percent of long-term incentive plans do not include an adjustment for fluctuations in the value of the US dollar.
Mr. Papaix noted that US equity programs could offer less value to overseas executives if grants are share-number based. A greater number of shares would be needed to maintain the same target value to these executives, which leads to increased costs and dilution for the employer.
According to Mercer’s survey, most multinational organizations have formal global mobility policies that include mechanisms for responding to fluctuations in currency. Nearly three-quarters of responding organizations (74 percent) have formal global mobility policies and the majority of these organizations (70 percent) have policies with mechanisms to address the depreciating value of the US dollar. In addition, about half of these organizations review their mobility programs annually, while the other half reviews them semi-annually, quarterly or on an as-needed basis.
To address the impact of foreign exchange fluctuations, the majority of responding organizations use cost of living allowance updates, while others review assignment packages when currency shifts exceed certain levels.
“Compensation is changing as mobility evolves with business needs,” explained Ms. Powers. “For overseas assignments, mobility programs must balance the needs of the employee and employer, and clearly define how the effects of currency shifts will be handled in each situation.”