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Split Pay: A Solution to Expat Compensation challenges

Administering a "split pay" dual-currency model can simplify expat compensation administration, improve communications and save money.

22 June 2022

The last Consulting Corner (Feb 2022) presented one of the most challenging communications issues in expatriate compensation: communicating downward adjustments to COLA allowances.  That advice may be found here: https://www.bristolglobal.com/consulting-corner/expat-cost-of-living-allowances-downward-adjustments/

The article discussed the problems inherent in administering frequent pay updates and communicating steep reductions in allowances.  Since February those reductions have actually deepened as the dollar's continued strengthening coupled with accelerating U.S. price inflation have lowered expat COLA recommendations in many locations by over 50% in just over a year's time. The USD has achieved near 1:1 parity with the Euro (0.95 as of this writing), a 21st century high against the Japanese yen, and similar appreciation against virtually all other major world currencies.

Most companies pay their U.S. 100% in USD, and best practice calls for COLA review 2-4 times annually in order to protect the assignee’s ongoing purchasing power AND to ensure the company is properly managing expenses (i.e. not overpaying). The approach is designed to provide the assignee with purchasing power stability in host country currency.

The chart below illustrates how host spendable in EUR has been protected with regular pay adjustments in response to fluctuating exchange rate and relative price inflation. We  see that a typical U.S. expatriate in Germany would experience a reduction of COLA from over $1,000 per month in mid-2021 to $415 currently:

DATE     FX RATE    Home Spendable (USD)  +  G&S Differential (USD)  =  Host Spendable (USD)  = Host Spendable (EUR)

May-21     0.827                $ 3,500                          +            $ 1,030                     =          $ 4,530                      =        EUR 3,745

Aug-21     0.851                 $ 3,500                          +            $   903                     =          $ 4,403                      =        EUR 3,745

Feb-22     0.874                $ 3,500                          +             $   756                      =          $ 4,256                      =        EUR 3,720

Jun-22     0.950                 $ 3,500                          +             $   415                      =          $ 3,915                       =         EUR 3,720

In the example we reference a salary of $100,000 / family size 1 whose monthly home country spendable (the amount typically spent in the U.S.) is $3,500 per month; the company then makes up any difference in foreign costs through the fluctuating GSD payment. Note that host spendable in EUR is maintained at a relatively constant EUR 3,745 at each point in time, as a result of the differential declining from $1,030 to $415 monthly. (source - Mercer)

Some companies are understandably hesitant to implement and communicate such steep cuts, despite the accuracy of the calculation.  Is there a better way?  Yes!

SPLIT PAY SIMPLIFIES PAY ADMINISTRATION AND SAVES YOUR COMPANY MONEY

The split pay model for the same example dictates that rather than paying a fluctuating GSD payment in USD, the same effect is achieved by instead administering a two-part payroll measure: (1) deduct "home spendable" from home payroll (USD 3,500 in the example) and (2) deliver "host spendable" in local currency (EUR 3,745) to the employee's host country bank account. Voila - both numbers are relatively constant (typically only updated once per year) with exchange rate risk becoming an internal company accounting matter instead of an employee concern. 

The benefits: Simplicity, predictability, exchange rate risk protection, company cost efficiency,  and no more awkward "allowance reduction" communications.

We realize Global Mobility managers may have questions on the above. For further clarity and precise answers to your questions...

Talk to Bristol!  We recommend our clients consult with us as we can save you time, money and help achieve your business goals. We welcome your comments and our Global Compensation team is available to assist. Please reach out to your Bristol Client Engagement Director, mfoxwell@bristolglobal.com or info@bristolglobal.com. 

 

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