During the past 12 months the U.S. dollar has gained value against several major currencies including the Euro, GBP, JPY and others. The 5-10% strengthening of the dollar coupled with accelerating U.S. price inflation has lowered expat COLA recommendations up to 20-30% in some locations including the Eurozone.
Bristol’s Global Compensation team is currently carrying out Q1 global pay reviews for our clients. Many are doing so concurrently with merit increases to base salary… and discovering they have a decision to make.
"Best" practice calls for COLA review 2-4 times annually in order to both protect the assignee’s ongoing purchasing power AND to ensure the company is managing expenses (i.e. not overpaying). In "actual" practice, however, adjustments may be spotty, nonexistent, or linked only to once-annual salary reviews - which for many companies is NOW.
COMMUNICATING DOWNWARD ADJUSTMENTS
A particular challenge arises when the latest data indicates downward adjustments to COLA. Some companies are understandably hesitant to implement and communicate these. There may be an (erroneous) expectation that cost of living “only goes up”, or they do not want to bring a negative message by communicating a “takeaway” to employees, especially alongside a salary increase.
Current case: One Bristol client has a cadre of U.S. expats throughout Europe and Scandinavia. Their last COLA update was in June 2021 when the dollar was at a particular low point and COLA payments were elevated. Upon 2022 review, Bristol advised the client to implenment the lower COLAs and carefully explained. The client approved, and Bristol took the lead in preparing the initial communications to assignees. The assignee population response was as expected: “The exchange rate changed only 10%, but you’re cutting my COLA nearly 30%? This can’t be right! Please explain.”
We followed up in preparing detailed individualized communications explaining the research, logic and mathematical formulas behind the adjustments (see excerpts below). The assignees gained a breakthrough understanding of the COLA payment system, and expressed their appreciation for the detailed communications and respect for the professionalism and logic of the approach.
The result: The client achieved cost savings, rebalanced their worldwide pay equity AND strengthened the bonds of trust with their employees by communicating with extraordinary care, respect and fairness.
We recommend our clients entrust these delicate communications to Bristol as we can save you time, money and help achieve your business goals. Companies may also work directly with their third-party data providers on these explanations, if necessary. In either case - do not hesitate to make these adjustments - it is the right thing to do.
Talk to Bristol! Bristol welcomes your comments and our Global Compensation team is available to assist. Please reach out to your Bristol Client Engagement Director, email@example.com or firstname.lastname@example.org.
APPENDIX: SAMPLE EXPLANATION
Below we provide excerpts of our Global Compensation team's explanations as they may assist you in your own communications. Bristol touched on points including:
The Goods & Services Differential (GSD) is a supplementary payment intended to compensate for the approximate difference between home and host country costs. The data is obtained from an internationally recognized third-party research organization - major ones include Mercer, AIRINC and ECA - to ensure fairness, competitiveness and objectivity.
The “balance sheet” compensation approach is designed to provide purchasing power stability in host country currency. The brief chart below illustrates how host spendable in EUR has been protected over the past year in response to fluctuating exchange rate and relative price inflation.
There is a four-variable mathematical equation for the cost equalization concept: [Home spendable (USD) plus differential (USD)] x (exchange rate) = Host spendable (EUR).
Example: U.S. to Munich, Germany, 2021-2022. We reference below a sample 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 individual is assumed to continue spending the same amount on G&S from salary as if they had not left the U.S.; the company then makes up any difference in foreign costs through the fluctuating GSD payment. Note in the chart below 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 nearly 30% from $1,030 to $756 monthly. (source - Mercer)
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 3,719