Expatriate Compensation

Inflation

When something costs more each time you purchase it, you are a experiencing inflation.

We become particularly concerned when our income doesn't rise and our standard of living declines, because we are unable to purchase what we are used to. Expatriates often encounter this problem since inflation is not the same in all countries.

For example: If a U.S. expatriate is transferred to a country with a high inflation rate, and there is a lower inflation rate in the United States, the expatriate's spendable income in the country will decline (sometimes rapidly).

The following illustrates the difference in inflation rates between the United States and Brazil over ten years. In some years the differential was quite large. Keep in mind that while these differences are large, they are not as extreme as 2019 inflation rates in Venezuela (9,585.5%), Argentina (53.55%), Turkey (11.84%), and India (9.63%).

Allowances adjusted for inflation. To adjust for changes in exchange rates and inflation over time, companies need to review and change their cost-of-living (COL) allowances at regular intervals.

There are two variables involved with changing COL allowances:

1. exchange rate
2. inflation

Either variable can move for or against the expatriate's advantage.

How often should COL changes be made? The rate of COL change is a judgment call but should be based on the volatility of the exchange rate and inflation.

A good rule of thumb: Re-calculate the cost-of-living allowance when it appears that there is a change in inflation of 5% or more, or at least quarterly.

It may be useful to compare a portion of expatriate expenses to the prices of the same items in the home country. These items are not subject to the change in exchange rates, so many companies use an unchanging portion of expenses (usually 20%) to calculate the impact of inflation on cost of living.

Split payroll

To ease the concerns of volatile exchange rates and inflation, a split payroll method may be used for the expatriate.

In this arrangement, a portion of the expatriate’s pay is paid on the home country payroll, and a second portion is distributed to the employee on the host country payroll.

A typical split payroll is based on the following:

• Host Payroll: Expatriate's living expenses in host country
• Home Payroll: Remainder in home country (home mortgage and maintenance, college expenses, savings, etc.)

A split payroll is especially helpful when the expatriate has not moved family members from the home country. It will also help to eliminate costly bank wire transfer fees for expatriates.

Using a split payroll can also help to ease the equity problem between the expatriate and the local employees, since only a portion of the expatriate’s total pay shows up on the host country payroll.