Can’t You Just Convert the Currency?

Chuck Csizmar – CMC Compensation Group

It is human nature to look for simple solutions to perplexing problems.  Simple avoids confusion, keeps you “on message” and helps create greater employee awareness and appreciation of programs and policies. However, when you are dealing with the diversity and complexity of international compensation it is just not that easy – nor should it be.   For those seeking the simple life it can be difficult to understand and accept that each country operates in a different environment from the next.

Perhaps because of its long history of isolationist tendencies, or perhaps due to a bit of Yankee arrogance, but US managers tend to struggle with the challenge of this concept more than other players on the global scene.

For the most part US Managers do not want to hear that pay levels in Finland, or Argentina or Tunisia are different from the US.  They would rather treat everyone the same, call it globalization and consider themselves a one-world player.  Many push an agenda of simplicity that is in fact a misleading distortion, will be a costly strategy to implement and its results will more than likely irritate key talent within their workforce.

Consider the senior manager who simply wants to convert a foreign national’s salary into US dollars – based on a concern with what they call “internal equity”?  The assumption is that everyone pays approximately the same for an “XYZ Manager”.

Other considerations:

  • If simple conversion was a viable approach, why do we not see such formulae prominently displayed by salary survey providers?
  • Employees will be skeptical of the simplistic approach, as in their mind too many local realities would be ignored in favor of what is perceived as the Company somehow saving money
  • Lacking a strong correlation you will either needlessly increase your compensation costs, or under-value your employee talent and risk disengagement – or worse

I once developed a formulaic approach that explained to a COO why he could not (should not) establish internal equity between the US and the UK by simply converting GBP into USD.   I factored in a host of elements, including local taxation, competitive pay levels, incentive practices, cost of living, required social charges, benefit costs, etc. to make my case.   My point was that a simple conversion would be a distortion of the economic realities that drive pay levels in both countries.

Sad to say, but the explanation was ignored and the COO, though he acknowledged the logic of my argument, continued to prefer a simple conversion to establish relative values in his own mind.

To operate successfully on a global basis management needs to understand, to truly believe that each country operates like a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 comparison with any other country a distortion that will cause you to either over spend or under spend your reward dollars.  Either result should be avoided.

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9 responses to “Can’t You Just Convert the Currency?

  1. Try to add in equity-based rewards world-wide, and it gets even more complicated. I worked with a multi-national hospitality company that wanted every employee, around the globe, to own company stock. When they figured that a single share of stock had a value equal to 10% of annual pay for lower-level employees in China, they knew this was not going to be a simple exercise.

    • You make a good point, Dave – and at the same time illustrate another example of a simplistic agenda. I once worked with a so-called “global” company (whose mindset was actually just a US firm with international operations) who insisted that worldwide all executives at certain levels receive the same target incentive opportunity. They ignored the differing common practices in multiple countries – some paying more, many paying less. This simplistic practice *was* easier to administer, but cost a great deal, and the extra spend added little by way of ROI.

  2. Based on our practical experience with the European market, we reached the same conclusions about the need for this kind of flexibility across cultures and geographies. Sales territories which do not necessarily coincide with a country’s borders is a common concern.

    In light of that, as well as differing regulations, practices, etc., one needs both the right policy and the right tool. The tool should support flexible policies while making them easy to administer (which is the usual roadblock and the reason simplistic solutions are used). When considering a global compensation management platform, you need more than just double-byte character support and the ability to store different currencies. You really need a profile of each employee that tells you their earnings currency, payment currency (can be different), functional territory, geographical/legal location, and language. Then you can craft compensation rules that are appropriate for the local market and the individual.

    Implementing a truly global policy requires a truly global tool. Our solution (which incorporates all the above) is Excentive, http://www.excentive.com.

  3. Holly M. Cleary

    Converting currency will indeed get you into trouble and could throw off the equity of your international workforce. You must look at the market when pricing the role in the country and look a total remuneration. Next you need to consider the country’s statutory requirements such as mandatory profit sharing like Mexico or rich benefit plans. Looking at where the incumbent currently falls in the range and how equipped they are for the new role will help you place them appropriately in the international grading structure or make a sound recommendation for salary based on market data you obtained earlier. Finally, consider your company’s pay practice as well as the company life cycle in that country to determine the best compensation package.

  4. Pingback: Global Salary Budgeting – Smart Approach or Misguided Shortcut? « International HR Forum

  5. Clive Wright

    I agree with all that Chuck says but let’s also look at another aspect that is equally important. Chuck talks about the comparative salary levels but you also need to consider the design of rewards in the organisation. In a global organisation there may be a desire to design reward so that it treats people equitably wherever they are; this may cut across the need to reward people in the same way as others in the local country market.

    There may be nothing wrong in having the same levels of bonus for everyone at a certain level in the organisation. This may not result in some people being treated in line with local market practice, but the messages that it delivers to employees may be more important. What is important is that overall, i.e., at a total compensation level with benefits and perqs included, the package is right for the relevant market which for most is country based, but for executives may be more international than local. Once you have the right total package and look at the various elements you then have to start to earn your money.

    Reward is an art rather than a science so this is the time you start to look at the package and determine what makes sense for the company and the employee. Setting the package too high does the company no favours and setting it too low is wrong for the employee, and if they choose to leave is also wrong for the company.

    It’s all a rather delicate balancing act; simplicity may be attractive but one way or another it’s very costly.

  6. Jacob Borgholm

    Well, that’s why C&B is a HR discipline….
    Most HR generalists are not that strong of the numerical aspects of life and that can lead to interesting discussions.
    This highlights the need for communication skills in C&B professionals.

    We need to make our stakeholders to understand the basics of our profession and that’s not always easy, but nevertheless an important job to do.

    • You have the right of it, Jacob. HR generalists in general tend to avoid the numbers and associated “black magic” of Compensation, while we specialists remain tongue-tied and for some reason reluctant / unable to get out there and explain ourselves. Not a good combination at all.

  7. The big challenge for HR of any global organization is fixing compensation & Benefits for an employee when he is moved from one country to another country. HR negotiates salary at the time of recruiting an employee considering the prevailing pay levels, cost of living, social benefits, taxes, allowances, etc. After some time, when he is moved to other country, the entire salary structure differs and when he is called back, the salary factor goes high and organization cannot pay single penny less than the salary & benefits that he enjoys. HR professionals should identify a way to manage it.