When a business hires new employees as part of its global expansion, salary considerations are key; the contract will always be based in local currency. Put broadly, that business will need to perform a conversion from its currency to the employees’. In other words, if an organization is based in the United States but is hiring employees in India, the currency stated in their contract will be based not against the U.S. dollar, but India’s.
While this isn’t necessarily difficult to keep track of, it does introduce a fairly large variable into the conversation: annual currency fluctuation adjustments.
Annual Currency Fluctuation Adjustments 101
Generally speaking, currency valuations are based on the rate at which money is flowing into and out of a particular country. If there is a high demand for a particular currency, the value of that currency will rise; the converse is true, too.
A wide range of factors go into determining the value of a country’s currency at any given moment, including economic activity (or instability), international trade activity, speculation, and even tourism. Because of this, the value of some currencies changes more than others—which can cause a great deal of stress for global employees.
Countries like the United States and those in the European Union tend to have more stable currencies than most. For many companies expanding globally, however, such stable currency may not be available in their new markets.
Many employees may prefer that their salary be based on the U.S. dollar, so that these types of fluctuations are less likely to occur—or, at least, not in any way that causes great concern. The problem is that this isn’t usually compliant with labor laws in various countries, and employees’ salaries need to be based in local currency so that they can make any and all necessary contributions to local payroll.
If employees become concerned with these ideas, a quality partner organization in the area may suggest and/or assist with analyzing salaries on an annual basis to properly account for currency fluctuations as often as possible. At the very least, this will make sure that the employee is getting every dollar to which they are owed under the original terms and conditions of their employment contract.
Currency Devaluation Considerations
One problem is that oftentimes the value of a currency will degrade during a fluctuation adjustment. This means that even though the employee is getting paid the same amount on paper, the actual value of their employment is now less. In those situations, employers may provide quarterly bonuses to employees to account for this degradation. An experienced partner organization in the country into which a business is expanding will be able to help ensure proper payments.
Argentina, for example, has over the last few years experienced several, often dramatic currency fluctuations. Part of this has to do with the fact that inflation in Argentina reached 3.9% in August of 2018—the fastest pace that has been recorded since President Macri made significant changes to INDEC over the last few years. Consumer prices rose an astounding 34.4% in a year, and the peso closed at an all-time low of 39.55 per dollar. This type of activity affects both the amount of money the employee receives and the final cost to the employer for the assignment.
Countries like Argentina offer incredible opportunities for expansion—but they can also expose an organization to certain risks, like annual currency fluctuation adjustments. None of this is to say that a business should write off certain countries solely based on currency fluctuations. But drafting a contract’s payment terms in USD is often not an option because it is not in compliance with other countries’ laws and regulations.
Navigate Country-Specific Challenges with an Experienced Partner
Navigating country-specific currency fluctuations serves as a reminder of the value that an experienced expansion partner can bring to the table. Businesses can focus less on the way one country’s currency changes versus another, and can instead remain focused on keeping daily operations running—no matter where a global expansion may lead.
Velocity Global’s suite of global expansion services that includes its International PEO (Professional Employer Organization) solution has helped hundreds of clients break into new markets in over 185 countries—many in as few as 48 hours. Whether you’re hiring in Bangkok or Berlin, International PEO can help your organization realize its global expansion goals quicker and more cost-effectively than with traditional entity set up, meaning no teardown costs should you decide to leave your market. Ready to go global? Let’s talk.