Can't You Just Convert the Currency?

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 their long history of isolationist tendencies (check your History books), or perhaps it is 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 world stage.

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 blind simplicity that is in fact a misleading distortion, will also 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 base 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" - only the currency differs.

In their drive for administrative ease they tend to ignore several warning flags:

• If a simple conversion was a viable approach, why are such formulae not prominently displayed by salary survey vendors?

• Employees will be skeptical of this conversion strategy, as in their minds 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

While working overseas several years ago I developed a formulaic approach that explained to my 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 his preference for a simple conversion to establish relative values in his own mind.

As anticipated, this type of head-in-the-sand thinking created a host of costly pay decisions and numerous employee relations issues on both sides of the Atlantic.

To operate successfully on a global basis management needs to understand and firmly believe that each country operates as a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 rewards correlation 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.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Editor's Note:  We are pleased and proud to welcome Chuck to our Cafe team of core contributors!  

Image: Creative Commons photo "Currency Signs" by nicolasnova

Comments

[working girl]

So true and timely! If you paid someone a US salary in some locations, they would live like kings while some of your local folks can barely make ends meet. A word of caution, however: I once worked with a team in a country where everyone earned on average 20% below HQ and they found out about it. Lots of HR activity ensued and an equity adjustment soon followed.

[Chuck Csizmar]

I think you really need to understand that each country is unique, before you can grasp that pay equity stops at the border. Even attempts to provide balance through Total Rewards (vs. basic pay)fail to consider all the complexities at play.

Sigh. We are a simple people, always trying to simplify and boil things down to the basics. If only the world operated that way - wouldn't that be nice?