May 02

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 formula 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.

Article originally published here:  http://www.compensationcafe.com

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