Mercer can help mitigate the impact of cost-of-living fluctuations on your assignees’ purchase power. We will release our next cost-of-living surveys in May as planned and monitor the situation through our international network of correspondents.
Managing fluctuations: exchange rate and inflation
Two factors drive changes in cost-of-living indexes: exchange rates and the inflation differentials between home and host locations.
In time of crisis, some currencies might be viewed as safe havens. This has been the case during the first phase of the COVID-19 pandemic, when the USD rose against many other currencies. Unlike with regional crises, the global nature of the COVID-19 emergency means that countries are affected at different times and that currency volatility remains high. As of early April, the US dollar has already given up some of its gains as the epidemic has spread within the country. Find out more on the impact of exchange rate fluctuations.
Shortages of specific goods and ensuing disruptions in supply chains can drive the prices of goods and services up. At the same time, the provision of goods and services can be temporarily stopped or go through different channels (e.g. home delivery and web services). The final impact of these disruptions is uncertain and requires monitoring. This is even more the case as the supply chains for some goods are international. Price increases can results from disruptions that are happening in a third country that is not the home or the host location of the assignees. The cost-of-living index change is driven by the price differential between the home and the host locations, but sometimes prices might increase in the home location as well as in the host location, a situation expatriates might not be aware of as they focus only on the prices in their assignment location.
Exchange rate changes and inflation differentials can push the cost-of-living indexes in the same direction or they can counter-balance each other. However, in recent years exchange rate fluctuations have had more effect on cost-of-living indexes than inflation, except in some countries with hyper-inflation.
Communicating about cost-of-living: finding the right balance
In normal circumstances, companies review their cost-of-living allowances once or twice a year. The objective is to protect the purchasing power of assignees while avoiding a sense of uncertainty that would result from more frequent updates. During a crisis, mobile employees do not want to have financial worries on top of health and safety concerns. Their perceptions of their subjective purchase power is driven by the headlines in the news and what they see in a few shops. They often need reassurance even if there is little change in cost-of-living in their locations.
This expectation should not automatically lead to changes in assignment packages, but it might justify additional communication efforts. A fluctuation threshold can be used to assess the need for an update or at least for a new communication – some companies trigger a review when there is a fluctuation of more than 10% in the exchange rate or inflation differential. This review might lead to a change in the cost-of-living allowance, or if the fluctuation is judged temporary and the situation still unstable, a change might be deferred until the next Mercer Cost of Living data release or the next planned cost-of-living allowance adjustment.
Revising assignees packages: finding the right logic
The logic behind the cost-of-living allowance approach is to ensure that the purchasing power of the assignees remains stable during a long-term assignment (“no gain, no loss”). Similarly, during a short-term assignment, a per diem is provided to assignees to cover host-country expenses and avoid double costs, as the families of short-term assignees might stay in the home country.
This logic should guide decisions when dealing with unexpected situations. For example, in case of emergency evacuation, assignees might be relocated temporarily to their homes countries or even to third countries. They might be in a situation when they face additional expenses or double costs. In these cases, temporarily maintaining the cost-of-living allowance or even providing a per diem might be justified.
HR teams should ask themselves this question: are the company’s decisions creating additional costs for assignees that they would not normally have? If the answer is yes, some form of financial support is justified.