How Can We Peg Local Salaries to the US Dollar Like Expatriates? Seeking Guidance!

At my place of work, we would like to 'peg' all salaries to the US Dollar. Does anyone have any write-up on how to go about this, please? We want to denominate all the local salaries in the same currency as that of expatriates.

Thank you.

Are the expats outnumbering the local workforce? Why don't you peg the expats' salaries in INR? If your company is located in India, it should be in INR, which is my opinion.

Regards,
Pon

We want to bring about some parity in salaries and compensation because of inflation, which really eats into the salaries of local staff. If we put it all in dollars, inflation is more or less the same.

It is just confusing my tiny brain. If you pay in INR by converting the Dollar value to INR, how are you taking care of inflation? Is the dollar not influenced by inflation? First, explain what inflation is and how it is affecting your salary structure. I am not an economist but curious to know from you.

Regards,
Pon

If your company is operating or doing business in countries outside the US, the general mode of compensation payment is the local currency. However, there is no obstacle in using the US dollar as a reference point for an organization's compensation scheme, especially if the intent is to establish a certain sense of "parity" or equity.

In our international consulting business and practice, we always use the US dollar as our international pricing rate. However, whenever we are paid, we do not object to receiving the local currency equivalent of the agreed US dollar fee for the project.

Compensation System Design

HR practitioners must not forget that in designing the compensation system of an organization, it must always take into consideration the basic compensation principles. In this instance, the principle of external equity (or parity with the local labor market), which is usually expressed in terms of the local currency value, must always be considered. Hence, the US dollar equivalent of the local labor market median rate is the appropriate reference point. To use the US dollar mainland labor market rate or even the US Head Office dollar market rate is disadvantageous to the company. Only international organizations (like the UN, WB, ADB, and similar international organizations) peg all staff salaries strictly to one international currency, like the US dollar, regardless of their branch/office/staff location around the world.

Best regards from the rainy city of Metro!

Regards,
Ed Llarena, Jr.

Managing Partner

Emilla International Consulting Services

(Helps improve corporate governance worldwide)

Many thanks for this very insightful comment. What I have done is to suggest a bank rate (exchange spot rate) at the beginning of each month when salaries are being computed, at which locally recruited staff will have their salaries pegged. There will be a bit of variation in the exchange rate, but this will be taken care of.

Thank you all for your comments.

You can work it out backwards. Fix the first salary in INR. Every month, convert INR into Dollars and accordingly prepare the salary statement. Every month, INR will not change, and the Dollar will change according to the Rs. value.

Over and above, if you do otherwise, then based on the dollar rate you fix, sometimes you may have to pay less salary compared to the last month, which is not allowed as per the statutory norms.

Using the monthly exchange rate as the basis for salary computation would be a very tedious process. This will be easy for very small organizations but would be difficult for big ones. Moreover, currency exchange rates are very volatile, and the fluctuations are unpredictable. Hence, if there is a sharp decline in the rate, there is indeed a danger that in a certain pay period, the employee's pay would be less than the previous amount. This can become a legal issue if your country has a "non-diminution" provision in your labor law.

What is being done by many companies (who want to make sure that the purchasing value of their employees' salary is not eroded by inflation) is to make an adjustment on a year-to-year basis—using the country's annual average inflation rate as the adjustment factor. This is usually done simultaneously with the merit and/or seniority increments given to employees. To be meaningful and to get the actual intent, the annual merit increase rate (e.g., 3%) should be added to the average inflation rate (e.g., 6.3%) of the past year.

But, then again, this decision must always consider the 3rd and 4th compensation principles of affordability and sustainability—because an increase of 9.3% in the total monthly payroll cost (given as an example above) can impact the company's bottom line and create problems, especially if it will affect the organization's expected profitability and lessen the shareholders' expected returns. It can even cost the HR Director and the CEO their jobs.

Regards,
Ed Llarena, Jr.
Managing Partner
Emilla International Consulting Services
(helping improve corporate governance worldwide)