A Guide to Currency Fluctuation and Optimizing International Payroll

When you have a global business, you need to pay close attention to currency fluctuation to keep compensating your international employees fairly. 

What is currency fluctuation? Currency fluctuation refers to the variation in a currency's value as a result of market-driven changes in floating exchange rates. The top causes of currency fluctuations include inflation, interest rates, terms of trade, public debt, and economic performance. 

As exchange rates fluctuate, they affect an employer’s ability to pay foreign workers and increase or decrease an employee's salary purchasing power. Currency exchange rates should therefore be top of mind for businesses with international operations, or companies hiring remote workers globally.

Here’s our guide on navigating the intricacies of currency fluctuations to make financial management of your global workforce easier.

The Impact of Currency Fluctuations on International Salaries

Exchange rates can negatively or positively affect the compensation international employees and remote workers receive. 

For instance, foreign currency depreciation lowers the employee's salary amount in local currency, making it difficult to budget their living expenses. When foreign currency strengthens relative to the local currency, the employee salary increases, moving things in their favor.

Therefore, changing exchange rates may bring unexpected surprises for both the employer and the employee. That presents a challenge to companies with a global workforce. They may end up paying their employees less if the foreign currency depreciates, or pay more than they should if it strengthens.

Financial Consequences for International Businesses

If you have varying payroll costs because of currency fluctuation, it makes it difficult to properly budget for employee salaries. It will be especially difficult if the currency pairs have exchange rates that fluctuate often.

To that end, international business owners have to understand the specific approaches they can use to minimize how exchange rate fluctuation affects their businesses. They also need to establish who bears the burden if exchange rates move against either party.

Mitigating Currency Fluctuation Risks for Businesses

There are various currency hedging strategies to help businesses minimize the effects of changing floating exchange rates. They help set transparent salary structures, clearly defining who bears the burden or benefit when exchange rates fluctuate.

They include:

• Localization: The employee is paid a fixed salary amount in local currency. The business owner bears the burden of currency depreciation.
• Equalization: The employee salary is fixed on a foreign currency-based rate. The employee bears the burden or benefit of currency fluctuation.
• Employee packages: Companies create a provision for currency rate fluctuations to offer currency exchange rate protections.
• Offering dual or split payrolls: A portion of the salary is allocated in foreign currency, and the remainder in local currency. That helps spread out risk and minimize the exchange rate effect on the employee's salary.
• Working with a Global Employer of Records(EOR): EORs like Playroll are experts in payroll and compliance. They help you administer payroll in local currencies to mitigate the effect of currency exchange rates on employee salaries.

Using Currency Fluctuation to Drive Employee Retention

Ensuring your employees are paid fairly amid currency fluctuations can be a key driver of employee satisfaction and retention. That may mean allowing your workers to reap the benefits when exchange rate fluctuation moves in their favor.

Companies may also consider offering exchange rate protections to ensure that employee salaries maintain their purchasing power amid foreign currency depreciation.

A global employer of record (EOR) can help you make an informed decision on which currency hedging strategy to use to keep your global workforce motivated and satisfied.

Playroll's Approach to Currency Fluctuation

Exchange rate fluctuation presents a big challenge to international businesses. However, Playroll offers automated currency management features to help businesses navigate this problem.

We help companies pay their employees a stable income amid foreign currency depreciation with our payroll software that does all the complex currency conversion calculations on your behalf. It automatically adjusts monthly salaries pegged to different local currencies to ensure fair and accurate compensation.‍

Tackle currency fluctuations with Playroll solutions.

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