The world is changing as both organisations and individuals become increasingly connected and new markets emerge onto the international business stage for the first time. But while such change is undoubtedly positive in growth and expansion terms, it is also creating a host of new challenges for payroll managers.
Not only is it necessary to manage overseas payroll efficiently, but it is also important to find ways to pay employee expenses in different countries and in a range of different currencies. A chellenge here is that expenses issues for expats are often quite different to those for employees who stay predominantly in their domestic market.
For instance, while local staff might claim for a train journey or a client lunch on expenses, an employee moving overseas will need support in paying more significant day-to-day costs such as renting a new home or paying for their utilities. As a result, their employer generally pays these kinds of bills directly to a landlord or utilities provider rather than reimbursing them.
So it is easy to see how complications can arise. Not only is it necessary to pay out larger sums than usual to cover basic needs, but payroll managers also have to keep up to date with ever-changing local payment regulations and exchange rates. Here are some other considerations that are worth thinking about in this context:
1. Currency fluctuations
Currency values are in a constant state of flux and so need to be monitored on a daily basis. But it is not just sales that are affected by exchange rates. Business mobility teams put together cost projections based on current exchange rates for each employee sent on an international assignment.
For example, if they are moving to France for two years on a salary of €50,000 per annum and the exchange rate stands at €0.85 to US$1, their employer would expect their annual wage to be US$58,750 - or US$117,500 over 24 months.
But unexpected exchange rate shifts can make a material difference to such projections.
As a result, it makes sense to adopt a hedging strategy instead of playing chicken with the currency markets. Hedging involves purchasing in advance the currency you will need at a later date in order to avoid the risk of it dropping in value and becoming more expensive. Taking this tack makes it easier to come up with accurate and less risky cost projections.
2. Operating a split payroll
Companies sometimes operate a ‘split payroll’ for staff members who are on overseas assignments. For example, if their rent and utilities are paid for as an expense, their living costs will be significantly reduced.
As a result, they may request that a portion of their wages be paid into a separate bank account in their home currency. This account may then be used to cover ongoing expenses at home such as mortgage payments or supporting family members who have stayed behind.
Employees also sometimes choose to split their salary into separate currencies if they are assigned to a country where the local currency is not particularly stable. Part of their wages would then paid in their home currency in order to minimise their exposure to the volatility of the local currency.
But operating a split payroll does require payroll managers to be twice as diligent in ensuring that payments reach their intended destination as usual. They will also need to make sure that the necessary taxes are paid in both countries to ensure they comply with local regulations.
3. Compliance controls
The amount of time it takes for payments to be made is often affected by the maturity of the local banking system, which will vary from country to country. It is usually simpler to pay workers based in Europe than those situated in Algeria, for instance.
One of the leading causes of late payments relates to compliance controls. For example, cross-border payments are often routed through intermediary banks before reaching their destination, adding an additional regulatory compliance layer to each payment.
Using a country’s local payment infrastructure removes the need for an intermediary, however, and is a far more reliable, and cost-effective, means of ensuring that payments are not held up. Exercises such as the ‘penny test’, in which a small amount of currency is transferred to a new beneficiary in a dummy run, can help to ensure there are no complications when sending important payments.
Conclusion
International expense management is a complex area that has a big impact on people’s daily lives, which means that payroll managers need to be prepared.
The best advice is to thoroughly research each new country’s financial infrastructure and regulations well in advance of sending a fresh employee to the area. If possible, use a local payments network for disbursements, employ hedging strategies to minimise the risk of volatile exchange rates and, where necessary, consult a specialist.
“The amount of time it takes for payments to be made is often affected by the maturity of the local banking system, which will vary from country to country.”
Nat Davison has 13 years’ experience in the currency world. He has held senior positions at a number of specialist companies in London, but relocated to Sydney between 2008 and 2010 to set up a new dealing hub in Australia. Nat subsequently joined Frontierpay as a partner and is a regular contributor to the UK national press, which includes The Financial Times and Telegraph newspapers.
The world is changing as both organisations and individuals become increasingly connected and new markets emerge onto the international business stage for the first time. But while such change is undoubtedly positive in growth and expansion terms, it is also creating a host of new challenges for payroll managers.
Not only is it necessary to manage overseas payroll efficiently, but it is also important to find ways to pay employee expenses in different countries and in a range of different currencies. A chellenge here is that expenses issues for expats are often quite different to those for employees who stay predominantly in their domestic market.
For instance, while local staff might claim for a train journey or a client lunch on expenses, an employee moving overseas will need support in paying more significant day-to-day costs such as renting a new home or paying for their utilities. As a result, their employer generally pays these kinds of bills directly to a landlord or utilities provider rather than reimbursing them.
So it is easy to see how complications can arise. Not only is it necessary to pay out larger sums than usual to cover basic needs, but payroll managers also have to keep up to date with ever-changing local payment regulations and exchange rates. Here are some other considerations that are worth thinking about in this context:
1. Currency fluctuations
Currency values are in a constant state of flux and so need to be monitored on a daily basis. But it is not just sales that are affected by exchange rates. Business mobility teams put together cost projections based on current exchange rates for each employee sent on an international assignment.
For example, if they are moving to France for two years on a salary of €50,000 per annum and the exchange rate stands at €0.85 to US$1, their employer would expect their annual wage to be US$58,750 - or US$117,500 over 24 months.
But unexpected exchange rate shifts can make a material difference to such projections.
As a result, it makes sense to adopt a hedging strategy instead of playing chicken with the currency markets. Hedging involves purchasing in advance the currency you will need at a later date in order to avoid the risk of it dropping in value and becoming more expensive. Taking this tack makes it easier to come up with accurate and less risky cost projections.
2. Operating a split payroll
Companies sometimes operate a ‘split payroll’ for staff members who are on overseas assignments. For example, if their rent and utilities are paid for as an expense, their living costs will be significantly reduced.
As a result, they may request that a portion of their wages be paid into a separate bank account in their home currency. This account may then be used to cover ongoing expenses at home such as mortgage payments or supporting family members who have stayed behind.
Employees also sometimes choose to split their salary into separate currencies if they are assigned to a country where the local currency is not particularly stable. Part of their wages would then paid in their home currency in order to minimise their exposure to the volatility of the local currency.
But operating a split payroll does require payroll managers to be twice as diligent in ensuring that payments reach their intended destination as usual. They will also need to make sure that the necessary taxes are paid in both countries to ensure they comply with local regulations.
3. Compliance controls
The amount of time it takes for payments to be made is often affected by the maturity of the local banking system, which will vary from country to country. It is usually simpler to pay workers based in Europe than those situated in Algeria, for instance.
One of the leading causes of late payments relates to compliance controls. For example, cross-border payments are often routed through intermediary banks before reaching their destination, adding an additional regulatory compliance layer to each payment.
Using a country’s local payment infrastructure removes the need for an intermediary, however, and is a far more reliable, and cost-effective, means of ensuring that payments are not held up. Exercises such as the ‘penny test’, in which a small amount of currency is transferred to a new beneficiary in a dummy run, can help to ensure there are no complications when sending important payments.
Conclusion
International expense management is a complex area that has a big impact on people’s daily lives, which means that payroll managers need to be prepared.
The best advice is to thoroughly research each new country’s financial infrastructure and regulations well in advance of sending a fresh employee to the area. If possible, use a local payments network for disbursements, employ hedging strategies to minimise the risk of volatile exchange rates and, where necessary, consult a specialist.
“The amount of time it takes for payments to be made is often affected by the maturity of the local banking system, which will vary from country to country.”
Nat Davison has 13 years’ experience in the currency world. He has held senior positions at a number of specialist companies in London, but relocated to Sydney between 2008 and 2010 to set up a new dealing hub in Australia. Nat subsequently joined Frontierpay as a partner and is a regular contributor to the UK national press, which includes The Financial Times and Telegraph newspapers.
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