Expanding into new markets and managing a global workforce is an exciting yet complex process for businesses.
One of the biggest challenges companies face when going international is figuring out the right approach to paying employees across different locations.
It’s not just about transferring money—currency risks, local market dynamics, and competitive salary benchmarks all come into play.
In this article, we delve into the key considerations businesses must address when paying employees internationally, using insights and expert advice from leaders at Privalgo.
Table of contents
- Understanding local work cultures
- Salary strategies: cost of living vs. local competition
- Global salary trends and regional variations
- The debate: flat global salaries
- The role of currency fluctuations in international payroll
- Why transparency and communication matter
- Best practices for paying employees internationally
- Conclusion
- 10 FAQs about paying international employees
Understanding local work cultures
When entering a new market, understanding local work cultures and salary expectations is crucial. Companies need to align their employee value proposition with what matters most to local talent. As Kajal Pankhania, Director of People and Culture at Privalgo, notes:
“Expanding into new markets requires a nuanced understanding of local work cultures. It’s not just about competitive salaries; we focus on crafting compelling employee value propositions that truly resonate with local talent.
This might include unique professional development opportunities or benefits that are particularly valued in that market. Get it right, and you’ll find yourself with a queue of top-tier candidates at your door.”
By taking a strategic approach that goes beyond pay, your business can attract top talent and create a workforce that feels valued and motivated.
Salary strategies: cost of living vs. local competition
Determining the right salary level for international employees is often a balancing act between paying according to the local cost of living or aligning salaries with local competition. Each approach has its pros and cons.
Paying salaries based on local cost of living
Paying in relation to local cost of living helps ensure a similar standard of living for employees across locations. However, it may not align with local market rates, which can be a setback when competing for talent in highly sought-after industries.
“Paying according to local cost of living can help maintain equity in lifestyle and a similar standard of living across your global workforce,” explains Kajal.
“However, this approach may not always align with local market rates, potentially putting you at a disadvantage in highly competitive job markets. It’s a delicate balance to strike.”
Paying salaries based on local competition
On the other hand, matching salaries with local competition allows companies to stay competitive and responsive to market conditions.
This approach, however, can lead to issues with compensation, which may result in problems with your workforce internally. Dan Biggs, CEO of Privalgo, comments:
“Aligning salaries with local competition keeps us competitive in each market, which is crucial for attracting top talent.
However, this approach can lead to significant disparities in compensation across our global workforce, which may create internal issues. It’s a complex challenge that requires constant attention.”
Read: How global payroll solutions are driving business growth
Global salary trends and regional variations
The rate at which salaries increase, and the amount they’re expected to change by, varies significantly depending on the industry and location. For instance, in sectors such as technology and finance, salary increases can be more frequent and jump by larger margins.
“The reactivity varies significantly by sector and location. In highly skilled, competitive sectors like tech or finance, we see rapid salary adjustments,” says Kajal.
“In other industries or regions, changes tend to be more gradual. It often depends on the scarcity of skills in that market and the overall economic conditions. Keeping a finger on the pulse of these trends is crucial for staying competitive.”
In London, for example, American law firms have pushed salaries higher, influencing British law firms to follow suit. Similarly, the tech scene in London has experienced salary inflation as global tech firms establish their presence in the city.
The debate: flat global salaries
Some companies consider implementing a flat global salary structure to promote fairness and equality. However, while this makes life easier for setting budgets and managing payroll, it makes many worse off due to the relative value of their earning versus their environment.
“A flat global salary structure can promote a sense of equality across the organisation and simplify administration,” Kajal adds.
“However, it can also lead to significant disparities in actual purchasing power between employees in different locations. It’s a bit like giving everyone the same size shoes—they might all cost the same, but they won’t fit everyone equally well.”
The role of currency fluctuations in international payroll
Despite not always being the first thing many businesses think of when paying employees internationally, currency fluctuations can be a challenge for payroll.
Changes in exchange rates can significantly affect the amount of money employees receive or the amount you have to pay to meet their expectations. As Dan explains:
“One often overlooked aspect is the impact of currency fluctuations on international payroll. At Privalgo, we use our own technology to power smarter payroll solutions.”
Through our high-tech platform, you can upload spreadsheets containing thousands of payment data – including multiple currencies – and have them paid out in just a few clicks.
Contact us to learn more about how our proprietary technology can streamline your global payroll.
Why transparency and communication matter
To maintain employee trust and satisfaction, it’s essential you’re transparent in how you communicate your compensation practices.
Clear reasoning about why salaries are the way they are helps global employees understand the rationale behind their pay and, ultimately, keeps them happy.
“Transparency in your compensation philosophy is crucial,” says Kajal.
“Clear communication about how and why you set salaries helps build trust with employees.
While competitive pay is important, we’ve found that factors like company culture, career development opportunities, and meaningful work often play an equally significant role in attracting and retaining top talent across our global operations.”
Best practices for paying employees internationally
Use local currency or USD for payments
Consider whether to pay employees in their local currency or in a commonly used currency like US dollars (USD).
Paying employees in their local currency removes the need for them to exchange currencies themselves, while some may prefer to be paid in USD due to global popularity.
Looking to pay employees in their local currency? Read our guide on restricted and exotic currencies to navigate paying those in restricted areas.
Keep up to date with political and economic events
Stay informed about currency market sentiment and expectations before and after political and economic events in the countries you expand to.
This will ensure your business can anticipate potentially damaging swings in currency value and react to any changes.
Alternatively, you can leave the market monitoring up to us.
At Privalgo, our Currency Specialists keep on top of global political and economic events and possess a thorough understanding of how similar events have impacted currencies in the past.
They can alert you when important events are on the horizon so you can assess whether or not to act.
This means you can take advantage of their guidance and save yourself and your team from constantly checking the latest updates.
Read our article on the upcoming UK Budget for insights into how this might affect the pound.
Implement treasury management strategies
To mitigate the risks of currency volatility, use strategies like forward contracts and hedging to stabilise payroll costs.
As a foreign exchange and international payment specialist, Privalgo can help you build FX hedging strategies tailored to your business’s specific requirements.
Our specialists are experienced using FX products like forward contracts and market orders to help you forecast more confidently and maximise the value of your currency exchange.
Understand local labour laws and tax regulations
Compliance with local employment laws and tax regulations is critical to avoiding legal issues and financial penalties.
While these practices are essential for ensuring employee satisfaction, managing costs and setting payroll budgets, executing them can be a difficult process.
At Privalgo, we can facilitate high-speed, reliable international payments in up to 140 currencies, covering 180 countries.
We also have access to a wide range of restricted currencies thanks to our partnerships with 16 global banks and payment providers.
This means you can pay employees all over the world accurately and at competitive exchange rates.
Contact us to find out more about how our international payment solutions can help you pay your employees in the currency that suits them at a price that suits you.
Conclusion
Paying employees internationally is a challenge that requires businesses to carefully consider local conditions, currency risks, and internal equity.
By strategising efficiently and maintaining transparent communication, your business can manage global payroll with confidence and keep your workforce motivated and engaged.
When it comes to sending payments for global payroll, it’s essential you manage foreign exchange risk to keep costs down and improve forecasting.
At Privalgo, our Currency Specialists are experts in helping businesses manage their currency risk.
They can work closely with you to build tailored hedging strategies using products like forward contracts and market orders that help you budget with confidence and maximise the value of your currency exchange.
Fill in the form below to learn more about how our FX hedging strategies can help drive growth for your business.
10 FAQs about paying international employees
Below are 10 frequently asked questions (FAQs) about paying international employees. Some include content featured in this article.
What’s the best currency to pay international employees in?
It depends on various factors such as the employee’s location, preference, and the company’s financial strategy. Generally, paying in local currency is preferred as it eliminates the employee’s need to exchange currencies. However, some employees may opt for USD or EUR, given their global stability.
What are the risks of paying employees in foreign currencies?
The main risk is currency fluctuation, which can impact the value of the salary in the local market or the cost faced by the employer. This can lead to unexpected budget challenges. To manage this, businesses can use financial strategies like hedging or open multi-currency accounts.
What factors should businesses consider when determining international salaries?
Key considerations include the local cost of living, the competitive landscape for talent, industry standards, and exchange rates. Balancing these factors can help attract and retain top talent while maintaining internal pay equity.
What is a flat global salary structure, and what are its pros and cons?
A flat global salary structure means offering the same salary for a role regardless of location. While it simplifies administration and promotes a sense of equality, it may not account for differences in local purchasing power, leading to employee dissatisfaction.
How can businesses manage payroll costs amidst currency volatility?
Businesses can use hedging strategies such as forward contracts and market orders to lock in exchange rates or use multi-currency accounts to stabilise payroll costs. This helps protect against adverse currency movements and maintain predictable payroll expenses.
Can a UK company pay overseas employees?
Yes, UK companies can pay overseas employees, but they must navigate various tax regulations, labour laws, and currency exchange considerations specific to each country. Businesses often use international payroll providers or open local bank accounts to streamline the payment process and ensure compliance.
Why is transparency important in international compensation?
Transparent compensation practices build trust and foster a positive company culture. When employees understand how their salaries are determined and why certain decisions are made, they are more likely to feel valued and engaged, particularly in a global context.
What are the benefits of using a global payroll solution?
A global payroll solution simplifies managing multiple currencies, ensures compliance with local laws, and reduces administrative costs. It allows businesses to pay employees across various regions efficiently and manage currency risk through automated processes.
How do currency fluctuations affect international payroll?
Currency fluctuations can alter the value of salaries, affecting both the employee’s earnings and the employer’s payroll budget. This can lead to unpredictability in payroll costs and impact employee satisfaction. Implementing treasury management systems can help businesses mitigate this risk.
How can companies attract top talent in new markets?
Companies should offer competitive salaries aligned with local market rates and provide a compelling employee value proposition.
Kajal Pankhania, Director of People & Culture at Privalgo, explained in this article that attracting top talent is far more complex than just offering strong salaries.
It also involves creating an employee value proposition that really resonates with local talent.
Business can focus on benefits that are really valued by employees. Similarly, they could draw their attention to personal development plans that seek to get the best out of new hires and enhance their careers.
