The core strategy driving expatriate pay programs globally is the principle of protecting an employees domestic income and spending power, irrespective of global location. How to achieve this has been an issue many organizations spend considerable time on.
Exchange rates are volatile as they are based on short-term factors and are subject to substantial distortions from speculative movements and government interventions. In the short term, exchange rates, even when averaged over a period of time such as a year, are not a good measure of the comparative value of a salary in relation to its comparative international purchasing power. In the short to medium term at least, apparent changes in the comparative level of remuneration between one country and another may be principally a function of changes in the exchange rate.
In response to this Steven Coleman developed an on-line tool to calculate the salary purchasing power parities (SPPP’s) for every country in the world. In simple terms the salary purchasing power parity is the rate of salary purchasing power that equalizes the purchasing power of different currencies given the relative cost of the same basket of goods at the exchange rate versus one US Dollar. This means that a given salary, when converted into different currencies at the SPPP rates, will buy the same basket of goods and services in all countries.
The basket of goods and services used in SPPP calculations is derived on an International basis and includes certain items often excluded from expatriate cost of living data (most notably housing costs), however any or all of the 13 basket groups can be included or excluded from a calculation. SPPP’s provide a reasonably good picture of the differences in standards of living for individuals resident and paid in different countries.
Internationally comparable data are crucial to forming sustainable expatriate pay policies and monitoring progress. Market exchange rates give misleading comparisons because they do not reflect salary purchasing power differences. Salary Purchasing Power Parities account for price differences between countries and so measure real quantities.
By establishing salary purchasing power equivalence, where one dollar salary purchases the same quantity of goods and services in all countries, SPPP conversions allow cross-country comparisons of salary levels free of salary survey market and exchange rate distortions.