Getting carried away with the euro

The
introduction of the euro as the single European currency represents a huge
challenge for HR departments across the European Union. Deciding how best to
solve the impending problems needs to be a management, union and

French
president Jacques Chirac marked 1 January 2002 as the "biggest and most
significant economic and financial reform in the past 50 years". He was
referring to the introduction of the euro, the single European currency adopted
not only in France but in 11 other European Union states (Austria, Belgium,
Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain).

The
euro, in its electronic form, came into effect on 1 January 1999, but in a more
tangible way on 1 January 2002 with notes and coins now in existence, alongside
national currencies. (Countries cease accepting legacy currencies at different
times but all legacy currencies will lose their legal value on 1 July 2002).
The introduction of the euro is a crucial occasion for the business world, not
only because it will help to accelerate integration across economic, political
and cultural lines, but it will help to open markets and fundamentally alter
business conditions.

With
the euro, the world of work will never be the same again. Not only has the
comparison of prices paid for products and services been made easier, but  employees can now quickly compare salaries
across the Union. This transparency of pay represents a huge challenge for the
HR department. Compensation specialist firm William M Mercer explains in a
recent issue of The Mercer Quarterly Newsletter: "The primary and most
visible aspects of HR likely to be affected by the euro are salary and wage
management. The immediate impact will be on pay transparency. Employees working
in different countries will find it easier to compare how much they are being
paid if they receive their pay in the same currency."

Who’s
really paying for the euro?

But
before employees can do that, they have to understand the new currency and be
able to interpret changes in their pay slips. According to the Association for
the Monetary Union of Europe, this is a key issue for HR managers. "The
accurate translation of the pay amount in euros and the explanation of the new
pay-slips to employees."

Although,
in most cases, salaries have basically stayed the same, their presentation is
very different. AMUE continues: "Management has to take the necessary time
to account for any rounding difference and to consider how to deal with the
change in thresholds resulting from the currency change."

Daniel
Buquet of IBM’s HR access international business co-ordination team, says:
"The transformation of a basic salary from a legacy currency into euros
has created differences that employers need to explain to their employees, and
negotiate upon with them," he says. Citing an example of travel expenses,
he says: "If a company pays an employee mileage based on a certain amount
of French francs per mile, that will be converted into an odd number in euro
cents. If you multiply the small difference by hundreds, you could have a
difference of several dozens francs to the employee’s disadvantage."

However
firms decide to solve this problem – accept the increase in euros to their cost
or some other solution – it is far from simply a technical decision.
"Every time there is a figure to convert into euro, it’s not for the
technical staff to decide," Buquet warns, "it’s a management
question, that has to be discussed with the unions and workers’ council."

With
the euro now a reality and understanding of it wide-spread, Yves Corne, a
partner with Hewitt Associates, a global management consulting and outsourcing
firm specialising in human resource solutions, says: "Whether we like it
or not, the subject of cross-border pay comparisons is with us to stay."

A
can of euro-worms

Take
the example of Jean-Claude, based in Paris and responsible for a product line
in Europe, and Hans, a colleague and friend in Cologne whose responsibility is
for a different but equally profitable, pan-Europe product line. With the euro
now the common currency between them, Jean-Claude is aware that Hans earns
about 30 per cent more than he does, although they have essentially the same
responsibilities. Friendship has its limits and jealousy and rivalry emerge –
not a useful situation for either manager or the firm’s future.

Jean-Claude
and Hans are just an example of what could happen. "If all the European
managers got together and compared remuneration," says Hewitt’s Corne,
"they would see even bigger discrepancies. This is a can of worms that the
compensation director of the parent company does not want to open up."

For
years, it has been common knowledge the Germans and Swiss have always earned
more than everyone else, he says. "Nobody stops to ask why; it’s just always
been that way. "But," he continues, "explaining the difference
becomes difficult when you are negotiating with two people who are working no
more than a few hundred kilometres from each other."

Why
is there such a pay difference?

Although
close in kilometres, France and Germany are culturally and politically very far
apart and their work practices are extremely diverse. Corne says: "The
kilometres between Paris and Cologne are more than toll fees on the motorway.
There is a huge divide of different income tax and social security systems,
cost of living difference (although decreasingly so) and two other items that
are more difficult to define. "One," he explains, "is the often
invisible way in which governments transfer resources and wealth within the
community, the other is life style; the way I spend my money."

But
these are factors that will take time for employees to get to grips with and
fully appreciate. And as labour mobility in Europe increases, the situation
will only get harder for Europe’s HR professionals.

Will
a one-size-fits-all pay scale work?

Does
that mean that in the near future we will see harmonisation of pay across the
states?

This
is an idea that has compensation directors shifting uncomfortably in their
seats. "Harmonisation of pay will result in one thing," Corne says,
"the highest common denominator, and that means we will all end up with
German or Swiss salaries. No-one wants to go there because it will not end with
the global managers; there will be a trickle-down effect. Once we have
increased the remuneration of the marketing director, the company’s
compensation committee will observe the pay differentials for the next level
are too great." And so it goes on through the entire company. What we
would end up with, he says, is hyper salary inflation.

Most
firms agree with him. Eighty per cent of companies that took part in a survey
by Organization Resources Counsellors do not believe pay harmonisation will
happen in the near future. In its latest research, The Implications of the Euro
for Expatriate Policies and Practices in Europe, published in January, it finds
that only 20 per cent of companies believe the euro will bring about
convergence of national pay levels and only 16 per cent believe benefits will
converge.

The
survey, the third in a series that began in 1998, focuses on expatriate
compensation and shows firms are still taking a wait-and-see approach over
whether any fundamental changes will be required to their expatriate
programmes. According to the report, there has been a marked decline in the
optimism over the expected benefits the euro will bring to expatriate
administration. Only 14 per cent of companies believe the euro will result in
cost savings compared to 36 per cent in 1998. Similarly, fewer companies expect
the euro will result in simplified expatriate administration. Thirty-three per
cent believe the euro will simplify the process compared with 52 per cent in
1998 and 42 per cent in 1999.

Despite
a fall in confidence about the immediate advantages to be gained from the
introduction of the euro, it seems that its implementation, at least, went
smoothly. ORC says: "Sixty-four per cent of companies reported they have
experienced no significant problems with their strategy for the introduction of
the euro and only eight companies reported they started the process too late or
did not undertake sufficient planning. In the longer-term, participants expect
to experience benefits from increased transparency of relative employment
cost-of-living costs across Europe."

What
it takes to be euro-compliant

In
technological terms, the introduction of the euro meant all automatic payroll
systems had to be updated to accept the currency. Master data, gross salary
figures, meal allowances and other benefits had to be changed to euros and
problems with rounding of figures had to be eliminated. The deadline for doing
so was 1 January 2002. For other systems and software controlling business
process affected by the euro (those dealing with products costs and pricing of
services for example) the deadline was earlier; 1 January 1999, when the euro
was introduced as a wholesale currency.

Useful
websites

www.eds.com

www.hewitt.com

www.orcinc.com

www.sap.com

www.union-network.org

www.wmmercer.com

This
article first appeared in the April 2002 edition of Global HR.  To subscribe click here

Comments are closed.