Pay me in US dollars: UK employees hit by pound weakness

A weak pound can also translate into a pay cut for professionals at multinational firms with globalised compensation scales. PHOTO: AFP

LONDON – It’s a question UK staff at firms ranging from big banks to small startups have been asking for months: “Could you pay me in dollars instead of pounds?”

It felt like a no-brainer to Hamish Drake, a senior director at recruiter Montresor Legal in London. His client was a large US law firm. The contract they negotiated was based in dollars. And with sterling sliding to its weakest level against the greenback since the mid-1980s, being paid by the client in dollars rather than pounds would have meant making more money for the same amount of work. 

The answer was “no.”

Drake’s experience illustrates the conflicting interests of staff and employers at multinational firms as the pound remains weak relative to major peers. Inflation is biting for everyone in Britain. But for a small group of well-paid professionals with foreign connections ⁠– and financial obligations ⁠– the drop in sterling has translated into a significant hit. 

Some are American expats with debts back home that appear to grow when they’re converted into the slumping pound. Others are British staff at US-headquartered firms who feel like they’re losing ground against their dollar-compensated American coworkers. Recruiters, relocation experts and managers say the slide poses challenges for both employees and firms in post-Brexit Britain as the labour market remains tight and the war for talent continues. 

“It’s not an uncommon discussion across the board for expats at the moment in the UK regardless of whether they are American, European, anybody,” said Kate Fitzpatrick, Mercer’s global mobility practice leader for the UK and Ireland. “The knock-on effect is the talent attractiveness and retention issue. Can companies pull in the talent they want if they are expecting or demanding wages in a stronger currency?” 

The pound stumbled as low as US$1.035 in late September on the heels of a disastrous “mini-budget” announced by then-finance minister Kwasi Kwarteng, which featured an aggressive plan for unfunded tax cuts. The ensuing market chaos helped end the brief tenure of Prime Minister Liz Truss and gave way to her successor, Rishi Sunak. His premiership has focused on restoring financial stability to Britain, but the pound is still trading near multi-decade lows.

A number of multinational firms use standardized pay scales that are pegged to the dollar. Some set that rate once in the beginning of the year, and are already contemplating what figures to use for 2023. The thorny issue is that these rates can diverge significantly from the market’s spot rate, potentially creating cross-border and even cross-town resentments.

Roughly 18 per cent of Britain’s workforce was born abroad, according to the Migration Observatory at the University of Oxford. Many keep up mortgages, savings accounts, retirement funds and remittances in their home countries. 

When the pound is weak, foreign debts become more of a burden. Take an American working in London who’s paid in pounds and still has student debt in the US. The average federal student debt for Americans is around US$37,800, according to the Education Data Initiative. In 2014, when the pound hit a recent peak of US$1.72, that debt in sterling would have been valued at roughly £22,000. Based on the current exchange rate of about US$1.19, it would amount to nearly £32,000. 

A weak pound can also translate into a pay cut for professionals at multinational firms with globalised compensation scales. Big US law firms operating in London often use New York salaries as a benchmark for their UK staff. Many follow the so-called Cravath scale, which uses the salaries set by the firm Cravath, Swaine & Moore as a guide. 

This year, the most senior associates on that scale earn US$415,000. If a hypothetical firm converted that salary into pounds using the spot rate in January, it would have been a little over £300,000. That same salary converted in November should have meant a pay bump to nearly £350,000. The trouble is, firms typically don’t use the spot rate, and instead rely upon a mishmash of exchange rates that aren’t always in sync with the market. 

“One of our clients is using a 1.2 exchange rate and another one is using a 1.4,” said Drake, the legal recruiter, who notes that the dollar-pound spread has turned UK-based lawyers at US firms into foreign-exchange experts. “Effectively the associates work the same amount of hours, and that’s thousands of pounds difference.” 

UK-based partners at big law firms who are already paid in dollars got “raises through the back door” this year, Drake added.

By contrast, pay at global banks is structured differently and harder to change, compensation experts say. The European Union introduced a cap on bonuses in the wake of the 2008 financial crisis, limiting them to roughly two times salary. In broad strokes, that translated into higher fixed pay for London staff, but lower bonuses compared with peers in New York. A potential scrapping of the cap in Britain could align pay structures and make cross-pond comparisons easier. 

Morgan Crosby, chief strategy officer at global mobility consultancy AIRINC, said the strength of the dollar versus currencies such as the pound could buck a longtime trend in the structure of expat pay packages. Companies have been transitioning over the years from salaries paid in the expat’s home currency – Americans working in the UK but paid in US dollars, for example – to “host-based” pay in the local currency, she said.

The host-based model worked because there was limited volatility between the currencies of expat hubs such as London, New York and Hong Kong. But she believes swings in currencies may cause potential workers to reevaluate these options. And she has a word of advice for American employees considering a stint abroad.

“I would be asking for a US-dollar package,” she said. BLOOMBERG

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