Say you are an export-oriented company, selling products abroad and receiving income in some (nominally stable) basket of currencies. Now let's suppose your own domestic currency, the one you use to pay salaries, depreciates. What is the best option of adjusting people's pay in such a way that they maintain same purchasing power/quality of life as before?

closed as off-topic by littleadv, GS - Apologise to Monica, mhoran_psprep, JTP - Apologise to Monica Dec 19 '14 at 13:27

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    This question appears to be off-topic because it is about corporate not personal finance. – littleadv Dec 19 '14 at 9:43
  • Generally, you cannot adjust pay because of currency fluctuations. In most countries, employment contracts are in local currency. You can give raises, if you wish so, but currency fluctuations are irrelevant then. – littleadv Dec 19 '14 at 9:44
  • @littleadv is there an appropriate StackExchange site for this? because I doubt this fits in well with, e.g., Quant SE – Dmitri Nesteruk Dec 21 '14 at 17:26

It is not an employers job to protect employees from currency fluctuations. It is the country's central banks job to curb volatility and protect the citizens from currency fluctuations.

You must have noticed Russia's central bank raised interest rates to 17% a few days ago and that's an example of how a country's central bank tries to protect its currency. Employees will not get a raise until the company that employes them does not feel that attrition will rise and they would lose valuable work force due to lower wages or there is a law that makes it mandatory for them to do so.

  • It's also true that a currency devaluation doesn't affect most employees that much. Domestic goods and services still cost the same, so unless the worker spends a high fraction of their wages on imported goods, the effect isn't always that high. – DJClayworth Dec 19 '14 at 14:52
  • @DJClayworth but does it matter if things are imported? I thought globalization ensured that, basically, devaluation == inflation, no? – Dmitri Nesteruk Dec 21 '14 at 17:24
  • In the short term it matters if things are imported but inflation picks up soon after resulting into high inflation making even domestic produce costlier. – Parminder Singh Chahal Dec 22 '14 at 9:50

Excellent question. Most employers won't adjust salary automatically, though I have worked for one firm, which automatically did a cost-of-living adjustment when inflation was high for two years. Note that this was an exception not a rule.

As hard as it sounds, outside of the Central Bank as Parminder mentions, the responsibility falls on the employee. If you see your cost of living rising because of inflation, you can pass off the costs to your employer by stating that you'll only stay if your salary/pay rises with the cost of living. I've only had success with one employer on a contract negotiating a "benchmark pay" to a currency (ie: if they paid in EUR, benchmarking my costs to the USD), and that had to be done up front. The alternative is to have a discussion after inflation rises and negotiate a higher salary.

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    Importantly, you don't care about exchange rates, you care about inflation. – gnasher729 Dec 19 '14 at 16:20
  • Out of curiosity, why would you want to peg USD to EUR (or vise versa)? Surely the volatility there isn't high enough to justify such a concern? – Dmitri Nesteruk Dec 21 '14 at 17:25

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