.png?height=120&name=MicrosoftTeams-image%20(6).png)
Understanding what purchasing power parity and if it is a good choice for your organization.
It can be a difficult task to coordinate recognition programs and ensure your employees have equal opportunity to receive recognition of a similar value across international borders.
Thankfully it’s easy to configure a recognition program in JobPts that allows employees to access high-quality redemption options of the same value as their peers around the world by establishing purchasing power parity with the Standard of Living Index (SOLI).
What is standard of living index (SOLI)?
The SOLI allows employees in multiple countries to receive equitable awards by adjusting the purchasing power of points in the platform by the local purchasing power of a country. This is achieved by applying ratios that are calculated using cost of living tables that ensure every individual, no matter where they are located across the globe, is receiving equivalent purchasing power so they can purchase the same general “basket of goods”.
Exchange rates are updated constantly within the platform and are applied in the point cost of items. The SOLI ratios used are adjusted manually and sourced from a third party’s “standard market basket” calculations with the intent to provide a country-wide footing in establishing purchasing power as it relates to all countries. Semos Cloud is able to import custom rates and ratios should an organization choose to input their own values.
See Admin Center documentation on how to setup and use the Standard of Living Index (SOLI) in the system.
Is This Right for Your Organization?
SOLI can only be setup by country so if you are only in one country it will not be needed. It is also important to consider your budget. Most countries have a ratio lower than 1 when compared to the base country which means the amount being spent will typically be less than the amount you budgeted for the individual to spend. This means you could come in under budget. For countries that have a higher than 1 ratio compared to the base currency, you might end up being over budget.
Japan is a good example of potentially going over budget because the ratio when compared to USD has an index of 1.17. That means that a user in Japan that is awarded 100 points would have around 117 USD of purchasing power, 17% more than was anticipated.
Purchasing Power Parity Example
Applying purchasing power parity in our platform ensures the purchasing power of 1 USD is adjusted to account for the local economy and the local spending power provided by 1 USD. To understand purchasing power parity, it is critical to understand what purchasing power is at its core. The following example further explains and illustrates the principle of purchasing power.
Employee named Alexandra recognizes 5 coworkers around the globe. They all participated equally on a project and Alexandra wants each of her team members to receive the same reward. She submits a recognition for 100 points* and each coworker is awarded 100 points.
For example, in this scenario the platform based currency is set to be USD, so 100 points represents 100 USD of purchasing power for each user. For her British coworker the $100 represents £72, for her French coworker the 100 points represents €90, and for her Japanese coworker the 100 points represents ¥10,864. This is great because they all get the same $100. One could easily argue that is a fair distribution of points!
Unfortunately, this recognition system did not account for how the purchasing power of 100 USD changes in different locations. By leveraging SOLI, we’re able to see how much an individual can buy in different places with the same monetary value. Returning to the example above, if I exchanged 100 USD to the British Pound, I would walk away with £72. Although 100 USD and £72 carry the same monetary value, I can’t necessarily buy the same things with £72 in London that I could with 100 USD in New York City. With this purchasing power inequity, it makes sense to adjust the purchasing power of an award to account for local spending power. For example, in the UK the SOLI index is roughly 0.85 or 85% of the US. This means that an item which costs $1 in the US would only cost, on average, the equivalent of 85¢ in the UK. Conversely, in Japan the index is roughly 1.17 or 117% of the US. An item which costs $1 in the US would generally cost the equivalent of $1.17 in Japan.
Where do the rates come from?
We use a third party real time currency rate conversion via a direct API to get the exact conversion. And we provide a standard set of rates for the SOLI that are adjusted annually. These rates are sourced by Mercer's "standard market basket" calculations with the intent to provide a country-wide footing in establishing purchasing power. We are also able to import and edit custom rates and ratios should an organization choose to input their own values.
If this article left your questions unanswered, please submit a Support Form, and we can clarify this topic.