Which practice supports effective currency risk management in global compensation?

Which practice supports effective currency risk management in global compensation?

• A. Eliminates all exchange rate risk.
• B. Reduces exposure to exchange rate volatility.
• C. Guarantees salaries in USD.
• D. Requires ongoing monitoring of pay.

Answer: (B)

Currency risk in global compensation comes from how much pay changes when currencies move. The goal isn’t to remove risk entirely—markets can always shift—but to limit how much those shifts affect budgets and fairness. Reducing exposure to exchange rate volatility achieves that by designing pay in a way that dampens rate-driven swings. For example, paying in local currency or using hedging and aligned adjustments lets compensation stay more stable across locations, helping budgets and employee expectations stay consistent. Eliminating all exchange rate risk isn’t feasible because rates fluctuate due to market forces. Guaranteeing salaries in USD would transfer or magnify risk in other currencies and can create inequities across locations. Ongoing monitoring of pay is important, but without a strategy to limit volatility, monitoring alone doesn’t actively manage currency risk.

Currency risk in global compensation comes from how much pay changes when currencies move. The goal isn’t to remove risk entirely—markets can always shift—but to limit how much those shifts affect budgets and fairness. Reducing exposure to exchange rate volatility achieves that by designing pay in a way that dampens rate-driven swings. For example, paying in local currency or using hedging and aligned adjustments lets compensation stay more stable across locations, helping budgets and employee expectations stay consistent.

Eliminating all exchange rate risk isn’t feasible because rates fluctuate due to market forces. Guaranteeing salaries in USD would transfer or magnify risk in other currencies and can create inequities across locations. Ongoing monitoring of pay is important, but without a strategy to limit volatility, monitoring alone doesn’t actively manage currency risk.