Purchasing Power Parity

The article will help you understand what Purchasing Power Parity is and if it is a good choice for your organization. Reference this one sheet for more information. 
 

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 Awardco that allows employees to access high-quality redemption options of the same value as their peers around the world by establishing purchasing power parity (PPP) in your Awardco platform.
 

What is purchasing power parity?

PPP allows employees in multiple countries to receive equitable awards by adjusting the purchasing power of points in the platform based on the local purchasing power of a country. This is achieved by applying ratios calculated using cost of living tables that ensure every individual, no matter where they are located across the globe, is receiving equivalent purchasing power to purchase the same general “basket of goods.”
 

Purchasing Power Parity Examples

Exchange rates are updated constantly within the platform and are applied in the point cost of items. The PPP ratios used by Awardco 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 the United States. Awardco can import custom rates and ratios should an organization choose to input their own values.
 

Is This Right for Your Organization?

PPP can only be set up by country, so if you are only in one country, it may 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.
 

Switzerland is a good example of a potential increase in budget because the ratio when compared to USD has an index of 1.05. That means that a user in Switzerland that is awarded 100 points would have around 105 USD of purchasing power, 5% more than was anticipated.
 

Next Steps for Configuring PPP in Your Platform

In-platform PPP configuration is managed by your Awardco Client Success Manager or Implementation Consultant. To begin the process of configuring PPP in your organization’s platform, reach out to your Awardco point of contact.
 

Purchasing Power Parity Example

Applying purchasing power parity in the Awardco 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.
 

A platform user 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.
 

Since the platform is based in USD, 100 points represent 100 USD of purchasing power for each user. For her British coworker, the $100 represents £77, for her French coworker, the 100 points represent €90, and for her Swiss coworker, the 100 points represent CHF 106. 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 a purchasing power index, 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 Swiss Franc, I would walk away with CHF 95. Although 100 USD and CHF 95 carry the same monetary value, I can’t necessarily buy the same things with CHF 95 in Zurich 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 Switzerland, the PPP index is roughly 1.05 or 105% of the US. This means that an item which costs $1 in the US would only cost, on average, the equivalent of $1.05 in Switzerland.
 

Awardco systems can set a PPP ratio on a country-by-country basis to indicate how far the purchasing power of 1 USD goes in the countries in which your organization is operating.
 

*In the examples contained in this document, a 1 point to 1 USD platform point ratio is assumed.
 

How Parity is Achieved Example

To account for the difference in spending power, the value of points is adjusted at the time they are redeemed. This means that when an employee receives points, they get the full amount. For example, a Swiss user awarded 100 points will see 100 points in their account.

When the user redeems those points, calculations are made in the background based on their country's purchasing power index to adjust the point value. The adjusted item price appears in points as a single value, so the user doesn't see the complex calculations. The following example illustrates how this works.

A user in Brazil looking in the platform would see a basketball listed at a specific point value. To understand how that value is determined, we start with the cost of the item in the local currency and convert it into the platform's base currency (USD).

For instance, if the basketball costs 133.80 BRL in Brazil, this is the equivalent of $27.64 USD.

To account for local purchasing power, the cost in USD is divided by Brazil's PPP ratio. If Brazil's PPP ratio is 0.50, the calculation would be: $27.64 USD / 0.50 = 55.28 points. Since point amounts must be a whole number, this is rounded to 55 points.

This means that a Brazilian user would pay 55 points for the basketball, ensuring the points have an equivalent purchasing power to points spent by a user in the US.

Where do the rates come from?

Exchange Rates Awardco has a standardized approach to the exchange rate and uses a third party real-time conversion via a direct API to get the exact conversion. This is based on current markets. When rewarding points, the exchange rate uses a standardized exchange rate. Each year the exchange rate for the reward process resets on the first of the year and holds constant for 12 months. Using a standardized exchange rate establishes consistency for reward amounts, especially with currencies with extreme rates—a change from today to tomorrow may drastically change the points rewarded.
 

The redemption processes differ in that they use the current exchange rate. This is because money will actually be used to make a purchase at the point of redemption. As the exchange rate is susceptible to change daily, the amounts adjust to reflect current exchange rates accordingly in the redemption tools.
 

Purchasing Power Ratio Awardco provides a standard set of rates that are adjusted annually. These rates are sourced by our third party's calculations with the intent to provide a country-wide footing in establishing purchasing power as it relates to the United States.
 

Awardco is able to import custom rates and ratios should an organization choose to input their values.
 

Considering turning on PPP after your account has gone live?

It's crucial to understand the complexities involved in making this switch. Here's a brief overview of some of the challenges you might encounter:

1. Taxation Troubles: One of the most significant issues when enabling PPP post-launch revolves around taxation. When PPP is activated, it applies a conversion ratio to existing points, impacting their value. For example, an employee who received 100 points initially taxed at $100 USD might now find those points are only worth $50 due to PPP. Adjusting taxes to account for this can be a logistical nightmare, especially when different programs are taxed differently.
2. Varying Valuations: If your organization has multiple reward programs with different tax treatments, the complexity increases further. For instance, Service Awards and Spot Awards might be taxed differently, adding another layer of intricacy to PPP implementation.
3. Partial Point Spending: Things get even trickier if employees have spent some of their points before PPP was enabled. Some of their points may have had the full 1:1 USD value, while others now have an adjusted value post-PPP. Calculating and reconciling these differences can be a daunting task.
4. Employee Expectations: You may also encounter challenges in managing employee expectations. Employees used to a 1:1 point-to-USD ratio may feel their points have lost value, leading to potential dissatisfaction and queries.

In essence, turning on PPP after your account is live is a complex process that requires careful planning and communication. Taking these precautions can help minimize disruptions and ensure a positive experience for both you, as an admin, and employees.