Purchasing Power Parity

The article will help you understand what Purchasing Power Parity is 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 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 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”.

 

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

 

Is This Right for Your Organization?

PPP 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 then 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 represents 100 USD of purchasing power for each user. For her British coworker the $100 represents £77, 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 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 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 PPP 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.

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 are adjusted at the time they are redeemed. This means that when a user recognizes a coworker, no amount is adjusted at the time of recognition and the full amount of points are received. A UK user awarded 100 points would receive 100 points. When the user redeems those points, calculations are made based on the purchasing power index to adjust the power of the points according to the countries’ index ratios. The adjusted item pricing appears in points as one value so the user doesn’t see the adjustments occurring behind the scenes. The following example illustrates how this works and what employees see in the platform when PPP is applied.

A UK user looking in the platform would see this suitcase listed at 118 points. This same suitcase is listed on the Amazon UK website for £72.04. Why does it cost 118 points? We start with the cost of the item in the local currency and convert it into the base currency of the platform. In this example this item costs £72.04 which is the equivalent of 100.14 USD.

 

 

To account for local purchasing power, the cost in USD is divided by the PPP ratio which will give you the amount of points the item will cost in the Awardco platform. 100.14 USD divided by the UK PPP ratio of .8507 gets you 117.71 points. Since point amounts must be a whole number, 117.71 is rounded so this suitcase will cost 118 points within the platform.

 

 

Where do the rates come from?

Exchange Rates

Awardco uses a third party real time conversion via a direct API to get the exact conversion. 

Purchasing Power Ratio

Awardco provides a standard set of rates 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 as it relates to the United States.

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

If you have any questions, please contact our Awardco Support Team.