29 Feb Determining Cost-Of-Living Allowance For International Assignees
How does one handle cost-of-living allowance (COLA) or goods and services differential when policies can vary from one company to another? For global mobility professionals already swamped with recruitment work, getting an audit and advisory firm can help you wade through the complexity of it all but it’s essential to understand it as well.
COLA is an allowance awarded to expats who move overseas as part of a job offer can live the life that they enjoy in their home country. It’s an important component of any contract negotiation process.
COLA then reimburses between the cost of goods and services from the assignee’s home and host location. This can be based on compensation level, family size and comparative cost-of-living standards. Even how cost of entertainment options compare with those in your assignee’s home country.
It would be much easier to focus on just housing costs to determine COLA, but it’s not a one-size fits-all scenario. As part of housing costs, though, make room for calculating property rental, household and grocery expenses, even car rental–and a host of additional costs. Take note that prices and the rate of exchange between locations are compared at regular intervals. The home location is assigned an index of 100. If the host location index is more than 100, costs are higher than at the home location.
Expatinfodesk.com elaborates on this: “The more above 100 it is the more expensive it is comparatively. Each point above 100 represents 1 percent, so, if a relocation country has a cost of living of 112, this means it is 12 percent more expensive to live there than it is for you to live in your current location.
Adversely, if the new cost of living is below 100 on the index, this means the country to which you are moving is cheaper than your home country and an index of 80 will mean that the host city will be 20 percent cheaper than your home city. Click here to find out how to calculate COLA.”
The index is reportedly applied to the home country spendable income of the assignee. Spendable income is the base salary normally devoted to the purchase of goods and services. These could be food, clothing, entertainment, medical care.
The amount is said to be not a fixed percent of base salary; as it can vary according to nationality, income level, and family size. Applying the index to the home country spendable income results in the amount needed to maintain home country expenditure patterns in the host country.
For its part, the global consulting firm Mercer’s Cost-of-Living indices relies on actual expatriate spending habits, allowing its indices to reflect actual international spending patterns. It breaks down cost-of-living indices to accommodate shopping habits as follows:
- The reversible Mean-to-Mean Index is an indicator of overall differences in prices between two locations because it compares the mean prices (average price of each item) in the base city to the mean prices in the host city.
- The Efficient Index applies to a relatively experienced shopper and compares the average of the low and mid prices in the base city to the mean prices in the host city.
- The Convenience Index applies to a less-experienced shopper, or a newcomer in the location, and compares the average of the low and mid prices in the base city to the high prices in the host city.
For all its worth, even assignees should learn more how COLAs work before they negotiate their fees, as some may not just be about housing costs, but tax and education as well. Click on this checklist under heading additional costs.