The Cost of Living Allowance (COLA) — also known as Goods and Services Differential, Commodities and Services Allowance, or Cost of Living Index – is a critical element of international assignee pay.
What is a COLA and when should you use it?
The Cost of Living Allowance, abbreviated as COLA, is an ongoing allowance paid to employees on international assignments. The COLA is paid to protect the employee against excess goods and services (G&S) costs in the host location. Most simply, the COLA covers the difference in costs between goods and services at the home and host locations.
How is the COLA determined?
There are two key components in establishing the COLA: the employee’s spendable income and the Cost of Living Index.
The spendable income is the amount of the employee’s salary spent on G&S; this is the amount protected while on assignment.
The location’s Cost of Living Index (or COLA index) indicates the relative cost difference between the host and home. An index of 100 indicates that the host location is equally expensive as the home location. A location under 100 tells us that the host is less expensive, and an index over 100 tells us that the host is more expensive.
To calculate the COLA, the COLA index is multiplied by the employee’s spendable income. The result is the amount that the employee needs to maintain their purchasing power.
Who should receive a COLA?
Employees on an international assignment who continue to receive a home-based salary should receive a COLA. Because costs in the host location can be higher than in the home country, a COLA ensures that the portion of salary spent on G&S, called spendable income, is protected against excess G&S costs. This allows the employee to maintain their home country purchasing power in the host location.
Should COLA be updated?
One benefit of the COLA is that it is paid separately from salary and can be updated for changes in economic conditions – both up and down. Because the COLA compares costs between home and host, an exchange rate is used to facilitate the comparison. As exchange rates change they are applied to the COLA to keep it up to date.
Additionally, both the market basket at home and at host are affected by inflation and deflation, so the COLA is updated for those as well. Updating the COLA for exchange rate and inflation allows the company to make sure the employee is protected against economic changes.
As a result of changing economic circumstances, the COLA can increase when more support is needed, decrease when less of a supplement is needed. Although COLA changes keep the employee balanced, COLA decreases may raise questions from employees and the global mobility team often is called on to help field questions.
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