A I R S h a r e

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Cheat Sheet for Explaining Cost of Living Allowance [COLA] Changes to Employees

Sep 26, 2019 @ 01:41 PM / by Weston Hicks

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Are you reactive or proactive?

A couple of months ago, Jessica Caligan shared how companies are using proactive communication strategies to enhance employee experience on international assignments.

Today, I’d like to share a cheat sheet I’ve pulled together to illustrate how common circumstances translate into changes to an assignee’s cost of living allowance.

The few real-world scenarios I’d like to highlight are:


  • Changes to family size (a partner, a new child, or a separation between partners)                                

  • Merit increases – how an increase to a person’s salary impacts their cost of living allowance               

  • Decreases in someone’s cost of living allowance – let’s be honest, you are most likely to hear from employees when their cost of living allowance is going down

 

Changes in family size 1

 

Changes in family size 

How does adding a family member to your household change your spendable income and your cost of living allowances? 

Let’s pretend that AIRINC decided to send me on assignment from the U.S. to our Hong Kong office and while I was there I met my partner. How would marrying my partner change how I spend my money and what support AIRINC is providing me along the way?

First, I would be spending more of my income on goods and services because there is now another person to make meals for, buy clothes, etc.

Assuming exchange rate and inflation do not change, COLA will need to increase to protect the larger portion of income spent on goods and services.

The opposite would happen if my partner and I separated while I was on assignment in Hong Kong. The portion of my income I spend on goods and services would go down since I’m shopping for one instead of two. Assuming no other changes, my cost of living allowance would decrease to protect the smaller portion of income spent on goods and services.

 

Merit / Salary Increases

Let’s continue with my assignment in Hong Kong and arrive at everyone’s favorite time of the year – merit increases. I get the great news that my annual salary is going to go up by three percent due to my on-the-job performance and inflation. How does this change my cost of living allowance when my next paycheck arrives?

First, I’ll have more income available to me to spend on goods and services – how much of that income I take home in my paycheck is dependent on income taxes – but I should have more money to spend than before.

Second, I may opt to save a portion of my salary increase, but it’s likely I will spend a portion of it as well. Which means:

 

COLA Change Example for Blog 1


Excerpt from AIRINC's employee-ready Cola Change Report. 

 

As shown in the example above, my living standard is enhanced because I have more to spend on goods and services than before.

My COLA will also go up to protect this higher living standard. Assuming exchange rate and home and host inflation do not change—and I am below my company’s COLA cap, should they have one—I should see an increase in my cost of living allowance.

 


AIRINC's COLA Change Report: An employee-ready explanation of change!Related:

Riding the COLA-Coaster: 2 Proactive Communication Strategies for Cost-of-Living


 

My Cost of Living Allowance Went Down – Why?

My cost of living allowance in Hong Kong could decrease for a handful of reasons:

  • A decrease in my family size – for example, if my partner and I separated while in Hong Kong.

  • Exchange rate – the Hong Kong Dollar is pegged to the US Dollar, so my assignment wouldn’t be impacted by exchange rate change. However, if Hong Kong removed the peg and the US Dollar purchased more Hong Kong Dollars than before – my allowance would decrease.

  • Inflation – if price increases for goods and services at home in the United States outpaced the price changes in Hong Kong then I would also be looking at a decrease in my cost of living allowance. This tends to be the most difficult thing to explain to a person on assignment since they aren’t home to see the price increase firsthand.

 

Want to learn more?

Click below to learn more about these great reports and how they can not only boost your productivity, but also enhance your employee experience with the proactive approach you've been dreaming of:

Learn More

 

Topics: Mobility Policy, COLA, Cost of living allowances, Technology and Tools, Calculate cost of living allowance, Employee Experience, COLA Change Report

Weston Hicks

Written by Weston Hicks

Weston joined AIRINC in 2012 working with clients in a client facing role. Over that time he has assisted many clients with challenges including on-site surveys. He has transitioned into a product marketing role that allows him to engage clients and prospects via presentations and webinars.