A Cost of Living allowance (Cola) is a wage supplement paid to employees to cover differences in the cost of living, particularly as a ensue of an international assignment. The number of Cola should enable an expatriate to be able to buy the same basket of goods and services in the host location as they could in their home country. The basis for calculating a Cola is the Cost of Living Index (Coli) which indexes the costs of the same basket of goods and services in dissimilar geographic locations. Cola is a easy correct recipe of measuring fluctuating wage purchasing power and ensuring parity.
Cost of Living Index
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Our cost of Living Indexes portion the cost of 230 products and services across 13 dissimilar basket groups in 276 cities across the globe. The data is gathered by a team of investigate analysts who eye comparable items that are available internationally. A minimum of 3 prices for the same brand/size/volume of product is used to decide the average price for each item in each location. The items are priced on a quarterly basis and tend to rise and fall with inflation. The 13 dissimilar basket categories are as follows:
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Alcohol & Tobacco: Alcoholic beverages and tobacco products
- Alcohol at Bar
- Beer
- Cigarettes
- Locally Produced Spirit
- Whiskey
- Wine
Clothing: Clothing and footwear products
- Business Suits
- Casual Clothing
- Children's Clothing and footwear
- Coats and hats
- Evening Wear
- Shoe Repairs
- Underwear
Communication
- Home Telephone Rental and Call Charges
- Internet relationship and service provider fees
- Mobile / Cellular Phone covenant and Calls
Education
- Crèche / Pre-School Fees
- High School / College Fees
- Primary School Fees
- Tertiary Study Fees
Furniture & Appliances: Furniture, household equipment and household appliances
- Dvd Player
- Fridge Freezer
- Iron
- Kettle, Toaster, Microwave
- Light Bulbs
- Television
- Vacuum Cleaner
- Washing Machine
Groceries: Food, non-alcoholic beverages and cleaning material
- Baby Consumables
- Baked Goods
- Baking
- Canned Foods
- Cheese
- Cleaning Products
- Dairy
- Fresh Fruits
- Fresh Vegetables
- Fruit Juices
- Frozen
- Meat
- Oil & Vinegars
- Pet Food
- Pre-Prepared Meals
- Sauces
- Seafood
- Snacks
- Soft Drinks
- Spices & Herbs
Healthcare: normal Healthcare, healing and healing Insurance
- General Practitioner Consultation rates
- Hospital underground Ward Daily Rate
- Non-Prescription Medicine
- Private healing assurance / healing Aid Contributions
Household: Housing, water, electricity, household gas, household fuels, local rates and residential taxes
- House / Flat Mortgage
- House / Flat Rental
- Household Electricity Consumption
- Household Gas / Fuel Consumption
- Household Water Consumption
- Local asset Rates / Taxes / Levies
Miscellaneous: Stationary, Linen and normal goods and services
- Domestic Help
- Dry Cleaning
- Linen
- Office Supplies
- Newspapers and Magazines
- Postage Stamps
Personal Care: Personal Care products and services
- Cosmetics
- Haircare
- Moisturiser / Sun Block
- Nappies
- Pain Relief Tablets
- Toilet Paper
- Toothpaste
- Soap / Shampoo / Conditioner
Recreation and Culture
- Books
- Camera Film
- Cinema Ticket
- Dvd and Cd's
- Sports goods
- Theatre Ticket
Restaurants, Meals Out and Hotels
- Business Dinner
- Dinner at bistro (non fast food)
- Hotel Rates
- Take Away Drinks & Snacks (fast Food)
Transport: social Transport, vehicle Costs, vehicle Fuel, vehicle assurance and vehicle Maintenance
- Hire buy / Lease of Vehicle
- Petrol / Diesel
- Public Transport
- Service Maintenance
- Tyres
- Vehicle Insurance
- Vehicle Purchase
Each basket type does not count equally and are weighted in the final calculation based on expatriate spending patterns.
In order to hypothesize an correct cost of living index for a specific private the basket items that are not relevant to the private should be excluded from the calculation. For example if study and housing is in case,granted by the employer these basket categories would be excluded from the cost of living index calculation. This increases the accuracy of the cost of living index and makes it potential for each private to have their own customized cost of living index based on their specific arrangements rather than using an unabridged "generic" index which is likely to contains costs that are not relevant to the individual.
The recipe for calculating the specific cost of living index for an international assignment is as follows:
Cost of Living Index = Customized Cost of Living Index for Host City / Customized Cost of Living Index for Home City
When entertaining to a higher cost of living host city, the index will be greater than 1 (positive). When entertaining to a lower cost of living host city the index will be less than 1 (negative). Where the index is negative it means that in real terms the cost of living in the host city is lower than the home city. This means that if the negative index where to be applied to the employee's salary, they would in effect be paid proportionately less spendable wage in the host city. It is important to note that the majority of organizations do not apply a negative cost of living index because it makes it difficult to persuade an employee to take up an assignment as they tend to see it as a allowance in salary.
Examples of Cost of Living Index Calculations using our data:
Example 1) An Australian employee entertaining from Perth to London where healthcare and transportation will be in case,granted by the employer
More high-priced in London:
- Alcohol & Tobacco +4.77%
- Clothing +21.85%
- Education +31.53%
- Furniture & Appliances +16.03%
- Groceries +16.35%
- Household +50.72%
- Miscellaneous +137.47%
- Personal Care +11.18%
- Recreation & Culture -6.82%
- Restaurants Meals Out and Hotels +34.99%
- Transport +19.80%
The unabridged contrast in cost of living entertaining from Perth and London is +28.06%.
In this case the cost of living index is safe bet and would be applied as it is.
Example 2) A British employee entertaining from London to Mumbai where the employer will supply housing and education
More high-priced in Mumbai:
- Alcohol & Tobacco -37.53%
- Clothing -9.58%
- Communication -44.92%
- Furniture & Appliances -19.31%
- Groceries -24.03%
- Healthcare -31.24%
- Miscellaneous -72.43%
- Personal Care -24.94%
- Recreation & Culture -35.73%
- Restaurants Meals Out and Hotels -33.11%
- Transport is -27.99%
The unabridged contrast in cost of living entertaining from London Mumbai is -30.53%.
In this case the cost of living index is negative and would not be applied.
Net Spendable Salary
Differences in cost of living only impact the portion of the wage that is spendable in the host country. Items in the home country such as retirement funding, healing assurance and other home based costs are not impacted by the cost of living in the host country.
To decide the Net Spendable wage originate what number / portion of the current wage (in home currency) is spent in maintaining the employee's current appropriate of living / lifestyle. What will the expatriate need to spend their wage on in the host country? For example will accommodation be in case,granted or will the employee pay rent, will healthcare be in case,granted etc. Deduct all items that are either in case,granted in kind or are spendable in the home country. Deduct the hypothetical number of tax, social contributions and any other statutory deductions applicable in the home country from the Spendable Salary. What is left is the Net Spendable Salary.
Cost of Living allowance (Cola)
The recipe for calculating the cost of living allowance using the above inputs is as follows:
(Net Spendable wage X Cost of Living Index X Hardship Index X replacement Rate) less (Net Spendable wage X replacement Rate) = Cola
Examples of Cola Calculations using our data
Example 1) An Australian employee with a net spendable wage of Aud0,000 entertaining from Perth to London where healthcare and transportation will be in case,granted by the employer
(0,000.00 X 1.2806 X 1 X 0.4768) less (0,000.00 X 0.4768) = Cola of £13,379.44 (Gbp)
Based on all the above factors a person would wish a Cost of Living allowance of £13,379.44 (Gbp), in expanding to their current wage of 100,000.00 Australian Dollar (Aud) to compensate for relocating from Perth to London. This Cost of Living allowance compensates for the unabridged cost of living contrast of +28.06% and the relative contrast in hardship of 0%.
Example 2) A British employee with a net spendable wage of £18,000 entertaining from London to Mumbai where the employer will supply housing and education
Note: Because the Cost of Living Index is negative it is not applied.
(£18,000.00 X 1 X 1.3 X 67.2852) less (£18,000.00 X67.2852) = Cola of 363,340.32 Indian Rupee
Based on all the above factors a person would wish a Cost of Living allowance of 363,340.32 (Inr ), in expanding to their current wage of £18,000.00 British Pound (Gbp ) to compensate for relocating from London to Mumbai. This Cost of Living allowance compensates for the unabridged cost of living contrast of [-30.53%] and the relative contrast in hardship of 30%.
Cola Payment
The Cola is paid as a wage supplement (i.e. As an further allowance) net of tax in the host country. If the Cola is a dutible allowance in the host country it should be grossed up in order that the full number of calculated Cola is paid net of tax given that the basis of the calculation is Net Spendable Salary. The Cola is often accompanied by other allowances and benefits such as flights home, relocation / settling in allowance, and furnishing allowance.
Exchange Rate Fluctuations
Significant changes in the replacement rate can make a indispensable contrast in the Cola calculation. In 2008 some of the major global replacement rates changed by as much as 30-40%.
The cost of living index reflects the changes caused by inflation and replacement rates. In the short-term there may be disequilibrium in the middle of inflation and the replacement rate (the one pushes the other), any way over time the cost of living index provides the most correct view of the cost of living.
It is important to remind expatriates that when the cost of living contrast is negative, and the negative value has not been applied, they have higher purchasing power in the host country than they would at home.
Where a negative cost of living index has not been applied (our recommended approach), and a turn in the replacement rate indicates an upward adjustment in Cola may be required, it is recommended that the Cola should not be adjusted upward until the cost of living index becomes safe bet i.e. The cost of living reflects that there is a "real" growth in cost of living in the middle of home and host countries. This may mean that their would be no growth in the Cola as a ensue of replacement rate fluctuations for some indispensable time. During this time the employee's purchasing power decreases. But it is important to remember that until the cost of living contrast becomes positive, the private will still have a higher purchasing power than they do in their home country.
It is advisable to stipulate a currency safety rule, rather than reacting to every fluctuation in the replacement rate. For example the rule may state that Cola will be reviewed if replacement rates or local inflation move by more than +10% During a year. It is important to keep in mind that the prices of goods and services are unlikely to drop in local currency. This would only occur in a period of deflation (negative inflation). Therefore the currency safety rule would normally make provision for upward adjustments in Cola and not downward adjustments During an employee's assignment. Downward adjustments to an existing Cola due to replacement rate fluctuations without a corresponding drop in the prices of local goods and services puts heavy pressure on an employee's host currency budget commitments and can lead to the employee experiencing financial difficulty.
Using an independent service provider provides an independent, objective basis for determining an employee's Cola.
We suggest therefore that a Cola is calculated by applying the specific (customized) cost of living index to the net spendable wage at the starting of the assignment and monitoring replacement rate fluctuations thereafter in expanding to the annual wage review.
How to suspect a Cost of Living discount
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