Cost of Living Allowance in your contract
The difference in the cost of consumer goods between home and host countries will be represented in your contract by the Cost of Living Allowance. If there is no difference, the amount of cost of living allowance will show zero in the salary build up calculation.
The method of calculation, as well as time and regularity of payments, varies from one policy to another. Most companies calculate the cost of living allowance they give to employees using a certain cost of living index and comparing your disposable income with the change in the index. The most important thing is for you to know the facts and to make sure that you check the index yourself and make sure it’s a legitimate source.
It is important for the employee to understand the following:
- Name of the external consulting firm
- Method of calculation
- Source of the index used
- Period of payouts (is it only the first year, or the whole duration)
- Is it 100% or decreasing over time
In your contract, your Cost of living allowance can also be called Goods and services (G&S) allowance. This is the part of the contract where you will be explained the Goods & Services differential.
Cost of Living Allowance Calculation
The human resources professional needs to source the Cost of Living index from professional consultants. On your side, you can also purchase Cost of living index information should you feel that it is important in your compensation negotiation. Most often just ask your HR department for the source of the COL index as part of your early relocation preparation meetings.
Once the cost of living index has been received, the calculation takes place within what is called a 'Balance Sheet Calculation' that compares home and hosts pay to provide a tentative equalisation. The home country net pay is first broken down:
- Savings and other expenses
- Spendable income
The Cost of Living Allowance (COLA) will result from multiplying the Spendable income with the Cost of living index.
Spendable income in home country: 38,000 USD
Cost of living index (with home as 100): 109
Cost of Living Allowance: 3,420 USD
You will note that housing is separated from the Spendable income as it is covered by a different allowance generally.
Other factors affecting the COLA
Some companies will factor more information in the Cost of Living Allowance such as:
- Exchange rate: your spendable income will be affected by currency fluctuation depending on where your salary is paid. Some companies will integrate an exchange rate factor to the calculation of the COLA.
- Family size: the number of eligible family member needs to be determined. This affects your everyday living costs so it is taken into account.
- Hardship: this can come as a separate allowance or included in the COLA. Some countries are considered as Hardship locations by some corporate policies and therefore gives a right to an additional payment.
Depending on the relocation agreement, these factors can be included in another part of the contract.