When relocating employees internationally as part of your global mobility programme, a Cost of Living Allowance (COLA) plays a key role in maintaining their financial well-being. But what exactly is it, and how should HR teams approach it?
A Cost of Living Allowance is designed to bridge the gap between an employee’s home country living costs and those in the host country. Without it, international assignments can become financially unviable for employees, leading to reluctance or dissatisfaction. But how do you calculate it fairly? What factors should you consider beyond the basic cost of goods and services?
Why Is a Cost of Living Allowance Important?
Relocating employees across borders isn’t just about covering flights and visas. The day-to-day cost of living can vary significantly between locations. A salary that provides comfort in one city might barely cover essentials in another.
Consider the implications:
- Financial strain on employees – Without COLA, employees may struggle to maintain their lifestyle, causing stress and potential dissatisfaction.
- Risk of assignment failure – Employees might return home early if the financial impact proves too challenging.
- Global mobility challenges – If international roles seem financially unattractive, fewer employees may be willing to relocate.
A well-structured COLA makes international moves more appealing and assignments more likely to succeed.
How Is The Allowance Calculated?
Calculating COLA involves several factors beyond simply comparing grocery prices:
- Goods and services index – Reflects differences in everyday expenses such as food, transport, healthcare, and leisure.
- Housing costs – Rent or mortgage expenses can vary greatly between locations.
- Currency fluctuations – Exchange rate changes can affect purchasing power.
- Taxation differences – Some countries impose higher tax burdens on allowances.
Most organisations rely on reputable external data providers to set these figures. However, HR teams should interpret the data carefully, ensuring it aligns with company policies and the needs of their workforce.
Should COLA Be Fixed or Variable?
HR teams face a key decision: should the allowance be fixed or variable?
- Fixed COLA: Provides predictability but might become outdated if local costs shift.
- Variable COLA: Adjusts in line with inflation, exchange rates, and economic conditions. It is fairer in theory but requires regular reviews.
The best approach may be a balanced one—reviewing COLA periodically with adjustments when necessary.
Common Challenges
Even with robust policies, COLA management has its hurdles:
- Perceived fairness: Employees might compare their COLA with colleagues on similar assignments. Discrepancies can occur due to differing local cost factors or individual tax situations, so clear communication is key.
- Cost fluctuations: Inflation, exchange rate movements, and changes in local living costs may render a COLA outdated. Some companies adjust allowances quarterly or annually, but frequent changes can lead to uncertainty.
- Tax complexities: In some regions, COLA is taxable, reducing its intended benefit. To address this, some companies choose to gross up allowances—boosting the COLA amount to cover tax liabilities. This ensures that employees receive the full benefit after taxation rather than losing out due to extra tax burdens. However, grossing up can increase overall assignment costs, so HR teams must carefully assess the financial impact.
A transparent and well-documented COLA policy helps mitigate these challenges by clarifying the rationale behind the calculations.
Does COLA Apply to Every Assignment?
Not every international move requires a COLA. The nature of the assignment plays a significant role:
- Short-term assignments: COLA is common for temporary relocations where employees are expected to return home after a set period.
- Long-term or permanent relocations: Companies might adjust the base salary instead of providing a separate COLA, as employees integrate into the local economy over time.
Ask yourself: Does the assignment justify a separate allowance, or is a salary adjustment more appropriate? Early clarity on this question can shape a comprehensive mobility package.
Best Practices for HR Teams
To navigate COLA effectively, HR teams should:
- Use reliable external data: Ensure cost-of-living figures come from reputable sources.
- Communicate transparently: Explain clearly to employees how their COLA is calculated.
- Review regularly: Economic conditions change, and so should the COLA.
- Consider tax implications: Decide whether to gross up allowances to ensure employees receive the full intended benefit.
- Balance structure with flexibility: Avoid rigid policies that may become outdated while also preventing too-frequent adjustments that could confuse employees.
Final Thoughts on Cost of Living Allowance
A well-structured Cost of Living Allowance ensures international assignments remain financially viable for employees and sustainable for companies. HR teams must balance accuracy, fairness, and adaptability to keep employees engaged and assignments successful.
How is your company approaching COLA? If you haven’t reviewed your global mobility policies recently, now might be the time.
Speak to one of our experts or send a message today and find out how we can support your employee relocation programmes.
