The cost of living allowance (COLA) is an allowance that is often awarded to expats who move overseas as part of a job offer and is based upon the need to ensure that the lifestyle that they enjoy in their home country can, at a very minimum, be retained if they are relocated elsewhere. As an individual who is considering a relocation, you need to ensure that any salary or allowances that you are awarded with be relative to any increases in the cost of living that you can anticipate; a move to a city that has a higher cost of living should be accompanied by a relatively higher salary. For this reason, the COLA allowance will be an important part of any contract negotiation process.
The cost of living index
Many research companies provide the cost of living index, which calculates the cost of living in major cities throughout the world by comparing the basic price of a basket of goods and services.
The Worldwide Salaries Website and the Mercer Cost of Living Index are both useful resources.
A COLA index will operate on the basis that your home country, i.e. the one that you are relocating from, has a cost of living index of 100. The cost of living in the country to which you are planning to relocate will be measured relative to this. If the cost of living in the relocation country exceeds 100 this will mean that the cost of living in that country will be higher than that you currently enjoy. The more above 100 it is the more expensive it is comparatively. Each point above 100 represents 1%, so, if a relocation country has a cost of living of 112, this means it is 12% more expensive to live there than it is for you to live in your current location. Adversely, if the new cost of living is below 100 on the index, this means the country to which you are moving is cheaper than your home country and an index of 80 will mean that the host city will be 20% cheaper than your home city.
How do the cost of living indices and the Cost of Living Allowance work together
In order to apply the cost of living index to the COLA calculation you need to understand what was included in the index calculation. The indices that are produced by companies such as Mercer and the Worldwide Salaries website are based upon a standard basket of goods and services, they do not include housing costs, taxes and education. For this reason, the index should only be used to calculate changes in disposable income.
How do you calculate the cost of living allowance?
In order to calculate the COLA you firstly need to identify what your current disposable income is, i.e. how much money you have left at the end of the month after you have paid all your fixed costs. This will essentially cover all of the items that are not included in the cost of living index provided by Mercer. Once you have done this you need to establish the cost of living index for the destination country. Again, data provided by Mercer should help you to do this or you can use data provided by government statistics.
If your spendable income is 25,000 and the index of the destination country as measured against your home country is 120, then the allowance should be calculated as follows:
Disposable income x change in index
= 25,000 x 0.2 (20%) = 5,000
This means that you will need an additional 5,000 to cover the additional expenses you will face in your destination country.