COLA - AIRINC | Better Mobility

What is the COLA and when should you use it?

The Cost-of-Living Allowance, abbreviated as COLA, is an ongoing allowance paid to employees on international assignments. The COLA is paid to protect the employee against excess goods and services (G&S) costs in the host location. Most simply, the COLA covers the difference in costs between goods and services at the home and host locations.

Who should receive a COLA?

Employees on an international assignment who continue to receive a home-based salary should receive a COLA. Because costs in the host location can be higher than in the home country, a COLA ensures that the portion of salary spent on G&S, called spendable income, is protected against excess G&S costs. This allows the employee to maintain their home country purchasing power in the host location.

What is included in the COLA?

The COLA is based on a specific group of goods and services (G&S) called the market basket. The cost of the market basket in the home location is compared to the cost of a similar one in the host location. The difference is the COLA.

The market basket covers a broad range of goods and services, often including:

food at home	clothing	home furnishings	recreation & entertainment
household supplies	medical care	domestic help	food away from home
personal care	telephone	transportation	alcohol & tobacco

Items in each of these categories are collectively referred to as the market basket.

Taxes, housing and utilities, education, and automobile purchases are often not included in the market basket, and are typically paid for separately by the employer.

How is the COLA determined?

There are two key components in establishing the COLA:

The employee’s spendable income
The Cost-of-Living Index

The spendable income is the amount of the employee’s salary spent on G&S; this is the amount protected while on assignment.

The Cost-of-Living Index (or COL index) indicates the relative cost difference between the host and home locations.

An index of 100 indicates that the host location is equally expensive as the home location
An index under 100 tells us that the host is less expensive
An index over 100 tells us that the host is more expensive

To calculate the COLA, the COLA index is multiplied by the employee’s spendable income. The result is the amount that the employee needs to maintain their purchasing power while in the host location.

Should the COLA be updated?

One benefit of the COLA is that it is paid separately from salary and can be updated for changes in economic conditions – both up and down. The COLA can be influenced by two factors:

Exchange rates: as the exchange rate between the home and host locations changes, the COLA is updated to capture the impact of a strengthening or weakening home / host currency.
Inflation / deflation: Additionally, both the market basket at home and at host are affected by inflation and deflation, so the COLA is updated for those as well.

Updating the COLA for exchange rate and inflation allows the company to make sure the employee is protected against economic changes.

As a result of changing economic circumstances, the COLA can increase or decrease. Although COLA changes keep the employee balanced, the Global Mobility team may need to field any employee questions about COLA decreases.

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Cost-of-Living Allowances / COLA

Education Knowledge Base

Related Tools

What is the COLA and when should you use it?

Who should receive a COLA?

What is included in the COLA?

How is the COLA determined?

Should the COLA be updated?

Related Resources

Recorded Webinars

Back to Basics: Exchange Rates

Recorded Webinars

Back to Basics: COLA

Back to Basics

Establishing the Cost-of-Living Allowance (COLA): Updating the Market Basket Over Time

Educational

Why does the COLA fluctuate?

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