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A Cost of Living reduction (Cola) is a salary supplement paid to employees to cover differences in the cost of living, particularly as a corollary of an international assignment. The amount 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 separate geographic locations. Cola is a simple correct formula of measuring ranging salary purchasing power and ensuring parity.

Cost of Living Index

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Our cost of Living Indexes quantum the cost of 230 products and services across 13 separate basket groups in 276 cities across the globe. The data is gathered by a team of research analysts who inspect comparable items that are ready internationally. A minimum of 3 prices for the same brand/size/volume of goods is used to settle the average price for each item in each location. The items are priced on a regular basis and tend to rise and fall with inflation. The 13 separate basket categories are as follows:

Alcohol & Tobacco: Alcoholic beverages and tobacco products
Alcohol at BarBeerCigarettesLocally Produced SpiritWhiskeyWine

Clothing: Clothing and footwear products
Business SuitsCasual ClothingChildren's Clothing and footwearCoats and hatsEvening WearShoe RepairsUnderwear

Communication
Home Telephone Rental and Call ChargesInternet association and service victualer feesMobile / Cellular Phone ageement and Calls

Education
Crèche / Pre-School FeesHigh School / College FeesPrimary School FeesTertiary Study Fees

Furniture & Appliances: Furniture, household equipment and household appliances
Dvd PlayerFridge FreezerIronKettle, Toaster, MicrowaveLight BulbsTelevisionVacuum CleanerWashing Machine

Groceries: Food, non-alcoholic beverages and cleaning material
Baby ConsumablesBaked GoodsBakingCanned FoodsCheeseCleaning ProductsDairyFresh FruitsFresh VegetablesFruit JuicesFrozenMeatOil & VinegarsPet FoodPre-Prepared MealsSaucesSeafoodSnacksSoft DrinksSpices & Herbs

Healthcare: general Healthcare, curative and curative Insurance
General Practitioner Consultation ratesHospital incommunicable Ward Daily RateNon-Prescription MedicinePrivate curative insurance / curative Aid Contributions

Household: Housing, water, electricity, household gas, household fuels, local rates and residential taxes
House / Flat MortgageHouse / Flat RentalHousehold Electricity ConsumptionHousehold Gas / Fuel ConsumptionHousehold Water ConsumptionLocal asset Rates / Taxes / Levies

Miscellaneous: Stationary, Linen and general goods and services
Domestic HelpDry CleaningLinenOffice SuppliesNewspapers and MagazinesPostage Stamps

Personal Care: Personal Care products and services
CosmeticsHaircareMoisturiser / Sun BlockNappiesPain Relief TabletsToilet PaperToothpasteSoap / Shampoo / Conditioner

Recreation and Culture
BooksCamera FilmCinema TicketDvd and Cd'sSports goodsTheatre Ticket

Restaurants, Meals Out and Hotels
Business DinnerDinner at restaurant (non fast food)Hotel RatesTake Away Drinks & Snacks (fast Food)

Transport: communal Transport, car Costs, car Fuel, car insurance and car Maintenance
Hire buy / Lease of VehiclePetrol / DieselPublic TransportService MaintenanceTyresVehicle InsuranceVehicle Purchase

Each basket class does not count equally and are weighted in the final calculation based on expatriate spending patterns.

In order to speculate an correct cost of living index for a exact personel the basket items that are not relevant to the personel should be excluded from the calculation. For example if education and housing is in case,granted by the manager 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 possible for each personel to have their own customized cost of living index based on their exact arrangements rather than using an allinclusive "generic" index which is likely to contains costs that are not relevant to the individual.

The formula for calculating the exact 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 spirited to a higher cost of living host city, the index will be greater than 1 (positive). When spirited 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 precisely be paid proportionately less spendable salary 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 worker to take up an assignment as they tend to see it as a reduction in salary.

Examples of Cost of Living Index Calculations using our data:

Example 1) An Australian worker spirited 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 allinclusive dissimilarity in cost of living spirited from Perth and London is +28.06%.

In this case the cost of living index is sure and would be applied as it is.

Example 2) A British worker spirited from London to Mumbai where the manager will furnish 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 allinclusive dissimilarity in cost of living spirited 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 quantum of the salary that is spendable in the host country. Items in the home country such as withdrawal funding, curative insurance and other home based costs are not impacted by the cost of living in the host country.

To settle the Net Spendable salary produce what amount / quantum of the current salary (in home currency) is spent in maintaining the employee's current proper of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will chamber be in case,granted or will the worker pay rent, will healthcare be in case,granted etc. Deduct all items that are whether in case,granted in kind or are spendable in the home country. Deduct the hypothetical amount of tax, communal 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 reduction (Cola)

The formula for calculating the cost of living reduction using the above inputs is as follows:

(Net Spendable salary X Cost of Living Index X Hardship Index X change Rate) less (Net Spendable salary X change Rate) = Cola

Examples of Cola Calculations using our data

Example 1) An Australian worker with a net spendable salary of Aud0,000 spirited 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 want a Cost of Living reduction of £13,379.44 (Gbp), in addition to their current salary of 100,000.00 Australian Dollar (Aud) to compensate for relocating from Perth to London. This Cost of Living reduction compensates for the allinclusive cost of living dissimilarity of +28.06% and the relative dissimilarity in hardship of 0%.

Example 2) A British worker with a net spendable salary of £18,000 spirited from London to Mumbai where the manager will furnish 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 want a Cost of Living reduction of 363,340.32 (Inr ), in addition to their current salary of £18,000.00 British Pound (Gbp ) to compensate for relocating from London to Mumbai. This Cost of Living reduction compensates for the allinclusive cost of living dissimilarity of [-30.53%] and the relative dissimilarity in hardship of 30%.

Cola Payment

The Cola is paid as a salary supplement (i.e. As an further allowance) net of tax in the host country. If the Cola is a taxable reduction in the host country it should be grossed up in order that the full amount 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 change rate can make a significant dissimilarity in the Cola calculation. In 2008 some of the major global change rates changed by as much as 30-40%.

The cost of living index reflects the changes caused by inflation and change rates. In the short-term there may be disequilibrium between inflation and the change 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 dissimilarity 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 change 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 sure i.e. The cost of living reflects that there is a "real" growth in cost of living between home and host countries. This may mean that their would be no growth in the Cola as a corollary of change rate fluctuations for some significant time. During this time the employee's purchasing power decreases. But it is important to remember that until the cost of living dissimilarity becomes positive, the personel will still have a higher purchasing power than they do in their home country.

It is advisable to stipulate a currency protection rule, rather than reacting to every fluctuation in the change rate. For example the rule may state that Cola will be reviewed if change 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 protection rule would usually make provision for upward adjustments in Cola and not downward adjustments During an employee's assignment. Downward adjustments to an existing Cola due to change rate fluctuations without a corresponding drop in the prices of local goods and services puts huge pressure on an employee's host currency budget commitments and can lead to the worker experiencing financial difficulty.

Using an independent service victualer provides an independent, objective basis for determining an employee's Cola.

We propose therefore that a Cola is calculated by applying the exact (customized) cost of living index to the net spendable salary at the starting of the assignment and monitoring change rate fluctuations thereafter in addition to the every year salary review.

How to reckon a Cost of Living reduction