A Cost-of-Living Adjustment or Allowance is important to consider for corporate relocation

Why is COLA (Cost-of-Living Adjustment or Allowance) important for corporate relocation? Moving from one city to another can be daunting, especially when the destination has a higher cost of living.

Picture this: an employee, accustomed to the modest living expenses of a small city in the heart of the United States, receives an opportunity to transfer to a bustling international metropolis. While the prospect of a new adventure is thrilling, the stark Cost-of-Living contrast between their current home and a big city makes the employee reconsider the move. Everyday expenses, from groceries to housing, could create a financial strain that can quickly become overwhelming for the employee and their family.

Companies can alleviate this burden by providing a Cost-of-Living Allowance or Adjustment (COLA) for relocating employees. This crucial measure bridges the gap between the employee’s previous standard of living and the increased expenses they face in their new location.

To shed light on this component of corporate relocation policy, we turned to our partners at AIRINC. Christopher Bloedel, CRP, GMS, Associate Director of Client Engagement, offered invaluable insights about considering and calculating COLA.

What is a Cost-of-Living Adjustment (COLA)?

A Cost-of-Living Adjustment (COLA) makes compensation more equitable for employees across different geographic locations.

COL Adjustment considers the Cost-of-Living variances in an individual’s compensation and salary package. For instance, a multinational corporation may offer higher salary ranges for positions based in its London branch compared to those in less expensive locales like Indianapolis, IN.

A reputable corporate relocation company can source a cost-of-living analysis for their clients to calculate a cost-of-living adjustment accurately.

Organizations with regional pay scales often incorporate Cost-of-Living Adjustments into their overall compensation structure. Therefore, if a company is hiring a new employee and permanently moving them for a new role, the COLA has already been taken into consideration in the company’s pay scales and is therefore reflected in the offered salary.

In some cases, a company may choose to apply a Cost-of-Living Adjustment to an existing employee’s salary if they are permanently relocating to a new city with a much higher cost of living.

What is a Cost-of-Living Allowance (COLA)?

A Cost-of-Living Allowance differs from a Cost-of-Living Adjustment in that it is not added to an employee’s base salary. A Cost-of-Living Allowance is temporary additional compensation.

Typically, a Cost-of-Living Allowance comes into play when an employee relocates to a higher cost-of-living area for a specific assignment, such as a temporary or international assignment.

Companies may structure COLA payments in various ways, such as paying the difference between the employee’s current cost of living and the new location’s cost of living over a predetermined period, often spanning several years.

A Cost-of-Living Allowance calculation reflects the typical expenditures of an individual or family in both their original and new locations.

Why Should Companies Provide a COLA (Cost-of-Living Adjustment or Allowance)?

Providing a Cost-of-Living Adjustment or Allowance (COLA) is not merely a gesture of goodwill. A COLA is a strategic decision that can significantly contribute to an employee relocation’s success.

Without a COLA, relocating employees may face a myriad of economic challenges. The cost of goods and services can vary dramatically between the employee’s pre and post-move locations. Housing affordability and availability, in particular, pose significant obstacles in many relocation scenarios. There can also be significant tax impacts during a relocation that add another layer of complexity to the process.

These financial concerns will impact every facet of life for the employee and their family and dictate their happiness with the decision to relocate and remain in the company’s role.

According to Christopher Bloedel of AIRINC, “Employers play an important role in making sure that a relocation is successful.” He recommends, “Counseling an employee is a great way to identify potential pitfalls and propose well-known or even innovative solutions. Data can allow an employee to see the full financial impact and allow them to adjust before issues spiral.”

When employers recognize these challenges, they ensure a relocation is successful by providing a Cost-of-Living Adjustment or Allowance to alleviate the impact of cost disparities and address housing challenges and compensation issues.

Providing a COLA represents an investment in both employee well-being and organizational success, fostering loyalty, productivity, and satisfaction among relocated employees.

When to Provide a COLA (Cost-of-Living Adjustment or Allowance) Program

The decision to implement a Cost-of-Living Adjustment or Allowance (COLA) program depends on many factors.

AIRINC’s Christopher Bloedel recommends asking these questions when determining a COLA program: “How difficult is it to attract and retain talent overall and specifically in that location? Do you have the budget? What is the risk of not providing financial assistance?”

While some organizations may opt to provide financial assistance for any location with a higher Cost-of-Living than the pre-move location, others may set thresholds, such as a certain percentage differential (e.g., 3%, 5%, etc.), above which assistance becomes warranted.

Other companies maintain a pre-determined list of locations where employees qualify for cost-of-living assistance.

Is COLA For Employee Corporate Relocation Common?

Whether to include a Cost-of-Living Allowance in employee corporate relocation benefits varies widely.

A COLA can apply to both domestic and international relocations but is not always offered in either scenario. It depends on factors such as the destination location, the magnitude of the cost-of-living difference from the origin, as well as the employer’s policies, and the type of assignment.

Many companies opt to implement COLA on an as-needed basis, addressing specific instances where significant disparities in living costs necessitate financial assistance. For instance, if an internal candidate expresses interest in relocating or a new hire raises concerns about the affordability of the destination, companies may conduct analyses to evaluate the accuracy of these concerns.

Relocating existing employees, especially across international borders, may prompt additional scrutiny. Employers can conduct salary assessments to determine appropriate compensation levels for the new location. By adopting a personalized approach to COLA implementation, companies can effectively address the diverse needs of their workforce while ensuring equitable treatment across relocations.

How is a Cost-of-Living Allowance (COLA) Calculated?

To calculate a Cost-of-Living Allowance (COLA), work with a data provider for accuracy and consistency. NRI Relocation works with AIRINC to analyze our clients’ Cost-of-Living Allowances. Working with the right partner for this analysis is important because the COLA calculation requires a large database of information that must be continually updated.

A Cost-of-Living Allowance calculation reflects the typical expenditures of an individual or family in both their original and new locations. This encompasses categories such as income taxes, goods and services, housing, and savings. Data providers often model this information to generate comprehensive COLA assessments.

It’s important to note that COLA programs are based on average expenses rather than the specific spending habits of individual employees. However, the COLA calculation accounts for individual employee factors, including the employee’s base salary, family size, and housing situation (whether they own or rent).

Is There a Cost-of-Living Allowance (COLA) Formula?

While there isn’t a universal formula for calculating a Cost-of-Living Allowance (COLA), a simplified formula is based on the ratio of Cost-of-Living indices between the employee’s current location and destination. This formula is expressed as:

COLA = (Cost-of-Living Index at Destination / Cost-of-Living Index at Current Location) x 100

Source: FinanceStrategists.com

However, it’s important to note that this formula only provides a basic estimate and won’t include all the relevant factors.

Companies typically rely on complex models run by data providers for a more comprehensive and accurate COLA calculation. These models take into account a wide range of factors, including housing costs, taxes, goods and services prices, and other economic indicators. This ensures that the COLA accurately reflects the real and current cost-of-living differences between locations.

Consider a cost-of-living allowance in your global mobility policy

How Does COLA Work For Employees?

The Cost-of-Living Allowance Should Be Included in the Global Mobility Policy

Companies typically outline COLA benefits as part of their relocation and global mobility policies. The employer can provide employees with details about the calculation, coverage, and payment process. By incorporating COLA into their relocation policies, companies demonstrate transparency and their commitment to supporting employees through equitable compensation when relocating to areas with higher living costs.

Paying the Cost-of-Living Allowance

A main feature of a Cost-of-Living Allowance program is that it is paid separately from an employee’s base salary. This approach enables the company to adjust or discontinue the cost-of-living assistance without affecting the employee’s base salary. The primary purpose of COLA programs is to provide temporary financial support, often disbursed over a specified period of 1, 3, or 5 years.

For instance, if the cost difference amounts to 11%, and the employee’s base salary is $150,000, the company might provide a Cost-of-Living Allowance of $16,500 in the first year, followed by $11,100 in the second year and $5,400 in the third year.

This incremental approach assists the employee with immediate financial changes and spreads out the COLA expense if the employee chooses to leave the company during their assignment.

Such COLA programs are particularly favored by companies with national pay scales. Conversely, organizations with regional pay scales typically incorporate COLA considerations into their overall compensation structures, eliminating the need to address COLA separately.

COLA After Repatriation or Return From Assignment

After an employee’s repatriation or return from an assignment, the Cost-of-Living Allowance (COLA) ceases, as it is temporary and dependent on the destination.

However, employees generally do not revert to their previous salary upon returning, as their circumstances and opportunities may have evolved during their assignment. Instead, salary reassessment is common at this point, often resulting in adjustments to reflect the employee’s expanded skills, experience, and market conditions.

Add COLA to your corporate relocation program

Adding a Cost-of-Living Allowance to Your Corporate Relocation Program

Incorporating a Cost-of-Living Allowance (COLA) into your corporate relocation program can significantly enhance the success and satisfaction of your employees undergoing relocation. 

Integrating a COLA will address cost-of-living differences, streamline administrative processes, and enhance employee retention and satisfaction. This benefit is a smart investment in your company’s talent management and global mobility initiatives. 

By partnering with NRI Relocation and leveraging the expertise of our experienced partners at AIRINC, you can ensure that your relocation policy and packages are comprehensive, transparent, and aligned with the unique needs of your workforce.

Contact NRI Relocation today to explore how we can tailor a COLA solution to support your company’s relocation objectives and drive success in the ever-evolving global marketplace.