Cost of Living Adjustment (COLA)
What is Cost of Living Adjustment (COLA)?
A compensation supplement given to assignees to account for differences in the cost of goods and services between their home and host locations, ensuring their purchasing power is maintained.
Cost of Living Adjustments are a core component of the balance sheet approach to international compensation. COLA indices are calculated by comparing the prices of a standard basket of goods and services in the home and host locations, including groceries, transportation, clothing, entertainment, and personal care.
The adjustment can be positive (when the host location is more expensive) or negative (when the host location is cheaper), though many organizations choose to apply only positive differentials. COLA data is typically sourced from specialized providers such as Mercer, ECA International, or AIRINC.
COLA amounts are reviewed periodically, usually quarterly or annually, and may be adjusted based on exchange rate fluctuations or changes in local market conditions. Transparent communication with assignees about how COLA is calculated and when it may change is essential for maintaining trust and satisfaction.
Related Terms
Balance Sheet Approach
A compensation methodology for international assignees that aims to keep employees financially 'whole' relative to their home country, by separately tracking income, taxes, housing, and goods and services costs.
Relocation Package
A bundle of benefits and allowances provided by an employer to support an employee moving to a new location, which may include moving expenses, temporary housing, travel, and settling-in support.
Tax Equalization
A compensation policy designed to ensure that an employee on international assignment pays no more or less tax than they would have in their home country, with the employer absorbing any difference.