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.
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Frequently Asked Questions
How is a cost of living adjustment calculated?
COLA is calculated by comparing the cost of a typical basket of goods and services between the home and host locations. Mobility teams use published cost of living indices from providers such as AIRINC, Mercer, or ECA International. The index is applied to a portion of the assignee's salary deemed spendable on goods and services, then paid as a regular allowance during the assignment.
Why does a cost of living adjustment matter for international assignments?
COLA matters because purchasing power varies dramatically across international assignments. Without COLA, an assignee moving from a lower-cost location to a higher-cost location would experience a real reduction in their standard of living, creating dissatisfaction and assignment failure risk. COLA keeps the assignee whole on everyday spending while the employer manages the cost predictably.
When is a cost of living adjustment paid?
COLA is typically paid as a recurring allowance throughout the assignment, integrated into the assignee's regular pay cycle. The allowance amount is updated periodically as cost of living indices and exchange rates shift, usually annually or semi-annually. COLA ends when the assignee repatriates, localizes, or moves to a new host location with a recalculated allowance.
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.
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.
Hypothetical Tax (Hypo Tax)
A notional tax withheld from an assignee's paycheck under a tax equalization policy, representing what they would have paid in taxes had they remained in their home country.
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.
Total Assignment Cost (TAC)
A comprehensive calculation of all direct and indirect costs associated with sending an employee on an international assignment, used to assess ROI and inform policy decisions.