Tuesday, November 15, 2011

How to Calculate a Cost of Living Allowance - Part 1


 


 A Cost of Living Allowance (COLA) is a salary supplement paid to employees to cover differences in the cost of living, particularly as a result of an international assignment.

The amount of COLA should enable an expatriate to be able to purchase 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 different geographic locations. COLA is a simple accurate method of measuring fluctuating salary purchasing power and ensuring parity.

Cost of Living Index
Xpatulator's cost of Living Indexes measure the cost of 230 products and services across 13 different basket groups in 300 cities across the globe. The data is gathered by a team of research analysts who survey comparable items that are available internationally. A minimum of 3 prices for the same brand/size/volume of product is used to determine the average price for each item in each location. The items are priced on a quarterly basis and tend to rise and fall with inflation. The 13 different basket categories are as follows:
  1. Alcohol & Tobacco: Alcoholic beverages and tobacco products
  2. Clothing: Clothing and footwear products
  3. Communication
  4. Education
  5. Furniture & Appliances: Furniture, household equipment and household appliances
  6. Groceries: Food, non-alcoholic beverages and cleaning material
  7. Healthcare: General Healthcare, Medical and Medical Insurance
  8. Household Accommodation: Housing, water, electricity, household gas, household fuels, local rates and residential taxes
  9. Miscellaneous: Stationary, Linen and general goods and services
  10. Personal Care: Personal Care products and services
  11. Recreation and Culture
  12. Restaurants, Meals Out and Hotels
  13. Transport: Public Transport, Vehicle Costs, Vehicle Fuel, Vehicle Insurance and Vehicle Maintenance

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

In order to calculate an accurate cost of living index for a specific individual the basket items that are not relevant to the individual should be excluded from the calculation. For example if education and housing is provided by the employer 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 individual to have their own customized cost of living index based on their specific arrangements rather than using an overall “generic” index which is likely to contains costs that are not relevant to the individual.


In part 2 we discuss the formula for calculating the specific cost of living index for an international assignment.