Imagine moving from rural Missouri to Manhattan: What’s the first thing that comes to mind? If you are like most people, you immediately think how much more expensive everything will be in a bustling city compared to more quiet, country living.
When corporations relocate employees or recruit new hires from outside of their local area, they must also consider the change in location costs when looking at that employee’s compensation and relocation expenses. Sometimes this change is accounted for in salary alone, but other times this becomes part of the employee’s relocation benefits.
What is COLA?
Cost of living allowances or adjustments (COLA) go by many names but operate essentially the same: An employee is relocated from a low or moderate cost of living location to a higher cost of a living location, and the employer compensates the employee for the difference. Factors that are examined for difference in cost include housing, goods and services, and taxes. Sometimes, a COLA is used as a one-time payment that eases adjustment to a higher cost location. Other times, a COLA is paid out over a period of time to subsidize the increased expenses. Essentially, COLA enables a relocated person and family to maintain the same standard of living in a new area.
Whether it is called a COLA, location cost differential (LCD), or something similar, there are several things to keep in mind before deciding to offer this benefit to your employees: How will it be calculated? Will it be paid all at once, or over time? Will it be paid for every increase or only after a set percentage in change between locations?
The Details of COLA
In order to pay any allowance, there must first be a standard to compare against. Costs of housing, goods and services, as well as the individual or family size will be examined to determine the standard. Several providers offer services to run these calculations for corporations and relocation management companies alike, but some corporations may determine these values on their own over time.
Based on cost of living factors mentioned, the origination city’s cost index is determined and then compared to the new city’s index. Oftentimes, employers have a limited number of locations where they might move someone, so the cost indexes of certain cities are already known. It is also common to see entire regions used for comparison instead of individual cities. Employers sometimes will only offer a COLA if the employee is moving into one of these predetermined and high-cost regions.
Once it is determined that there is a cost difference, the employer should determine at what point it will offer assistance. Must the cost of living change be greater than 3% between the locations? 5%? 10%? Will any change be paid? Employers wanting to offer richer benefits would have a lower threshold for cost of living changes, ensuring more employees realize this benefit.
How COLA is Paid
If it is determined that a payment is to be made, the final consideration is how the payment will be paid. Will you offer a one-time allowance? Will you recalculate every 6 months and offer allowances each time? Will you calculate the change once and then make monthly payments over 1 year? 2 years? 3 years?
Traditionally, U.S. domestic COLAs are only calculated once and then either paid once as an allowance or paid over a set amount of time. Depending on the severity of the increase, companies may want to maintain the adjustment for a longer period of time, allowing the employee more time to adjust in the new location.
Conversely, international COLAs are recommended to be recalculated more frequently due to fluctuating currency rates, inflation rates, and other uncontrollable factors. On international assignments where an end date is pre-determined, it is not uncommon to see companies offer the COLA all the way through the assignment. However, if an international assignment is open-ended, the company may want to transition the employee to a local standard of living (localizing) and cut off the COLA after a set amount of time.
Our benchmarking efforts have discovered different patterns in relocation benefits across different industries, which is why it is important to benchmark your policy against your peers’. Some industries will pay more and more often, while others will not consider a COLA at all. We can help you answer these questions for your organizational situation.