How to think a Cost of Living reduction
A Cost of Living allowance (Cola) is a salary supplement paid to employees to cover differences in the cost of living, particularly as a supervene of an international assignment. The whole 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 distinct geographic locations. Cola is a easy exact recipe of measuring fluctuating salary purchasing power and ensuring parity.
Cost of Living Index
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Our cost of Living Indexes measure the cost of 230 products and services over 13 distinct basket groups in 276 cities over the globe. The data is gathered by a team of explore analysts who search for comparable items that are ready internationally. A minimum of 3 prices for the same brand/size/volume of product is used to settle the midpoint 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 distinct basket categories are as follows:
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Alcohol & Tobacco: Alcoholic beverages and tobacco products
Alcohol at BarBeerCigarettesLocally Produced SpiritWhiskeyWine
Clothing: Clothing and footwear products
Business SuitsCasual ClothingChildren's Clothing and footwearCoats and hatsEvening WearShoe RepairsUnderwear
Communication
Home Telephone Rental and Call ChargesInternet association and aid victualer feesMobile / Cellular Phone ageement and Calls
Education
Crèche / Pre-School FeesHigh School / College FeesPrimary School FeesTertiary Study Fees
Furniture & Appliances: Furniture, household equipment and household appliances
Dvd PlayerFridge FreezerIronKettle, Toaster, MicrowaveLight BulbsTelevisionVacuum CleanerWashing Machine
Groceries: Food, non-alcoholic beverages and cleaning material
Baby ConsumablesBaked GoodsBakingCanned FoodsCheeseCleaning ProductsDairyFresh FruitsFresh VegetablesFruit JuicesFrozenMeatOil & VinegarsPet FoodPre-Prepared MealsSaucesSeafoodSnacksSoft DrinksSpices & Herbs
Healthcare: general Healthcare, healing and healing Insurance
General Practitioner Consultation ratesHospital inexpressive Ward Daily RateNon-Prescription MedicinePrivate healing guarnatee / healing Aid Contributions
Household: Housing, water, electricity, household gas, household fuels, local rates and residential taxes
House / Flat MortgageHouse / Flat RentalHousehold Electricity ConsumptionHousehold Gas / Fuel ConsumptionHousehold Water ConsumptionLocal asset Rates / Taxes / Levies
Miscellaneous: Stationary, Linen and general goods and services
Domestic HelpDry CleaningLinenOffice SuppliesNewspapers and MagazinesPostage Stamps
Personal Care: Personal Care products and services
CosmeticsHaircareMoisturiser / Sun BlockNappiesPain Relief TabletsToilet PaperToothpasteSoap / Shampoo / Conditioner
Recreation and Culture
BooksCamera FilmCinema TicketDvd and Cd'sSports goodsTheatre Ticket
Restaurants, Meals Out and Hotels
Business DinnerDinner at restaurant (non fast food)Hotel RatesTake Away Drinks & Snacks (fast Food)
Transport: social Transport, vehicle Costs, vehicle Fuel, vehicle guarnatee and vehicle Maintenance
Hire purchase / Lease of VehiclePetrol / DieselPublic TransportService MaintenanceTyresVehicle InsuranceVehicle Purchase
Each basket kind does not count equally and are weighted in the final calculation based on expatriate spending patterns.
In order to presuppose an exact cost of living index for a specific private the basket items that are not relevant to the private should be excluded from the calculation. For example if education and housing is in case,granted by the boss 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 private to have their own customized cost of living index based on their specific arrangements rather than using an extensive "generic" index which is likely to contains costs that are not relevant to the individual.
The recipe for calculating the specific cost of living index for an international assignment is as follows:
Cost of Living Index = Customized Cost of Living Index for Host City / Customized Cost of Living Index for Home City
When inviting to a higher cost of living host city, the index will be greater than 1 (positive). When inviting to a lower cost of living host city the index will be less than 1 (negative). Where the index is negative it means that in real terms the cost of living in the host city is lower than the home city. This means that if the negative index where to be applied to the employee's salary, they would nothing else but be paid proportionately less spendable salary in the host city. It is prominent to note that the majority of organizations do not apply a negative cost of living index because it makes it difficult to persuade an laborer to take up an assignment as they tend to see it as a allowance in salary.
Examples of Cost of Living Index Calculations using our data:
Example 1) An Australian laborer inviting from Perth to London where healthcare and transportation will be in case,granted by the employer
More high-priced in London:
Alcohol & Tobacco +4.77%Clothing +21.85%Education +31.53%Furniture & Appliances +16.03%Groceries +16.35%Household +50.72%Miscellaneous +137.47%Personal Care +11.18%Recreation & Culture -6.82%Restaurants Meals Out and Hotels +34.99%Transport +19.80%
The extensive incompatibility in cost of living inviting from Perth and London is +28.06%.
In this case the cost of living index is definite and would be applied as it is.
Example 2) A British laborer inviting from London to Mumbai where the boss will supply housing and education
More high-priced in Mumbai:
Alcohol & Tobacco -37.53%Clothing -9.58%Communication -44.92%Furniture & Appliances -19.31%Groceries -24.03%Healthcare -31.24%Miscellaneous -72.43%Personal Care -24.94%Recreation & Culture -35.73%Restaurants Meals Out and Hotels -33.11%Transport is -27.99%
The extensive incompatibility in cost of living inviting from London Mumbai is -30.53%.
In this case the cost of living index is negative and would not be applied.
Net Spendable Salary
Differences in cost of living only impact the measure of the salary that is spendable in the host country. Items in the home country such as resignation funding, healing guarnatee and other home based costs are not impacted by the cost of living in the host country.
To settle the Net Spendable salary create what whole / measure of the current salary (in home currency) is spent in maintaining the employee's current suitable of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will chamber be in case,granted or will the laborer pay rent, will healthcare be in case,granted etc. Deduct all items that are whether in case,granted in kind or are spendable in the home country. Deduct the hypothetical whole of tax, social contributions and any other statutory deductions applicable in the home country from the Spendable Salary. What is left is the Net Spendable Salary.
Cost of Living allowance (Cola)
The recipe for calculating the cost of living allowance using the above inputs is as follows:
(Net Spendable salary X Cost of Living Index X Hardship Index X transfer Rate) less (Net Spendable salary X transfer Rate) = Cola
Examples of Cola Calculations using our data
Example 1) An Australian laborer with a net spendable salary of Aud0,000 inviting from Perth to London where healthcare and transportation will be in case,granted by the employer
(0,000.00 X 1.2806 X 1 X 0.4768) less (0,000.00 X 0.4768) = Cola of £13,379.44 (Gbp)
Based on all the above factors a man would want a Cost of Living allowance of £13,379.44 (Gbp), in addition to their current salary of 100,000.00 Australian Dollar (Aud) to compensate for relocating from Perth to London. This Cost of Living allowance compensates for the extensive cost of living incompatibility of +28.06% and the relative incompatibility in hardship of 0%.
Example 2) A British laborer with a net spendable salary of £18,000 inviting from London to Mumbai where the boss will supply housing and education
Note: Because the Cost of Living Index is negative it is not applied.
(£18,000.00 X 1 X 1.3 X 67.2852) less (£18,000.00 X67.2852) = Cola of 363,340.32 Indian Rupee
Based on all the above factors a man would want a Cost of Living allowance of 363,340.32 (Inr ), in addition to their current salary of £18,000.00 British Pound (Gbp ) to compensate for relocating from London to Mumbai. This Cost of Living allowance compensates for the extensive cost of living incompatibility of [-30.53%] and the relative incompatibility in hardship of 30%.
Cola Payment
The Cola is paid as a salary supplement (i.e. As an added allowance) net of tax in the host country. If the Cola is a taxable allowance in the host country it should be grossed up in order that the full whole of calculated Cola is paid net of tax given that the basis of the calculation is Net Spendable Salary. The Cola is often accompanied by other allowances and benefits such as flights home, relocation / settling in allowance, and furnishing allowance.
Exchange Rate Fluctuations
Significant changes in the transfer rate can make a principal incompatibility in the Cola calculation. In 2008 some of the major global transfer rates changed by as much as 30-40%.
The cost of living index reflects the changes caused by inflation and transfer rates. In the short-term there may be disequilibrium in the middle of inflation and the transfer rate (the one pushes the other), however over time the cost of living index provides the most exact view of the cost of living.
It is prominent to remind expatriates that when the cost of living incompatibility is negative, and the negative value has not been applied, they have higher purchasing power in the host country than they would at home.
Where a negative cost of living index has not been applied (our recommended approach), and a change in the transfer rate indicates an upward adjustment in Cola may be required, it is recommended that the Cola should not be adjusted upward until the cost of living index becomes definite i.e. The cost of living reflects that there is a "real" increase in cost of living in the middle of home and host countries. This may mean that their would be no increase in the Cola as a supervene of transfer rate fluctuations for some principal time. While this time the employee's purchasing power decreases. But it is prominent to remember that until the cost of living incompatibility becomes positive, the private will still have a higher purchasing power than they do in their home country.
It is advisable to stipulate a currency security rule, rather than reacting to every fluctuation in the transfer rate. For example the rule may state that Cola will be reviewed if transfer rates or local inflation move by more than +10% While a year. It is prominent to keep in mind that the prices of goods and services are unlikely to drop in local currency. This would only occur in a duration of deflation (negative inflation). Therefore the currency security rule would regularly make provision for upward adjustments in Cola and not downward adjustments While an employee's assignment. Downward adjustments to an existing Cola due to transfer rate fluctuations without a corresponding drop in the prices of local goods and services puts massive pressure on an employee's host currency budget commitments and can lead to the laborer experiencing financial difficulty.
Using an independent aid victualer provides an independent, objective basis for determining an employee's Cola.
We suggest therefore that a Cola is calculated by applying the specific (customized) cost of living index to the net spendable salary at the beginning of the assignment and monitoring transfer rate fluctuations thereafter in addition to the yearly salary review.
How to think a Cost of Living reduction
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