Cost of Living Adjustments (COLA) compensate employees for higher expenses in assignment locations. They aim to maintain purchasing power comparable to what employees would have at home. COLA is common in expatriate packages for high-cost destinations.
How COLA Works
COLA calculations compare costs between home and host locations for goods and services employees typically purchase. When the host location costs more, an adjustment compensates the difference. COLA may be calculated on spendable income rather than total salary.
Data Sources
Cost comparisons use data from specialized providers who survey prices globally. Common sources include ECA International, Mercer, and others. These surveys measure prices for a basket of goods weighted for expatriate spending patterns.
Negative COLA
When host locations cost less than home, negative COLA could theoretically apply. Most companies do not reduce pay for lower-cost assignments. Some apply negative COLA only to localized employees or use COLA floors to prevent reductions.