Skip to content Companies who move talent across borders usually rely on a global mobility policy. This is a structured framework of guidelines governing how the company manages the cross-border relocation, assignment and taxation of their employees. It also includes immigration, compensation and relocation logistics.
In fact, beneath the logistics of international assignments lay complex financial aspects. For instance, how can a company ensure that an employee’s purchasing power remains stable when moving from a country to another?
This is where a cost-of-living analysis comes into play. It is a very important aspect of any international compensation strategy, ensuring that assignments are not only fair but also competitive and sustainable.
What is a cost-of-living analysis?
It is a comparative study of the expenses required to maintain a certain standard of living in two different locations. In the context of global mobility, it’s not just about the price of a loaf of bread; it’s about a comprehensive “basket of goods and services” that reflects the lifestyle of an expatriate.
The main goal is to ensure the employee is no better or worse off financially during their assignment. If an employee spends a specific % of their income on groceries and transport in their home country, a cost-of-living analysis helps determine how much extra or less they need in the host country to buy that same worth of lifestyle.
What is COLA?
To compensate for the difference in the cost of living, companies will provide to the employee a Cost of Living Allowance (COLA).
However, depending on the specific case, the cost of living in the host country may be lower than in the home country. In this case, most companies usually do not deduct any negative COLA from the employee’s salary, despite this may create issues in mobility and repatriation.
How to calculate the cost-of-living
A professional cost-of-living analysis does not consists only in looking at the exchange rate between the two countries. The analysis takes into consideration a basket of goods and services (“expat basket”). This is a curated collection of consumer products and services that is used to compare the cost of living between the home country and host location.
The “expat basket”
The basket usually includes many items, divided into categories that represent the expatriate lifestyle. Such categories include:
- Consumer Goods: such as groceries, household supplies
- Services: such as internet subscriptions, gym memberships.
- Transportation: cost of purchasing a car, fuel, insurance, and public transit.
- Utilities: Electricity, water, heating, and cooling.
- Housing and Education.
Depending on the company policy, the basic basket might exclude housing, education, and healthcare, which might be covered separately.
Furthermore, the spending can be very subject. While COLA is based on averages, an employee with family may have a different basket than an employee who is moving without family.
What is COLI
The cost of the basket is calculated in the home city (e.g. Rome) and the host city (e.g. London). The difference in cost, adjusted for the exchange rate, determines the cost-of-living index (COLI).
Such index determines if the assignee needs more money to maintain their home-country lifestyle. In the calculation, the index usually sets the home city at 100. So, if the host city index is 130, it is 30% more expensive. If the host city index is 70, it is 30% cheaper.
Most companies don’t collect data on the cost-of-living index themselves, rather they rely on specialized providers.
Why investing in a cost-of-living analysis
Considering that the price stability can fluctuate worldwide, investing in a cost-of-living analysis becomes important for multinational companies who wish to retain talent.
In fact, inflation may affect each country differently and there might be an increase in consumer prices or a decrease due to geopolitical shifts. Without a COLA, the expatriate salary can effectively lose value, leading to dissatisfaction and, eventually, failed assignments.
Talent retention
A failed assignment, where an employee returns early, can lead to significant costs to the company. Furthermore, in an era of talent shortage, sourcing new candidates is very challenging, and companies shall invest significantly in talent retention.
To avoid such risk, companies prefer to invest in a well-structured global mobility policy, with standardized processes that should prevent high employees’ turnover.
Common challenges of international assignments
Even after having implemented a good global mobility policy with a well-structured COLA, HR managers may still face some problems in talent retention.
First, exchange rate fluctuations can significantly complicate the COLA implementation, creating a disparity between the intended purchasing power and the actual value received. For this reason, companies need to update allowances frequently, to prevent large disparities.
Nevertheless, when exchange rate changes, prices for goods in the host country do not always adjust instantly. This creates a period where the assignee may experience a reduced COLA payment before the local prices have dropped. To mitigate this issue, employers shall provide clarity on how the allowance is calculated and communicate potential changes in advance.
Relocation services and spousal support
Secondly, the allowance provision is not the only way to support an assignee relocation abroad. While financial allowances like COLA address the economic side of relocation, the human factor often determines the success or failure of an assignment.
One of the primary reasons for early repatriation is the inability of the accompanying partner to adapt to the host country. Therefore, modern global mobility policies increasingly include professional relocation services and spousal support programs.
In fact, when a professional moves abroad, their spouse often undergoes a significant identity loss, especially if they must sacrifice their own career. Spousal support aims to mitigate this by providing career coaching, assistance with work permits, or professional networking in the new location. By investing in the partner’s professional and social integration, companies not only fulfill their duty of care but also ensure the employee’s satisfaction, directly impacting their performance and long-term retention.
Managing expectations
A well-calculated COLA and a robust support package are only effective if the employee understands how they work. One of the biggest challenges for HR managers is managing expectations. For instance, employees often confuse the cost of living allowance with a salary increase, leading to friction when the allowance is adjusted downwards due to currency fluctuations or when moving to a cheaper location.
To avoid dissatisfaction, companies should invest in financial counseling and transparent communication. Explaining the methodology behind the “expat basket” and the Cost of Living Index (COLI) helps the assignee understand their goal. A clear and proactive communication about how and when allowances are updated creates a culture of trust, reducing the likelihood of the employee feeling financially disadvantaged during their time abroad.