How to presume a Cost of Living reduction

Free Living Will - How to presume a Cost of Living reduction

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A Cost of Living discount (Cola) is a wages supplement paid to employees to cover differences in the cost of living, particularly as a supervene of an international assignment. The estimate of Cola should enable an expatriate to be able to buy 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 dissimilar geographic locations. Cola is a simple correct formula of measuring ranging wages purchasing power and ensuring parity.

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Cost of Living Index

Our cost of Living Indexes portion the cost of 230 products and services over 13 dissimilar basket groups in 276 cities over the globe. The data is gathered by a team of study analysts who search for comparable items that are available internationally. A minimum of 3 prices for the same brand/size/volume of stock is used to settle the midpoint price for each item in each location. The items are priced on a regular basis and tend to rise and fall with inflation. The 13 dissimilar basket categories are as follows:

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 service victualer feesMobile / Cellular Phone covenant and Calls

Education
Crèche / Pre-School FeesHigh School / College FeesPrimary School FeesTertiary Study Fees

Furniture & Appliances: Furniture, household tool 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: normal Healthcare, healing and healing Insurance
General Practitioner Consultation ratesHospital private Ward Daily RateNon-Prescription MedicinePrivate healing assurance / 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 property Rates / Taxes / Levies

Miscellaneous: Stationary, Linen and normal 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 cafeteria (non fast food)Hotel RatesTake Away Drinks & Snacks (fast Food)

Transport: group Transport, car Costs, car Fuel, car assurance and car Maintenance
Hire buy / Lease of VehiclePetrol / DieselPublic TransportService MaintenanceTyresVehicle InsuranceVehicle Purchase

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

In order to presuppose an correct cost of living index for a exact private the basket items that are not relevant to the private 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 potential for each private to have their own customized cost of living index based on their exact arrangements rather than using an allembracing "generic" index which is likely to contains costs that are not relevant to the individual.

The formula for calculating the exact 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 spellbinding to a higher cost of living host city, the index will be greater than 1 (positive). When spellbinding 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 actually be paid proportionately less spendable wages in the host city. It is foremost to note that the majority of organizations do not apply a negative cost of living index because it makes it difficult to persuade an employee to take up an assignment as they tend to see it as a discount in salary.

Examples of Cost of Living Index Calculations using our data:

Example 1) An Australian employee spellbinding from Perth to London where healthcare and communication will be provided by the employer

More costly 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 allembracing distinction in cost of living spellbinding 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 employee spellbinding from London to Mumbai where the employer will contribute housing and education

More costly 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 allembracing distinction in cost of living spellbinding 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 portion of the wages that is spendable in the host country. Items in the home country such as retirement funding, healing assurance and other home based costs are not impacted by the cost of living in the host country.

To settle the Net Spendable wages produce what estimate / portion of the current wages (in home currency) is spent in maintaining the employee's current approved of living / lifestyle. What will the expatriate need to spend their wages on in the host country? For example will room be provided or will the employee pay rent, will healthcare be provided etc. Deduct all items that are whether provided in kind or are spendable in the home country. Deduct the hypothetical estimate of tax, group 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 discount (Cola)

The formula for calculating the cost of living discount using the above inputs is as follows:

(Net Spendable wages X Cost of Living Index X Hardship Index X exchange Rate) less (Net Spendable wages X exchange Rate) = Cola

Examples of Cola Calculations using our data

Example 1) An Australian employee with a net spendable wages of Aud0,000 spellbinding from Perth to London where healthcare and communication will be provided 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 person would need a Cost of Living discount of £13,379.44 (Gbp), in increasing to their current wages of 100,000.00 Australian Dollar (Aud) to compensate for relocating from Perth to London. This Cost of Living discount compensates for the allembracing cost of living distinction of +28.06% and the relative distinction in hardship of 0%.

Example 2) A British employee with a net spendable wages of £18,000 spellbinding from London to Mumbai where the employer will contribute 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 person would need a Cost of Living discount of 363,340.32 (Inr ), in increasing to their current wages of £18,000.00 British Pound (Gbp ) to compensate for relocating from London to Mumbai. This Cost of Living discount compensates for the allembracing cost of living distinction of [-30.53%] and the relative distinction in hardship of 30%.

Cola Payment

The Cola is paid as a wages supplement (i.e. As an further allowance) net of tax in the host country. If the Cola is a dutible discount in the host country it should be grossed up in order that the full estimate 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 exchange rate can make a principal distinction in the Cola calculation. In 2008 some of the major global exchange rates changed by as much as 30-40%.

The cost of living index reflects the changes caused by inflation and exchange rates. In the short-term there may be disequilibrium between inflation and the exchange rate (the one pushes the other), however over time the cost of living index provides the most correct view of the cost of living.

It is foremost to remind expatriates that when the cost of living distinction 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 turn in the exchange 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" growth in cost of living between home and host countries. This may mean that their would be no growth in the Cola as a supervene of exchange rate fluctuations for some principal time. While this time the employee's purchasing power decreases. But it is foremost to remember that until the cost of living distinction 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 safety rule, rather than reacting to every fluctuation in the exchange rate. For example the rule may state that Cola will be reviewed if exchange rates or local inflation move by more than +10% While a year. It is foremost 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 safety rule would normally make provision for upward adjustments in Cola and not downward adjustments While an employee's assignment. Downward adjustments to an existing Cola due to exchange rate fluctuations without a corresponding drop in the prices of local goods and services puts heavy pressure on an employee's host currency allocation commitments and can lead to the employee experiencing financial difficulty.

Using an independent service victualer provides an independent, objective basis for determining an employee's Cola.

We propose therefore that a Cola is calculated by applying the exact (customized) cost of living index to the net spendable wages at the beginning of the assignment and monitoring exchange rate fluctuations thereafter in increasing to the each year wages review.

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