Navigating Cost of Living Adjustments (COLA) amidst geopolitical uncertainty

In an era of increasing geopolitical instability, the cost of living remains a trending topic. For assignees, facing this uncertain landscape will of course pose questions about the application of their cost of living adjustments (COLA) compared to their expectations. However, through clear and proactive policies, you can effectively balance company priorities with assignee expectations collaboratively.

What impacts cost of living adjustments?

While inflation globally has been on a downward trend after the peak of the post-pandemic economic crises, there are clear risks that could reverse this progress.

• Trade wars: markets were sent into turmoil following President Trump’s ‘Liberation Day’ tariff announcement in early April. A 90 day pause on the most stark new rates came into effect shortly after, with some countries choosing to impose retaliatory measures, and others engaging in conciliatory dialogue. Shifting trade barriers can disrupt supply chains, push companies to raise prices in anticipation, or absorb costs and feed into inflation. Exchange rates have been impacted too, with the US dollar and Canadian dollar dropping significantly.
• A warming planet: extreme weather events can have a huge impact on food inflation. For example, the El Niño climate pattern, in which surface waters warm then cool significantly, means that countries like Brazil and Vietnam have experienced severe droughts which have disrupted harvests.
• Geopolitical uncertainty: conflicts across the world can threaten the production and export of key goods, particularly impacting inflation in import reliant countries. The ongoing conflict between Russia and Ukraine has an impact on food and energy prices, particularly items like cooking oil and grains, while shipping routes and supply chains have been upset by the Red Sea crisis. Investor confidence can be diminished by rising tensions, causing currency depreciation, as seen recently in Turkey and South Korea.

Maintaining balance in times of change

Amidst all these changes, how can businesses manage cost of living adjustments to balance business priorities with employee expectations? Taking into account both interests alongside context requires an agile, forward-thinking approach, with no “one-size-fits-all” solution. Below are some principles that can guide alignment of policies and mechanisms:

• Aligning policies to company strategy and dynamics: rather than having one policy with many exceptions, a suite of clearly defined policies, tailored to different situations, can effectively meet assignee expectations for flexibility amidst volatility without compromising business objectives. If there are exceptions, are these happening in relation to particular locations, roles or business units? To ensure efficacy, these should be audited and reviewed regularly, identifying when and why exceptions are happening. ECA has previously offered audits and workshops for clients, facilitating insight into market practice amidst a changing talent pipeline and geographical footprint.
• Understanding of cost of living adjustments: inflation and currency fluctuations mean that cost of living adjustment payments might reduce during the course of an assignment or withdrawn altogether. If changes could happen, this should be communicated from the outset. To increase trust and reduce conflict, companies should provide clarity regarding COLA calculations and reviews, clearly explaining methodologies and the rationale behind any adjustment. Using Discovery, the AI generated search capabilities of our new unified platform Expert, assignees can find the answers they need quickly. Expert also provides clear and effective visualisation of price and exchange rate movements, allowing assignees to see how and why their COLA has changed.
• Proactive communication: to adapt to their changing needs and protect them from volatility, assignees might prefer responsive and frequent salary reviews. Predictable and infrequent updates might be more in line with a company’s availability. Companies might prefer simple, consistent and standardise reviews, while assignees might want pay delivery that protects them from volatility and adjusts to changing needs. To manage expectations, companies should clearly outline what is and isn’t flexible, giving proactive, timely updates. Assignees should be informed about how situations will be managed before they happen, ideally pre-assignment. Expert improves responsiveness and support for assignees in real time, allowing companies to ensure they are getting the information they need when they need it.
• Sufficient mechanisms: in a recent Expatriate Survey Management survey, 77% of European participants surveyed said that they reviewed salaries once a year. For low inflation countries with stable currencies, this is generally sufficient. In other scenarios, this isn’t so clear cut. It’s important to define a trigger when further action is needed in terms of local inflation and exchange rate fluctuation. It can be helpful to think of this in terms of calculation, quotation and delivery. What caused the allowance to change? What currencies are they being paid in? Are they receiving the amounts that they’ve been guaranteed? Through dynamic exchange rate tracking tools, quarterly publication of price data, and forward looking indicators to anticipate index movements, Expert can help companies shift from being reactive to proactive.

Amidst a shifting geopolitical landscape, economic volatility can present tricky questions regarding COLA. ECA Expert can help make policy management timely, proactive and agile, allowing companies to manage economic volatility without compromising business requirements and ensuring a flow of communication with assignees.

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