Debunking COLA Myths: An Interview with Georgia Wilson

For global mobility (GM) professionals overseeing long-term assignees on a home-based remuneration approach, navigating cost of living adjustments (COLAs) can be complex.  

Approximately 90% of companies using this approach factor in cost of living differences when determining assignment packages, making COLAs a standard – yet often contentious – component in both initial salary offers and mid-assignment compensation reviews. While the calculation of other allowances, like assignment and location allowances, tends to be straightforward (in that they are calculated as fixed percentages of the home salary), COLA calculations are significantly more complex. 

It can be challenging for assignees to understand their pay and for GM teams to provide clear explanations. To shed light on some of the most common misconceptions, we spoke with Georgia Wilson, a Customer Success Senior Manager at ECA with over 10 years of experience supporting customers with understanding cost of living data. In this interview, Georgia clarifies the purpose and application of COLAs, debunks common myths, and shares insights on best practices.  

Is the COLA supposed to fully cover all my expenses during an assignment? 

Georgia: No. Assignees can mistake COLA for an allowance that is meant to cover their expenditure on goods and services in full on assignment, resulting in concerns that the amount is too low.  

A COLA is not an allowance per se, but rather an adjustment – either positive or negative – applied to an assignee’s spendable income to reflect cost of living differences between the home and host locations, ensuring their purchasing power remains consistent. When the cost of living is more expensive in the host location than in the home, the COLA is simply a necessary ‘top-up' amount and does not cover the assignee's expenditure on its own. 

It’s actually the entire ‘host spendable’ part of the assignment salary that’s designated to cover the assignee’s day-to-day expenses in the host location. It is calculated by combining the home spendable with the COLA. 

Essentially the COLA should always be considered an addition (or sometimes a deduction) to spendable. The COLA amount should not be looked at in isolation. 

Some companies may wish to try to simplify things and provide the same COLA for all assignees in the same location. However, the COLA is designed as an adjustment to the assignee's spendable income to ensure they are no better or worse off. Spendable income will vary by nationality, income level and marital status, meaning the COLA should too. 

Is every assignee on a home-based package entitled to a COLA? 

Georgia: While COLA is often called a cost of living ‘allowance', it’s more accurate to consider it a cost of living ‘adjustment’. COLA is not something to which everyone on a home-based package is automatically entitled. 

Protecting a portion of an assignee's salary with a cost of living index simply means protecting the purchasing power that they had in the home location. Sometimes, the cost of living in the host location will be lower than the cost of living in the home location. In this case, the assignee would not receive a positive COLA amount and a negative adjustment to the assignee's spendable income is advised. 

Applying a negative COLA doesn't disadvantage the assignee, it just preserves their purchasing power in the host location at the same level as in the home location. This approach helps maintain consistency with the home country and ensures fairness across different assignment destinations. 

Not applying a negative COLA means there is no adjustment to the assignment salary to account for cost of living differences. This means the assignee will enjoy more purchasing power than they are used to; they essentially receive a windfall that their peers on assignment to locations with a higher cost of living do not. 

Our blog post on negative cost of living indices explains the main pros and cons of each approach, and why clear communication with assignees is key, whether you apply these or not. 

Should COLA be used as an incentive to make an assignment package offer more attractive? 

Georgia: The best way to make assignment salary packages more appealing is to include a dedicated mobility allowance in your policy. 

COLA and incentive allowances serve distinct purposes and should ideally be treated separately to maintain transparency, clarity and consistency in compensation. 

If a COLA review results in a decreased amount, does this make the assignee worse off? 

Georgia: A cost of living index will decrease if the assignee's home currency appreciates against the host currency, or if the price levels of the ECA shopping basket increase more in the home location than the host location – as explained here. 

As an example, let's consider a pay review case where relative price levels haven't changed and the index decreases due to the appreciation of the home currency against the host currency. This results in a smaller COLA in home currency terms, but it is important to bear in mind that this lower COLA is converted into host currency at a new, more favourable exchange rate. The drop in the index is offset by the updated exchange rate, resulting in no change to the COLA amount in host currency, i.e. the currency in which the assignee will be buying goods and services. 

However, if the assignee is receiving the host spendable in home currency, this may be where they are at risk of losing out if there are further exchange rate fluctuations. Having a policy in place to protect assignees from exchange rate changes is the most effective way to guard against this. 

But what about the opposite scenario: the exchange rate hasn't changed, but price rises in the home location outpace those in the host location, pushing the index down? This would indeed result in a lower COLA, in either home or host currency. Rest assured, this still doesn't make the assignee “worse off”. 

Living costs are increasing for the assignee's peers back home and we need to remember that the index is designed to maintain the same purchasing power they would be experiencing if they were not on assignment. If a company wishes to account for the effect of home inflation on an assignee's pay, generally this is captured by reviewing the assignee's notional home salary – as they would for the assignee's home country peers. An increase in the notional home salary leads to a higher home spendable, which in turn results in a larger COLA when the index is applied. 

Are regular COLA reviews really necessary?   

Georgia: Yes, absolutely, and there are two main reasons why COLA should be reviewed regularly: 

• If the COLA is not reviewed regularly, assignees may end up better or worse off during their assignment - undermining the very purpose of the adjustment. Both exchange rate fluctuations and inflation in the home and host location will have an impact on the COLA, and by not reviewing the COLA the amount provided will no longer fit the situation. 
• Regular reviews ensure fairness for assignees working in the same location. For example, an employee sent on assignment this year will have a certain COLA. If this is not reviewed next year but another employee gets sent on assignment to the same location next year with the same base salary, they will receive a different COLA (which could be more or less). The employees will both need to buy the same items, based on the same salary but one will have a higher COLA than the other leading to a clear disparity. 

COLA should be reviewed on at least an annual basis (more regular reviews may be required in economically volatile locations, and ECA publishes data more frequently for these locations to support this) and ideally alongside annual salary reviews. 

Can we benchmark our COLA values against what other companies provide? 

Georgia: Because COLA amounts vary based on factors such as an assignee’s nationality, salary, marital status and company-specific calculation policies, direct benchmarking of COLA values is not feasible. Instead, companies should focus on benchmarking the methodology used to calculate COLA. 

Should COLA be the main focus when evaluating an assignment package? 

Georgia: Arguably, COLA is the trickiest element of a home-based assignment salary. It can be difficult for assignees and GM professionals alike to understand its purpose, how it's calculated and why it changes. But it is important to always put the COLA into context. COLA is just one component of the net assignment salary. Assignees are likely to receive allowances, like mobility allowances and location allowances, that also add to their net salaries. On top of this, most assignees on a home-based package also receive valuable benefits, such as accommodation, education for children, transport and medical insurance, to name a few. Ultimately, it is not the COLA that determines how attractive an assignment pay and benefits package is overall. 

  FIND OUT MORE

  Please contact us to speak to a member of our team directly.