COLA Archives

What is COLA (Cost of Living Adjustment)?

by WHR Global | Jul 26, 2023 | News

Cost of Living Adjustment (COLA) is a crucial aspect corporations consider when relocating employees or hiring talent from different geographical regions. What is COLA? COLAs are payments designed to compensate employees for the higher cost of living they encounter in their new destination. Learn more about calculating cost of living adjustments, definition, and factors in cola payments.

Understanding Cost of Living Adjustment (COLA)

Cost of Living Allowances or Adjustments, commonly known as COLA, serve a common purpose: to bridge the gap between the cost of living in a low or moderate region and that in a higher-cost location. The employer compensates the employee based on housing, goods and services, and taxes, enabling them to maintain the same standard of living in their new area. This is the purest definition of a cola, but many nuances go into the calculation.

Calculating Cost of Living Adjustment

An accurate calculation is the foundation of a fair cost of living adjustment. Several providers offer services to calculate housing costs, goods, services, and other factors to determine the standard. The origination city’s cost index is then compared to the new town’s to identify the cost difference. Many employers have a limited number of potential locations for employee relocations, making it easier to assess cost indexes. Employers may also compare entire regions instead of individual cities for easy calculation. WHR can help our clients understand the COLA formula and make the best decision.

Factors in Calculating COLA

Employers must decide under what conditions they will offer a cost-of-living adjustment. The percentage of change in the cost of living between the locations is a critical factor in determining COLA. The question becomes, what is a standard cost of living raise? Some employers may require a cost-of-living shift greater than 3%, 5%, or 10% to provide the COLA. Those aiming to offer more generous benefits may set a lower threshold for cost-of-living changes to benefit a more significant number of employees. Every employer will determine their COLA benefits differently. The cost of living adjustment will also vary by employee and, of course, location. Many of these are case-by-case situations for COLA payments.

Duration and Payment of COLA

Once a COLA is determined to be provided, the next consideration is the duration and payment method. Traditionally, U.S. domestic COLAs are calculated once and paid as a lump sum allowance or distributed over a specified period. Companies may maintain the adjustment for an extended period to allow employees more time to adapt to their new location.

On the other hand, international COLAs are recommended to be recalculated more frequently due to fluctuating currency rates, inflation, and other uncontrollable factors. For international assignments with pre-determined end dates, companies often offer the cost of living adjustment for the entire duration. However, if the assignment is open-ended, the company may transition the employee to the local standard of living (localizing) and discontinue the COLA after a set period.

Importance of Benchmarking

Relocation benefits can vary significantly across industries. Therefore, benchmarking your organization’s COLA policy against peers is crucial. Some industries may offer more frequent and generous COLAs, while others may not consider it at all. Understanding these variations can help determine whether a COLA adjustment or increase is needed. Ultimately, it can help you tailor your policy to meet your organization’s needs. The last piece to consider in benchmarking is understanding market rates in target relocation areas.

Conclusion

Cost of Living Adjustment is a vital tool/formula corporations use to ensure their employees can maintain the same standard of living when relocating to higher-cost locations. Companies can design worker compensation and relocation packages that attract and retain top talent by understanding the factors involved in calculating COLA and benchmarking against industry peers.

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An Emphasis on COLA (Cost of Living Adjustment)

by WHR Global | Dec 4, 2018 | News

Creating policies that are competitive, compliant, and up-to-date for our clients is a top priority at WHR Group. By using the results collected from WHR’s 2018 Mobility + Culture benchmark study, we hope to do exactly that. The study has served as a tool to help us identify ways that we can enhance relocation programs and policies to ensure they are the best fit for the employees of current and future clients of WHR.

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WHR’s recent blog post outlined a handful of questions within the Culture Guide section of the study. These questions help us gain insight into what is important to companies when creating a relocation program or choosing a relocation management company. One question focused on whether the primary function of the company’s relocation program was to recruit new employees or retain existing employees. Questions regarding a Cost of Living Analysis (COLA) and its impact on employees were also included in the study. It was reported that 56% of companies that are retention focused offer a Cost of Living Adjustment.

Companies surveyed for the Mobility + Culture Benchmark study were instructed to ask their employees for the top reasons why they would deny relocation. A top reason for denial was due to the cost of living in the new destination being too high. Of the companies that reported this reasoning for denial, 75% of them do not offer COLA in their relocation policy. If these companies were to reorganize their relocation programs to accommodate for the cost of living, they might see more participation in relocation.

Reasons to Offer a Cost of Living Adjustment

Relocation is already a long and stressful process for the employee and their family. By offering a Cost of Living Adjustment benefit within a relocation program, a company can demonstrate to the transferee that they understand they are asking the employee (and their family) to make a huge life change. This leads to a possible positive affect on the company’s retention rate because the transferee feels less alone in their adjustment to a new way of living.

Organizations that that are more concerned about recruiting new employees could also gain from offering COLA within their relocation programs. By showcasing that a company offers more benefits within a relocation program, the organization is being proactive and competitive within their industry.

The Impact of an Integrated Relocation Strategy

It’s clear that we’re facing a talent shortage. In 2012, the McKinsey Global Institute reported that by 2020 the global economy could face 38 to 40 million fewer workers with college or postgraduate degrees than employers will need. Additionally, we’re facing 45 million too few workers with secondary education by 2020. As baby boomers exit the workforce and technology continues to advance, the demand for highly trained, sophisticated workers increases. These pains are heard all the way to the board room, where senior leaders frequently cite finding talent as their most significant challenge.

The mountainous talent challenge seems impossible. What do we do? Use the tools we have. If you’re already offering relocation, increase your attention to the program. We believe it’s important to view relocation as a strategic enhancement to your company’s acquisition plan, not an uncomfortable, expensive necessity. By using data from benchmark studies, you can quickly compare your program to your competitors and make changes accordingly. This can give you an edge in recruiting or retaining your top talent.

At WHR Group, we place the utmost importance on culture as it relates to your relocation or mobility programs. Understanding an employee’s needs and wants can go a long way in creating a fitting relocation program, and we believe this goes hand in hand with our dedication to advancing lives forward.