How to Calculate Cost of Living Allowance
Calculating the cost of living allowance (COLA) is an essential task for individuals and organizations looking to ensure that their employees or expatriates are adequately compensated for living expenses in a new location. The COLA is designed to account for the differences in the cost of living between two places, typically the home country and the host country. Here’s a step-by-step guide on how to calculate the cost of living allowance.
1. Identify the Comparison Cities
The first step in calculating the COLA is to identify the cities or regions in the home and host countries that are most comparable. This ensures that the comparison is accurate and reflects the actual living conditions of the individuals concerned. For example, if an employee is moving from New York City to London, the comparison should be between these two cities rather than the entire countries.
2. Gather Cost of Living Data
Next, gather comprehensive cost of living data for both the home and host cities. This data should include the prices of essential goods and services such as housing, transportation, food, healthcare, and education. Reliable sources for this information include the Expatistan Cost of Living Index, the Numbeo Cost of Living Index, and the Mercer Cost of Living Survey.
3. Calculate the Cost of Living Index (CLI)
The Cost of Living Index is a numerical representation of the cost of living in one city compared to another. To calculate the CLI, divide the cost of living in the host city by the cost of living in the home city and multiply by 100. For example, if the cost of living in London is 120% of the cost of living in New York City, the CLI would be 120.
4. Adjust for Personal Expenditures
While the CLI provides a general comparison, it’s important to adjust it for personal expenditures. This involves considering factors such as the individual’s lifestyle, family size, and other unique circumstances. For example, if an employee has a large family, the cost of living in the host city may be higher due to the increased expenses associated with raising children.
5. Calculate the COLA Percentage
Once you have the CLI and have adjusted for personal expenditures, calculate the COLA percentage. This is done by subtracting 100 from the CLI and multiplying the result by the adjustment factor. For example, if the CLI is 120 and the adjustment factor is 1.1, the COLA percentage would be (120 – 100) 1.1 = 12%.
6. Apply the COLA to the Employee’s Salary
Finally, apply the COLA percentage to the employee’s salary to determine the new salary amount. For example, if an employee’s salary is $50,000 and the COLA percentage is 12%, their new salary would be $50,000 + ($50,000 0.12) = $56,000.
In conclusion, calculating the cost of living allowance involves several steps, from identifying comparable cities to adjusting for personal expenditures. By following this guide, individuals and organizations can ensure that their employees are fairly compensated for the differences in living costs between their home and host countries.
