Moving to another city or country for your career can be a wonderful opportunity, but relocation can also put a strain on the budget. The good news is companies often offer an increased salary or other relocation benefits to help pay for increased expenses.
A goods and services “differential” or “cost-of-living allowance” (COLA) or “adjustment” is one way employers compensate employees for increased living expenses in a new location. If you’re considering relocating, read the fine print of your agreement to make sure your salary and relocation benefits will be adequate. Here’s what you need to know.
- Who should receive a cost-of-living adjustment? Salary adjustments are generally reserved for employees who move to a location with substantially higher costs for goods, services and housing. The adjustment allows workers to maintain a similar standard of living. Companies often use a cost index to compare locations to help determine if a salary adjustment is needed and how much it should be. Some companies offer an adjustment only if an employee is moving to a specific high-cost destination, while others may have a threshold cost-of-living change required before offering an adjustment.
- How is a cost-of-living adjustment calculated? Cost-of-living expenses refer specifically to goods and services. Most companies use a consulting firm to to assess expenses and applicable exchange rates. The Mercer Cost of Living Survey, performed annually, is an example. Companies use “a standard basket of goods and services” to calculate an index. Tip: For cost-of-living indices, the current location index is always 100. If your destination has a 10 percent higher cost of listing, its index would be 110. Another factor that influences how much you’ll need is the size of your family.
- How is it paid? A cost-of-living adjustment may be paid as a lump sum or as a periodic subsidy. Some companies offer one amount that can be paid out all at once or over time, while others may recalculate the allowance periodically, and then pay the adjustment as part of a paycheck. How the adjustment is assessed and paid will depend on the company, the destination, and the length of the appointment. As a general rule, domestic adjustments tend to be assessed once, while international adjustments are re-calculated periodically.
- How long does it last? The length of the adjustment payment period depends on multiple factors, including the level of the relocation benefit, the amount of the increase in cost of living, and whether the move is domestic or international. As a rule, employees who relocate overseas tend to receive adjustments for longer periods of time, if not the entire assignment. In addition, adjustments may change based on exchange rates and other fluctuating factors.