Rising Inflation and the Importance of a Cost of Living Allowance
As mobility professionals, we're used to the potential effect currency fluctuation can have on an assignee’s pay, but inflation can be just as significant, and its impact is being felt more today than in recent years. Inflationary pressures are dominating news headlines, Twitter feeds, and daily conversations around the world, but what can a mobility manager do to meet these challenges?
Many regions and countries are experiencing record-high inflation, and although some regions, like Asia, are faring well, many more are not. Take, for instance, my home country of Lebanon, which is clocking shocking hikes to the tune of over 200% (and still rising!), making its capital, Beirut, one of the most expensive places to work abroad. If, like me, you’re based in the U.S., I’m sure you’ve felt the 7% inflation rate at the grocery store, gas pumps, and in other parts of daily life.
What can mobility managers do?
While there is no one-size-fits-all answer for multinational organizations with employees on assignment, mobility managers should be prepared to examine existing practices and evaluate compensation structures and assignment allowances carefully on a case-by-case basis.
Many companies leverage the popular balance sheet approach, which is rooted in the theory that administering this method ensures an assignee is no better or worse off than if they remained at the home location. However, there's also a mechanism to overcome these challenges and their risk to employees working abroad—the cost of living allowance!
The importance of a cost of living allowance
A cost of living allowance (COLA) is the policy benefit payable to assignees while on an assignment that is above and beyond their established salary. It is designed to cover additional day-to-day living expenses in the host country, which may vary from city to city and whether the location is a large urban center or not.
It's crucial to understand the role a cost of living allowance plays in diffusing the effects of rising inflation. COLA counteracts the effects of currency fluctuation and inflation, but to be truly effective, allowances must be reviewed regularly to ensure budgets are in line with the most current currency and inflationary rates.
Price inflation is measured using the Consumer Price Index (CPI), an internationally comparable measure from the perspective of the purchaser. It is a measure of price change in consumer goods and services such as food, clothing, gasoline, and cars.
Following are key considerations when establishing a COLA at the start of an assignment:
- When calculating budgets, does your adopted method work for the current real estate market and supply in the host location?
- Is your budget based on an assignee’s job level or the size of the relocating family?
- What index do you use to assess COLA differences between the home and host locations? For example, do you use inexpensive or moderate ranges to establish a budget?
- What is your current practice and cadence for reviewing and updating your COLA?
- If you’re not on a split payroll, what thresholds have you set for currency fluctuations?
How does your company administer payroll?
Some organizations opt to pay 100% of an assignee’s payroll from the home location, but for companies who deliver a split payroll, an assignee’s salary is divided into two parts:
- Non-spendable income: The portion of the compensation package typically paid in the home location
- Spendable income: The portion of the compensation package designed to cover daily living expenses in the host location, e.g., goods and services. To protect against high inflation and currency fluctuation, the index should only be applied to this portion of the compensation package.
Adequate assignee support remains key
Encouragingly, there are initial signs that inflation around the world is likely to die down over the coming year. However, quality of life and well-being are increasingly vital to today's employees, especially in a post-pandemic world. As a result, priorities have evolved, and, to attract and retain talent, companies must ensure that their mobility programs offer the flexibility and solutions to deliver in this ever-changing environment. Companies that do not provide COLA adjustments therefore might be at risk of losing key talent to competitors who do offer such a benefit.
In addition, assignees in higher COLA locations will return home to have more disposable income. With this in mind, now is an excellent time to examine how your company administers this policy provision. It is also crucial that mobility managers have an in-depth understanding of compensation assumptions to communicate changes to employees clearly and proactively.
To find out more about this topic or any other aspect of your global mobility program, please contact your Cartus representative or email email@example.com.