Calculating COLA: How does it work?

The goods and services differential, also known as a cost of living adjustment or COLA, is the difference in the cost of goods and services in an employee’s home location versus the host location.

The purpose of the goods and services differential is to provide the employee with the same level of purchasing power in the host location as they had in their home location.  Companies such as Mercer, AIRINC and ECA are used to calculate goods and services amounts. These companies go through a variety of steps to create data tables that are used to determine a goods and services differential. As an example, in this article by AIRINC, they believe that incorporating behavioral change alongside the price change is critical to accurately capturing the true cost differential. For example, in a country where tap water might not be safe to drink, a relocating employee may have to change their habits to incorporate bottled water. 

If you follow these steps, establishing and revising a goods and services differential should be a breeze. Check out this Relo Tip Tuesday video on COLAs!