Cost-of-living allowance or goods and services differentials

Cost-of-living allowance or services differentials

Learn internal assignees' most common concerns with cost-of-living allowances and goods and services differentials.

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What is a goods and services differential (or cost-of-living allowance)?

A goods and services differential (GSD) — also known as a cost-of-living allowance (COLA) — is intended to reimburse you for the difference between the cost of goods and services at the host location and at home. The amount of the differential depends on your salary level, your family size, and the cost-of-living standards in your host location in comparison to your home location.

Typically, more than a dozen different categories of expenditures representative of the market ‘basket’ of items are considered in setting the differential. Various portions of your spendable income are allocated to these categories, based upon normal spending patterns.

The differential will be adjusted to incorporate foreign exchange fluctuations whenever they exceed pre-established parameters.

Please note, if you are on a host-based package, a COLA does not apply. This is because there is no home/host comparison, as you are being compensated according to host location, so your salary factors in the cost of goods from a host perspective.

How is the COLA determined?

Generally, an independent consulting firm initially calculates the differential and will develop an index that measures relative costs. Prices and the rate of exchange are compared between locations at regular intervals. The home location is assigned an index of 100. If the host location index is more than 100, costs are higher than at the home location.

The balance sheet approach can help protect your purchasing power so that you neither gain nor lose by accepting an assignment abroad. To do so, the index is applied to your home country spendable income. Spendable income is the base salary that is normally devoted to the purchase of goods and services (such as food, clothing, entertainment, medical care, etc.). The amount is not a fixed percent of base salary; rather it varies according to nationality, income level, and family size. Applying the index to the home country spendable income results in the amount needed to maintain the home country expenditure patterns in the host county.

My COLA is significantly different from that received by my neighbor (also an assignee, but from a different company) who earns a comparable salary. How can these allowances be different if they are both intended to make the recipient whole?

Some companies account for certain elements of the goods and services index in other ways, either through direct reimbursements or delivery of benefits-in-kind, such as reimbursement of certain travel or living expenses. The advisers, in order to account for these different approaches, will adjust the indices.

Although companies’ total assignment compensation packages are typically very competitive within their peer groups, employers may vary the components to satisfy industry demands and their internal corporate cultures. For these reasons, it is extremely difficult to compare specific elements of one package to another, especially if the employers are in different industriesor peer groups. In addition, it is important to remember your family size and specific point-of-origin (e.g., City A versus City B) can cause COLAs to differ even if your peer in the host location is making a comparable salary.

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