There’s no-one more qualified in cost of living data than an assignee who believes they are experiencing a loss in their purchasing power whilst on assignment! I’ve heard all sorts of justifications to back up their ‘expert’ opinion including the Big Mac index courtesy of The Economist!
(Not only is there a Big Mac index but in researching the link I also found out there is a Starbucks Chai Latte Index!)
However, there are limitations to these crude indexes (such as levels of competition with other fast food outlets, import taxes, advertising costs, salary costs etc) and when trying to explain why the index the organisation use is much more objective, you suddenly get a sense you may have lost them about half way through the explanation.
In terms of cost of living experts, of course, I am joking. There are far more qualified organisations that collate data to calculate a cost of living index (COLI). The resulting COLI provides an objective method of producing an allowance to ensure the assignee maintains the purchasing power of their disposable income whilst they are on assignment.
So, what data is included?
A COLI is based on a market basket of goods and services in the home and host location. However, this is not in isolation. It is reviewed in line with exchange rates, inflations figures and, in addition, assignee consumption patterns are taken into account. For example, someone going from the UK to Egypt may buy more bottled drinking water than they would at home due to the heat and the limited availability of safe drinking water. All this information is then combined to calculate the COLI which is then applied to the spendable portion of the home base salary in order to calculate the cost of living allowance (COLA).
The data collated can be used to create different types of COLI based on a blended international spending pattern or a nationality specific spending pattern. The blended international spending pattern combines the expatriate spending patterns from different nationalities whereas the nationality specific approach looks at the home country spending patterns.
Then within these different types of COLI there are different levels that either assume the expat shops in a similar manner to a local, shops in a manner similar to a local but with some expatriate items or shops in a manner where they purchase what they would have bought had they been at home. It is worth reviewing the cost of living indices chosen to ensure they most closely reflect an organisation’s assignee population.
In addition, it is important that the COLI is kept up to date and adjusted for exchange rate and inflationary changes where necessary. Whilst a balance sheet might be updated at salary review time, it is also worth monitoring ongoing exchange rate fluctuations and considering providing interim balance sheet updates if an exchange rate passes a certain threshold – such as a 5% or 10% fluctuation.
Of course, the assignees will soon let you know if they are losing purchasing power in the host location but are often less quick to come forward when they are in fact gaining purchasing power in the host location!