How Foreign Exchange Rates Impact on Cost of Living Allowances
Hearing from employees who receive Cost-of-Living Allowances (COLA) on international assignments may largely depend on the untimely fluctuation of Foreign Exchange (FX) rates.
Helping Make International Assignments Succeed Financially
As global organizations increasingly compete for skilled talent, offering competitive remuneration packages becomes imperative to attract top candidates for international assignments.
However, helping assignments succeed financially remains a fundamental bottom line consideration – especially since costs in popular global host locations can be higher than in one's home country. Most international assignments would simply be financially unfeasible for employees without considerable company support.
Providing Cost-of-Living Allowances (COLA) can be a key benefit to help assignees keep a similar standard of living and purchasing power in their host country in comparison to what they had in their home country. Researchers calculate the cost-of-living indices that analyze differences in major cities throughout the world by comparing the basic price of a basket of goods and services. These indices do not include housing costs, taxes, or education and are only used to calculate changes in disposable income.
As a note, each company chooses the specific index used for calculating COLA. Some companies offer employees a convenience index that allows them to purchase from high-cost international retailers, while other companies offer a lower index that accounts for an employee’s integration into the local culture and shopping practices.
Changes in Foreign Exchange (FX) rates significantly impact these living allowances. COLA indices are typically updated quarterly or semi-annually based on company preference, but may be reviewed more frequently in response to major FX fluctuations that result from volatility in the host or home locations.
Managing International Assignment FX Expectations
FX changes can surprise employees on international assignments when they notice a drop in their COLA, particularly as they face daily high costs in the assignment’s host location. However, it's common for assignees to overlook two key factors:
- Prices for goods and services in their home country are likely increasing
- Their home country’s currency may also be appreciating
Changing FX rates can adversely affect the perceived value of an assignment package. For instance, the US Dollar strengthened against the Euro in early 2021 but weakened by the end of 2022. This fluctuation, coupled with a decrease in the COLA index, can lead to reduced COLA payments for employees. An employee moving from Madison, Wisconsin to Paris, France, for example, might receive a smaller COLA than what was available the previous year. Consequently, this reduction could cause confusion and prompt the employee in Paris to request justification for the decreased COLA.
Companies are encouraged to review COLAs semi-annually at the very least and should consider conducting a more frequent review with their cost-of-living research partners should there be dramatic changes in FX rates.
While it's common for assignees to raise concerns when COLA payments decrease, the opposite scenario often unfolds in silence, as you would expect. Employees happily welcome any increase in their COLA.
Adapting to Fluctuating FX Rates
In conclusion, successful companies understand that FX rates are beyond control. They implement a clear policy for international assignees, outlining how dramatic FX rate fluctuations can impact allowances and detailing the company's schedule for making adjustments.
NEI is pleased to help answer any questions from companies or assignees about COLA or FX rates. Working alongside expert research firms, we ensure everyone understands the rationale and calculations behind revised COLA amounts.
If you would like to discuss this topic further, or other global mobility trends and company needs, please contact your NEI representative or Michelle Moore, CPA, MPA, CGMA, Chief Global Mobility Officer at NEI.
The above article is provided for informational purposes only. Please consult your tax, legal, immigration or accounting advisers before making any decisions or transactions.
How Foreign Exchange Rates Impact on Cost of Living Allowances
Hearing from employees who receive Cost-of-Living Allowances (COLA) on international assignments may largely depend on the untimely fluctuation of Foreign Exchange (FX) rates.
Helping Make International Assignments Succeed Financially
As global organizations increasingly compete for skilled talent, offering competitive remuneration packages becomes imperative to attract top candidates for international assignments.
However, helping assignments succeed financially remains a fundamental bottom line consideration – especially since costs in popular global host locations can be higher than in one's home country. Most international assignments would simply be financially unfeasible for employees without considerable company support.
Providing Cost-of-Living Allowances (COLA) can be a key benefit to help assignees keep a similar standard of living and purchasing power in their host country in comparison to what they had in their home country. Researchers calculate the cost-of-living indices that analyze differences in major cities throughout the world by comparing the basic price of a basket of goods and services. These indices do not include housing costs, taxes, or education and are only used to calculate changes in disposable income.
As a note, each company chooses the specific index used for calculating COLA. Some companies offer employees a convenience index that allows them to purchase from high-cost international retailers, while other companies offer a lower index that accounts for an employee’s integration into the local culture and shopping practices.
Changes in Foreign Exchange (FX) rates significantly impact these living allowances. COLA indices are typically updated quarterly or semi-annually based on company preference, but may be reviewed more frequently in response to major FX fluctuations that result from volatility in the host or home locations.
Managing International Assignment FX Expectations
FX changes can surprise employees on international assignments when they notice a drop in their COLA, particularly as they face daily high costs in the assignment’s host location. However, it's common for assignees to overlook two key factors:
- Prices for goods and services in their home country are likely increasing
- Their home country’s currency may also be appreciating
Changing FX rates can adversely affect the perceived value of an assignment package. For instance, the US Dollar strengthened against the Euro in early 2021 but weakened by the end of 2022. This fluctuation, coupled with a decrease in the COLA index, can lead to reduced COLA payments for employees. An employee moving from Madison, Wisconsin to Paris, France, for example, might receive a smaller COLA than what was available the previous year. Consequently, this reduction could cause confusion and prompt the employee in Paris to request justification for the decreased COLA.
Companies are encouraged to review COLAs semi-annually at the very least and should consider conducting a more frequent review with their cost-of-living research partners should there be dramatic changes in FX rates.
While it's common for assignees to raise concerns when COLA payments decrease, the opposite scenario often unfolds in silence, as you would expect. Employees happily welcome any increase in their COLA.
Adapting to Fluctuating FX Rates
In conclusion, successful companies understand that FX rates are beyond control. They implement a clear policy for international assignees, outlining how dramatic FX rate fluctuations can impact allowances and detailing the company's schedule for making adjustments.
NEI is pleased to help answer any questions from companies or assignees about COLA or FX rates. Working alongside expert research firms, we ensure everyone understands the rationale and calculations behind revised COLA amounts.
If you would like to discuss this topic further, or other global mobility trends and company needs, please contact your NEI representative or Michelle Moore, CPA, MPA, CGMA, Chief Global Mobility Officer at NEI.
The above article is provided for informational purposes only. Please consult your tax, legal, immigration or accounting advisers before making any decisions or transactions.
