How to Start a Cost-of-Living Allowance
A cost-of-living allowance is designed for expatriates working overseas. The goal of employers is to ensure that the individual can enjoy a standard of living in a foreign country equal to the one in his home country. The presence of a cost-of-living clause is common in employment contracts involving companies and governments posting employees and representatives to locations around the world. In order to start a cost-of-living allowance, you will need to internally develop or purchase cost-of-living statistics.
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Instructions
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Gather statistics on cost of living. The first step in designing a cost-of-living allowance is to establish a basis of comparison between your city or country and other cities or countries around the world. Various research organizations produce cost-of-living indexes based on representative baskets of goods and services deemed to reflect the cost of living for an average individual.
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Calculate comparative index values based on your home city or country. Use a base equal to 100 for your home city or country and calculate all other cost-of-living measures relative to that base. For example, if your home city has a cost-of-living index value of 100 and a foreign city has an index value of 105, then a representative basket of goods and services is 5 percent more expensive in the foreign city.
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Calculate the cost-of-living allowance for foreign postings. Adjust your staff's compensation based on the comparative index values. For example, if you are posting an individual overseas who would normally earn $50,000 a year in his home country and the cost-of-living index is 110 in the foreign country, you would award that individual a cost-of-living allowance equal to $5,000. This amount would allow the individual to cover the higher expenses of living overseas.
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Consider raising the living allowance for other factors. A cost-of-living index may not capture all expenses since it is based on a basket of goods and services. In particular, you may wish to award further funds to account for higher or lower costs in terms of school tuition, transportation, real estate, income taxes, healthcare and travel expenses between the two countries.
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Tips & Warnings
Review your cost-of-living allowances annually by updating your cost-of-living index data to account for changes in living costs between your home city and other cities.
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