Our company is looking to update our COLA program but not sure where to start. Any suggestions?
Cost Of Living Assistance (COLA) is designed to provide an adjustment to local standards of living in higher-cost locations. Allowances may be provided when compensation does not reflect local living costs or as an additional form of assistance to mobilize employees that are concerned with higher housing costs.
Because housing costs are one of the largest components of “living” costs, they have a decided impact on COLA programs. In today’s market, affordability in the destination may also be a function of lost equity in the departure (for a down payment) and whether the employee will qualify for financing in the new location due to tighter lending regulations.
In this post, I want to help you understand the trends, evaluate your options and appreciate other factors to consider when creating or updating a COLA program.
The results of Weichert’s 2015 Workforce Mobility Survey indicate that 49% of companies provide cost-of-living assistance to at least some of their employees. This is similar to data from Worldwide ERC; a recent survey reports that nearly 40% of companies provide a cost of living allowance either on a formal or case-by-case basis.
COLA Program Best Practices
Counseling and policy language should state that the allowance is used to offset increased costs of housing which implies shared responsibility and will be applied in the most effective way, based on the employee’s situation (COLA or Mortgage Subsidy). Avoid language that indicates the COLA is intended to take care of all housing/cost needs.
Develop policy language that can be utilized within the policy or as an addendum to the policy. Do not specify locations or amounts in the policy/addendum to ensure it is flexible enough to accommodate changes to cost of living.
To ensure impartial, consistent method for calculating the housing costs difference, the index (percentage used to calculate allowance) should come from an external data provider who can defend the method of calculating the differential.
Consider locations with significantly higher costs. Consider a reasonable threshold (i.e., the minimum cost differential must exceed 10%) to qualify.
Consider cost of living items in addition to housing costs when determining the calculation of the allowance.
Most policies provide COLA for three years on a declining scale to allow the employee to become acclimated to the costs in the new area. Establishing a longer payout (5 years vs. 3 years) may help to overcome reluctance to such areas. For renters, on the other hand, it’s normal to pay out the adjustment in one lump sum in the first year only.