A new approach to expatriate pay

Posted on September 24, 2010 by Xpatulator

The challenges of ensuring expatriates are paid fair salaries across different countries, in the current economic climate, of the credit crisis together with rapid currency and inflation fluctuations are increasingly complex.

The current economic climate has made it necessary to constantly review expatriate salaries. Rapidly fluctuating exchange rates and inflation can increase or decrease the amount of salary paid, and significantly impact purchasing power both positively and negatively in a very short period of time. The approach many organizations have taken is to convert a spendable percentage (typically 60%) of the expatriate’s salary into the host country currency on a monthly basis and to provide non-cash benefits such as accommodation, transport, education of children etc. This can result in employers paying too much or too little salary in these volatile times.

Too Much: The expatriate experiences short-term upside, as a result of a change in the exchange rate. A fall in the value of the host country currency against the home country currency, without an increase in the prices of goods and services in the host country, results in the expatriate having increased purchasing power. It may appear for a while that all is well. The expatriate has an unexpected windfall. A wise expatriate will save this windfall knowing that the situation will not be permanent. Either the exchange rate will adjust back to where it was or prices and inflation will begin to increase until economic equilibrium is achieved. The reality is, that in the short-term the employer will be faced with increased overall salary costs, and will eventually have to deal with disappointed expatriates when the trend inevitably reverses itself and their purchasing power drops again to realistic levels.

Too Little: The expatriate experiences short-term downside as a result of a change in the exchange rate. An increase in the value of the host country currency against the home country currency, without a decrease in the prices of goods and services in the host country, results in the expatriate having reduced purchasing power. This is when the employer faces complaints from expatriates unable to make ends meet. Prices of goods and services have remained the same in the host country but as a result of the change in the exchange rate, the expatriate receives less salary in local currency. In the long term either the exchange rate will adjust back to where it was, or prices and inflation will begin to decrease until economic equilibrium is achieved. The reality is that in the short-term the employer will be faced with decreased overall salary costs and will have to deal quickly with unhappy expatriates.

Clearly the approach on converting a portion of the salary into host country currency on a monthly basis does not work any more.

The expatriate compensation questions that employers must consider:

-What amount of salary will ensure that the expatriate will have the same purchasing power overseas as they have at home?

-What process / tool will be used to ensure the salary retains its purchasing power when inflation and exchange rates change?

New Approach: The ideal approach is for the employer to decide on a process / tool that establishes and maintains the expatriate’s salary purchasing power. The Salary Purchasing Power Parity (SPPP) approach is one such approach and involves the following steps:

-Committed Salary: Decide what amount / portion of the current salary (in home currency) will remain in the home country to meet committed expenses such as mortgage commitments, retirement funding, savings etc.

-Home Gross Spendable Salary: Establish what amount / portion of the current salary (in home currency) is spent in maintaining the expatriates current standard of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the expatriate pay rent, will healthcare be provided etc.

-Home Net Spendable Salary: Establish the net spendable salary by deducting the amount of tax, social contributions and any other statutory deductions applicable in the home country to the Home Gross Spendable Salary.

-Host Net Spendable Salary: Use the established amount of Home Net Spendable Salary in home currency, to calculate the amount of Host Net Spendable Salary required in the host country, in order for the expatriate to have the same amount of purchasing power as they have in their home country. The calculation comprises 4 factors:
1) The difference in the cost of living index for the same basket of goods and services between the home and host country applicable for the spendable salary.
2) The difference in hardship that the expatriate and their family are likely to experience.
3) The exchange rate between the home and host country.
4) The Net Spendable Salary

-Host Gross Salary: The Host Net Spendable Salary is “grossed up” by the amount of tax, social contributions and any other statutory deductions applicable in the host country, to establish the host gross salary that will provide the expatriate with the same standard of living as they had in their home country.

The Host Gross Salary is established in local host currency. As a result it is no longer subject to changes in the exchange rate. Over time the salary may be eroded by local inflation which will be reflected in the cost of living indexes. It is recommended that the Host Gross Salary be reviewed on a quarterly basis, to monitor the impact of any change in cost of living and the exchange rate.

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Clothing International Cost of Living Rank 2010

Posted on September 23, 2010 by Xpatulator

This report provides you with the rank of Clothing cost of living indexes as at September 2010 for each of our 300 global locations. The indexes are calculated using the prices for specific quantities of the same goods and services in each location, based on expatriate spending patterns across 13 broad categories (Basket Groups). Our calculators make use of the cost of living indexes, based on your input and Xpatulator’s data, to create reports online which you can save, e-mail or convert to a pdf file.

 

Clothing costs include clothing and footwear products such as business suits, casual clothing, children’s clothing and footwear, coats and hats, evening wear, shoe repairs, and underwear.

 

The September 2010 clothing international cost of living rank is as follows:

September 2010 Rank Country, City

1 Bahrain, Manama
2 Brazil, Sao Paulo
3 Ukraine, Kiev
4 United Arab Emirates, Abu Dhabi
5 Brazil, Rio de Janeiro
6 Brazil, Brasilia
7 USA, San Jose Calif
8 USA, Boston Mass
9 Angola, Luanda
10 Russia, Moscow
11 United Arab Emirates, Dubai
12 USA, San Francisco Calif
13 Croatia, Zagreb
14 Lebanon, Beirut
15 Mexico, Mexico City
16 Slovakia, Bratislava
17 Slovenia, Ljubljana
18 Japan, Tokyo
19 Papua New Guinea, Port Moresby
20 USA, Philadelphia Pa
21 Samoa, Apia
22 Qatar, Doha
23 Austria, Vienna
24 China, Beijing
25 Venezuela, Caracas
26 Denmark, Copenhagen
27 Philippines, Manila
28 New Caledonia, Noumea
29 USA, San Antonio Tex
30 Sudan, Khartoum
31 Russia, St. Petersburg
32 Belgium, Brussels
33 France, Paris
34 Liechtenstein, Vaduz
35 Switzerland, Geneva
36 Iran, Tehran
37 Switzerland, Zurich
38 Chad, NDjamena
39 Kuwait, Kuwait City
40 Netherlands, Amsterdam
41 Peru, Lima
42 USA, Detroit Mich
43 Micronesia, Palikir
44 China, Shanghai
45 Czech Republic, Prague
46 China, Hong Kong
47 Monaco, Monaco
48 Luxembourg, Luxembourg
49 Canada, Toronto
50 Malaysia, Kuala Lumpur
51 Greece, Athens
52 Colombia, Bogota
53 USA, New York NY
54 Belize, Belmopan
55 Canada, Vancouver
56 Jordan, Amman
57 Spain, Madrid
58 Georgia Republic of, Tbilisi
59 Germany, Munich
60 Korea Republic of, Seoul
61 Brunei, Bandar Seri Begawan
62 USA, Houston Tex
63 Sweden, Stockholm
64 Canada, Calgary
65 Germany, Frankfurt
66 China, Shenzhen
67 China, Wuhan
68 Germany, Berlin
69 Germany, Cologne
70 Germany, Bonn
71 France, Lyon
72 Kazakhstan, Almaty
73 Cote DIvoire, Abidjan
74 Spain, Barcelona
75 China, Dalian
76 Canada, Montreal
77 Turkey, Istanbul
78 Germany, Hamburg
79 Azerbaijan, Baku
80 USA, Columbus Ohio
81 Portugal, Lisbon
82 USA, Anchorage AK
83 Japan, Nagoya
84 Italy, Milan
85 Solomon Islands, Honiara
86 Japan, Osaka
87 Bosnia and Herzegovina, Sarajevo
88 Italy, Rome
89 Ethiopia, Addis Ababa
90 Mauritius, Port Louis
91 USA, Cleveland Ohio
92 San Marino, San Marino
93 Romania, Bucharest
94 Guinea-Bissau, Bissau
95 Hungary, Budapest
96 USA, San Diego Calif
97 Japan, Yokohama
98 USA, Washington DC
99 USA, Phoenix Ariz
100 China, Guangzhou

 

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Japan, Osaka – Cost of Living

Posted on September 23, 2010 by Xpatulator

The economy of Japan is the second largest in the world, after the United States at around $5 trillion USD in terms of nominal GDP and third after the United States and China when adjusted for purchasing power parity. Banking, insurance, real estate, retailing, transportation, telecommunications and construction are all major industries. Japan has a large industrial capacity and is home to some of the largest, leading and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The service sector accounts for three quarters of the gross domestic product.

 

Osaka is the third largest city after Tokyo and Yokohama. Osaka is the commercial capital of Japan and functions as one of the command centers for the Japanese economy. Commerce, services, and manufacturing are the three major industries.

 

Osaka has an overall cost of living index which equates it with high cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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International Cost of Living – September 2010

Posted on September 23, 2010 by Xpatulator

Tokyo is the costliest city in the world in which to live.

Tokyo is the most expensive city in the world in which to live, out of 300 global locations, surveyed in September 2010. While Tokyo is relatively cheap for items such as alcohol & tobacco (ranked 145), it is the most expensive for groceries and healthcare, and household accommodation costs. Tokyo has always been relatively expensive. This trend has strengthened again recently, as a result of the Japanese Yen having gained in value by about 18% against the United States Dollar in the past two years.

As the most expensive city in the world, Tokyo has an overall cost of living index of 155.4 (New York = 100), while Dubai (ranked 60 in the world) has a cost of living index of 88.84. Therefore Tokyo’s cost of living is 75% higher than Dubai. That means that an expatriate earning USD$5,000 per month in Dubai would need to earn USD$8,750 per month in Tokyo to enable them to have the same purchasing power, and therefore a similar standard of living as they had in Dubai. The cost of living for an expatriate is affected by both the availability and prices, of goods and services representative of an expatriate lifestyle, local inflation, and the exchange rate between the home and host country. As a result the cost of living has a significant impact of an expatriate’s salary package.

Caracas has moved up the rankings to become the second most expensive city to live in. Caracas is most expensive place in the world for furniture and appliances, recreation and culture as well as for hotels restaurants and meals out. Caracas is the second most expensive place for alcohol and tobacco, groceries, and healthcare.

Hong Kong is the third most expensive city in the world for expatriates to live in. The high overall cost of living rank for Hong Kong is primarily a result of two expensive basket groups. Hong Kong is the third most expensive city in the world for healthcare, and is the second most expensive city in the world for household accommodation, which typically comprises 30% of an expatriate’s expenses. Hong Kong is a good example of why many international organizations compensate separately for healthcare as well as household related costs such as housing rental, water, electricity, household gas, household fuels, local rates and residential taxes. Items that are provided by the employer should be excluded from a cost of living index calculation. The cost of living index for Hong Kong excluding healthcare and household related costs is substantially lower than it’s overall cost of living index of 128.9 (New York = 100). Hong Kong is relatively cheap for recreation & culture (ranked 241 in the world), education (ranked 259 in the world), as well as furniture & appliances (ranked 268 in the world).

Osaka, ranked fourth, is a new addition to the rankings. Osaka is most expensive for household accommodation (ranked 3 in the world), healthcare (ranked 5 in the world) and groceries (ranked 6 in the world).

Sao Paulo, another new addition to the rankings, is the fifth most expensive city in the world. Sao Paulo is the most expensive place in the world for education, and is ranked second most expensive for clothing. The Brazilian Real has strengthened by 11% against the United States Dollar in the past year, although it is still weaker than it was two years ago. Sao Paulo is ranked in the top 55 most expensive cities in the world for each of the 13 basket groups.

Africa’s most expensive city is Luanda (ranked 14 in the world). Luanda is the second most expensive place in the world for education. Luanda is rebuilding its infrastructure after years of war, which has contributed to making goods and services purchased by expatriates expensive, as a result of lack of availability, and the cost of bringing appropriate goods and services into the country. Lagos (ranked 33 in the world) has moved up the rankings to become the second most expensive city in Africa, followed by Libreville in Gabon. The cheapest city in Africa is Tunis (ranked 297 in the world).

Most expensive cities in Africa (Global rank in brackets)
1. Angola, Luanda (14)
2. Nigeria, Lagos (33)
3. Gabon, Libreville (51)
4. Sudan, Khartoum (55)
5. Congo Democratic Rep, Kinshasa (59)
6. Chad, N’Djamena (62)
7. Saint Helena, Jamestown (64)
8. Mali, Bamako (73)
9. Central African Republic, Bangui (80)
10. Sierra Leone, Freetown (89)

The Americas most expensive city is now Caracas, which is the world’s second most expensive city to live in, largely as a result of the recent devaluation of the official exchange rate. Brazil has 3 of the 4 most expensive cities in the Americas. New additions to the rankings, Sao Paulo (ranked 5 in the world), and Rio de Janeiro (ranked 7 in the world) are followed by Brasilia (ranked 13 in the world). Nassau (ranked 18 in the world) is the fifth most expensive city, while New York (ranked 21 in the world) is the sixth most expensive city in the America’s and most expensive in the United States of America. The cheapest city to live in the Americas is La Paz in Bolivia (ranked 294 in the world). The cheapest city surveyed in the United States of America is Indianapolis Ind (ranked 279 in the world).

Most expensive cities in the Americas (Global rank in brackets)
1. Venezuela, Caracas (2)
2. Brazil, Sao Paulo (5)
3. Brazil, Rio de Janeiro (7)
4. Brazil, Brasilia (13)
5. Bahamas, Nassau (18)
6. USA, New York NY (21)
7. Canada, Toronto (31)
8. Trinidad and Tobago, Port-of-Spain (32)
9. Bermuda, Hamilton (36)
10. Canada, Vancouver (42)

Asia-Pacific has 4 of the 10 most expensive cities in the world. Tokyo is first and Hong Kong the third most expensive location in the world (and most expensive in greater China), whilst Osaka is the third most expensive city in Asia-Pacific (ranked 4 in the world), followed by Nagoya (ranked 6 in the world).

Cities in mainland China remain relatively cheap, mainly due to the pegging of the Chinese Yuan to the US Dollar which has kept costs down. Within mainland China, Shanghai (ranked 15 in the world), and Beijing (ranked 116 in the world) are the most expensive locations. The cheapest city surveyed in China is Tianjin (ranked 281 in the world) with a cost of living index of 60.34 (New York = 100). The cheapest city in Asia-Pacific is NukuAlofa in Tonga (ranked 299 in the world) with a cost of living index of 54.45 (New York = 100).

Most expensive cities in Asia-Pacific (Global rank in brackets)
1. Japan, Tokyo (1)
2. China, Hong Kong (3)
3. Japan, Osaka (4)
4. Japan, Nagoya (6)
5. Japan, Yokohama (11)
6. China, Shanghai (15)
7. Singapore (20)
8. Australia, Sydney (22)
9. Korea Republic of, Seoul (24)
10. Australia, Canberra (25)

Europe’s most expensive cities are those that are not on the Euro. The most expensive city in Europe is Geneva (ranked 8 in the world), while Zurich is Europe’s third most expensive city (ranked 10 in the world), making Switzerland the most expensive country in Europe. The Swiss Franc has strengthened by 8% in the past year and by 16% over the past 2 years. Geneva is followed by Moscow (ranked 9 in the world), which had fallen in the cost of living rankings last year and shot back up to 6th most expensive city in Europe earlier this year. The Russian Rouble has strengthened 14% against the Euro in the past year. Oslo is the fourth most expensive city in Europe (ranked 12 in the world), followed by Copenhagen (ranked 16 in the world). The cheapest city in Europe is Sarajevo in Bosnia and Herzegovina (ranked 292 in the world) with a cost of living index of 57.15 (New York = 100).

Most expensive cities in Europe (Global rank in brackets)
1. Switzerland, Geneva (8)
2. Russia, Moscow (9)
3. Switzerland, Zurich (10)
4. Norway, Oslo (12)
5. Denmark, Copenhagen (16)
6. Liechtenstein, Vaduz (17)
7. United Kingdom, London (23)
8. France, Paris (26)
9. Monaco, Monaco (29)
10. Jersey, Saint Helier (34)

The Middle East has experienced a drop in inflation in most cities over the past two years following a few years of relatively high inflation. The strong link of most regional currencies to the United States Dollar has resulted in many regional currencies strengthening against other major currencies. The United States Dollar has strengthened against the Euro by around 21% in the past two years making imports from Europe into the region cheaper. Abu Dhabi (ranked 19 in the world) is the most expensive city in the Middle East, followed by Doha (ranked 28 in the world), and Bahrain (ranked 47 in the world). Dubai is the fourth most expensive city in the Middle East (ranked 60 in the world) with a cost of living index of 88.84 (New York = 100). Household accommodation, which comprises 30% of the 13 basket groups based on expatriate expenditure norms, has fallen dramatically in Dubai in the past year, as a result of over-supply, given the impact of the financial crises. The cheapest city surveyed in the Middle East (and cheapest in the world) is Sanaa in Yemen (ranked 300 in the world) with a cost of living index of 50.42, half that of New York which has a cost of living index of 100.

Most expensive cities in the Middle East (Global rank in brackets)
1. United Arab Emirates, Abu Dhabi (19)
2. Qatar, Doha (28)
3. Bahrain, Manama (47)
4. United Arab Emirates, Dubai (60)
5. Israel, Jerusalem (82)
6. Lebanon, Beirut (119)
7. Palestinian Territories, West Bank (141)
8. Syria, Damascus (146)
9. Iran, Tehran (158)
10. Kuwait, Kuwait City (163)

South Asia is the least expensive region in the world for expatriates to live in. The most expensive city surveyed is Mumbai (ranked 94 in the world), followed by New Delhi (ranked 127 in the world), and Chennai (ranked 129 in the world). The Indian Rupee has weakened by 7% against the United States Dollar over the past two years. The cheapest city in South Asia is Thimphu in Bhutan (ranked 298 in the world).

Most expensive cities in South Asia (Global rank in brackets)
1. India, Mumbai (94)
2. India, New Delhi (127)
3. India, Chennai (129)
4. India, Calcutta (130)
5. Maldives, Male (135)
6. India, Hyderabad (142)
7. India, Bangalore (160)
8. Afghanistan, Kabul (194)
9. Bangladesh, Dhaka (263)
10. Pakistan, Lahore 276)

Notes:
Figures used in this report were taken from Xpatulator.com’s cost of living database as at 1 September 2010. The above ranks are based on the overall cost of living index using all 13 basket groups with New York as the base city (Cost of living index = 100).

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Japan, Nagoya – Cost of Living

Posted on September 23, 2010 by Xpatulator

The economy of Japan is the second largest in the world, after the United States at around $5 trillion USD in terms of nominal GDP and third after the United States and China when adjusted for purchasing power parity. Banking, insurance, real estate, retailing, transportation, telecommunications and construction are all major industries. Japan has a large industrial capacity and is home to some of the largest, leading and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The service sector accounts for three quarters of the gross domestic product.

 

Nagoya is the third-largest incorporated city and the fourth most populous urban area in Japan. Nagoya’s main industry is the automotive business, as many Japanese automotive companies are based out of Nagoya. Major automotive suppliers also have a presence. There is also a sizable aerospace, machine tool and electronics industry in the area.

 

Nagoya has an overall cost of living index which equates it with high cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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Guadeloupe, Basse-Terre – Cost of Living

Posted on September 23, 2010 by Xpatulator

The economy of Guadeloupe depends on tourism, agriculture, light industry and services. It is dependent on France for large subsidies and imports.

 

Basse-Terre is the capital and second largest city of Guadeloupe. The surrounding areas of Basse-Terre consists of forest, grassland and sugar, coffee, banana and cocoa plantations.

 

Basse-Terre has an overall cost of living index which equates it with middle cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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French Polynesia, Papeete – Cost of Living

Posted on September 22, 2010 by Xpatulator

The economy of French Polynesia is moderately developed and dependent on imported goods, tourism, and the financial assistance of mainland France. Tourist facilities are well developed and are available on the major islands.

 

Papeete is the capital of French Polynesia. Papeete is the primary center of Tahitian and French Polynesian public and private governmental, commercial, industrial and financial services, the hub of French Polynesian tourism.

 

Papeete has an overall cost of living index which equates it with middle cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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French Guiana, Cayenne – Cost of Living

Posted on September 22, 2010 by Xpatulator

French Guiana is heavily dependent on France for subsidies, trade, and goods. Main industries include fishing, gold mining and timber. The Guiana Space Centre at Kourou contributes 25% of GDP and employs approximately 1,700 people.

 

Cayenne is the capital of French Guiana. Cayenne is an important industrial centre for the shrimp industry.

 

Cayenne has an overall cost of living index which equates it with low cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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France, Marseille – Cost of Living

Posted on September 22, 2010 by Xpatulator

The economy of France is a mixed economy which is the fifth largest economy in the world, by measurement of GDP (nominal), behind the United States, Japan, China and Germany. It is the second largest economy in Europe.

 

Marseille is on the south east coast, and is the third-largest urban area in Fance, after those of Paris and Lyon. Marseille is a major French centre for trade and industry,with excellent transportation infrastructure; roads, airport, and Frances largest sea port.

 

Marseille has an overall cost of living index which equates it with middle cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups.

 

The latest cost of living rank for each of the 13 Basket Groups is now available.

 

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How to Calculate an International Cost of Living Allowance

Posted on September 22, 2010 by Xpatulator

A Cost of Living Allowance (COLA) is a salary supplement paid to employees to cover differences in the cost of living, particularly as a result of an international assignment.

The amount of COLA should enable an expatriate to be able to purchase the same basket of goods and services in the host location as they could in their home country. The basis for calculating a COLA is the Cost of Living Index (COLI) which indexes the costs of the same basket of goods and services in different geographic locations. COLA is a simple accurate method of measuring fluctuating salary purchasing power and ensuring parity.

Cost of Living Index
Our cost of Living Indexes measure the cost of 230 products and services across 13 different basket groups in 276 cities across the globe. The data is gathered by a team of research analysts who survey comparable items that are available internationally. A minimum of 3 prices for the same brand/size/volume of product is used to determine the average price for each item in each location. The items are priced on a quarterly basis and tend to rise and fall with inflation. The 13 different basket categories are as follows:

Alcohol & Tobacco: Alcoholic beverages and tobacco products

  • Alcohol at Bar
  • Beer
  • Cigarettes
  • Locally Produced Spirit
  • Whiskey
  • Wine

 

Clothing: Clothing and footwear products

  • Business Suits
  • Casual Clothing
  • Children’s Clothing and footwear
  • Coats and hats
  • Evening Wear
  • Shoe Repairs
  • Underwear

 

Communication

  • Home Telephone Rental and Call Charges
  • Internet Connection and service provider fees
  • Mobile / Cellular Phone Contract and Calls

 

Education

  • Crèche / Pre-School Fees
  • High School / College Fees
  • Primary School Fees
  • Tertiary Study Fees

 

Furniture & Appliances: Furniture, household equipment and household appliances

  • DVD Player
  • Fridge Freezer
  • Iron
  • Kettle, Toaster, Microwave
  • Light Bulbs
  • Television
  • Vacuum Cleaner
  • Washing Machine

 

Groceries: Food, non-alcoholic beverages and cleaning material

  • Baby Consumables
  • Baked Goods
  • Baking
  • Canned Foods
  • Cheese
  • Cleaning Products
  • Dairy
  • Fresh Fruits
  • Fresh Vegetables
  • Fruit Juices
  • Frozen
  • Meat
  • Oil & Vinegars
  • Pet Food
  • Pre-Prepared Meals
  • Sauces
  • Seafood
  • Snacks
  • Soft Drinks
  • Spices & Herbs

 

Healthcare: General Healthcare, Medical and Medical Insurance

  • General Practitioner Consultation rates
  • Hospital Private Ward Daily Rate
  • Non-Prescription Medicine
  • Private Medical Insurance / Medical Aid Contributions

 

Household: Housing, water, electricity, household gas, household fuels, local rates and residential taxes

  • House / Flat Mortgage
  • House / Flat Rental
  • Household Electricity Consumption
  • Household Gas / Fuel Consumption
  • Household Water Consumption
  • Local Property Rates / Taxes / Levies

 

Miscellaneous: Stationary, Linen and general goods and services

  • Domestic Help
  • Dry Cleaning
  • Linen
  • Office Supplies
  • Newspapers and Magazines
  • Postage Stamps

 

Personal Care: Personal Care products and services

  • Cosmetics
  • Haircare
  • Moisturiser / Sun Block
  • Nappies
  • Pain Relief Tablets
  • Toilet Paper
  • Toothpaste
  • Soap / Shampoo / Conditioner

 

Recreation and Culture

  • Books
  • Camera Film
  • Cinema Ticket
  • DVD and CD’s
  • Sports goods
  • Theatre Ticket

 

Restaurants, Meals Out and Hotels

  • Business Dinner
  • Dinner at Restaurant (non fast food)
  • Hotel Rates
  • Take Away Drinks & Snacks (fast Food)

 

  • Transport: Public Transport, Vehicle Costs, Vehicle Fuel, Vehicle Insurance and Vehicle Maintenance
  • Hire Purchase / Lease of Vehicle
  • Petrol / Diesel
  • Public Transport
  • Service Maintenance
  • Tyres
  • Vehicle Insurance
  • Vehicle Purchase

Each basket category does not count equally and are weighted in the final calculation based on expatriate spending patterns.

In order to calculate an accurate cost of living index for a specific individual the basket items that are not relevant to the individual should be excluded from the calculation. For example if education and housing is provided by the employer these basket categories would be excluded from the cost of living index calculation. This increases the accuracy of the cost of living index and makes it possible for each individual to have their own customized cost of living index based on their specific arrangements rather than using an overall “generic” index which is likely to contains costs that are not relevant to the individual.

The formula for calculating the specific cost of living index for an international assignment is as follows:

Cost of Living Index = Customized Cost of Living Index for Host City / Customized Cost of Living Index for Home City

When moving to a higher cost of living host city, the index will be greater than 1 (positive). When moving to a lower cost of living host city the index will be less than 1 (negative). Where the index is negative it means that in real terms the cost of living in the host city is lower than the home city. This means that if the negative index where to be applied to the employee’s salary, they would actually be paid proportionately less spendable salary in the host city. It is important to note that the majority of organizations do not apply a negative cost of living index because it makes it difficult to persuade an employee to take up an assignment as they tend to see it as a reduction in salary.
Examples of Cost of Living Index Calculations using our data:

Example 1) An Australian employee moving from Perth to London where healthcare and communication will be provided by the employer

More Expensive in London:

  • Alcohol & Tobacco +4.77%
  • Clothing +21.85%
  • Education +31.53%
  • Furniture & Appliances +16.03%
  • Groceries +16.35%
  • Household +50.72%
  • Miscellaneous +137.47%
  • Personal Care +11.18%
  • Recreation & Culture -6.82%
  • Restaurants Meals Out and Hotels +34.99%
  • Transport +19.80%

The overall difference in cost of living moving from Perth and London is +28.06%.

In this case the cost of living index is positive and would be applied as it is.

Example 2) A British employee moving from London to Mumbai where the employer will provide housing and education

More Expensive in Mumbai:

  • Alcohol & Tobacco -37.53%
  • Clothing -9.58%
  • Communication -44.92%
  • Furniture & Appliances -19.31%
  • Groceries -24.03%
  • Healthcare -31.24%
  • Miscellaneous -72.43%
  • Personal Care -24.94%
  • Recreation & Culture -35.73%
  • Restaurants Meals Out and Hotels -33.11%
  • Transport is -27.99%

The overall difference in cost of living moving from London Mumbai is -30.53%.

In this case the cost of living index is negative and would not be applied.

Net Spendable Salary

Differences in cost of living only impact the portion of the salary that is spendable in the host country. Items in the home country such as retirement funding, medical insurance and other home based costs are not impacted by the cost of living in the host country.

To determine the Net Spendable Salary establish what amount / portion of the current salary (in home currency) is spent in maintaining the employee’s current standard of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the employee pay rent, will healthcare be provided etc. Deduct all items that are either provided in kind or are spendable in the home country. Deduct the hypothetical amount of tax, social contributions and any other statutory deductions applicable in the home country from the Spendable Salary. What is left is the Net Spendable Salary.

Cost of Living Allowance (COLA)
The formula for calculating the cost of living allowance using the above inputs is as follows:

(Net Spendable Salary X Cost of Living Index X Hardship Index X Exchange Rate) less (Net Spendable Salary X Exchange Rate) = COLA

Examples of COLA Calculations using our data

Example 1) An Australian employee with a net spendable salary of AUD$100,000 moving from Perth to London where healthcare and communication will be provided by the employer

($100,000.00 X 1.2806 X 1 X 0.4768) less ($100,000.00 X 0.4768) = COLA of £13,379.44 (GBP)

Based on all the above factors a person would require a Cost of Living Allowance of £13,379.44 (GBP), in addition to their current salary of 100,000.00 Australian Dollar (AUD) to compensate for relocating from Perth to London. This Cost of Living Allowance compensates for the overall cost of living difference of +28.06% and the relative difference in hardship of 0%.

Example 2) A British employee with a net spendable salary of £18,000 moving from London to Mumbai where the employer will provide housing and education

Note: Because the Cost of Living Index is negative it is not applied.

(£18,000.00 X 1 X 1.3 X 67.2852) less (£18,000.00 X67.2852) = COLA of 363,340.32 Indian Rupee

Based on all the above factors a person would require a Cost of Living Allowance of 363,340.32 (INR ), in addition to their current salary of £18,000.00 British Pound (GBP ) to compensate for relocating from London to Mumbai. This Cost of Living Allowance compensates for the overall cost of living difference of [-30.53%] and the relative difference in hardship of 30%.

COLA Payment
The COLA is paid as a salary supplement (i.e. as an additional allowance) net of tax in the host country. If the COLA is a taxable allowance in the host country it should be grossed up in order that the full amount of calculated COLA is paid net of tax given that the basis of the calculation is Net Spendable Salary. The COLA is often accompanied by other allowances and benefits such as flights home, relocation / settling in allowance, and furnishing allowance.

Exchange Rate Fluctuations
Significant changes in the exchange rate can make a considerable difference in the COLA calculation. In 2008 some of the major global exchange rates changed by as much as 30-40%.

The cost of living index reflects the changes caused by inflation and exchange rates. In the short-term there may be disequilibrium between inflation and the exchange rate (the one pushes the other), however over time the cost of living index provides the most accurate view of the cost of living.

It is important to remind expatriates that when the cost of living difference is negative, and the negative value has not been applied, they have higher purchasing power in the host country than they would at home.

Where a negative cost of living index has not been applied (our recommended approach), and a change in the exchange rate indicates an upward adjustment in COLA may be required, it is recommended that the COLA should not be adjusted upward until the cost of living index becomes positive i.e. the cost of living reflects that there is a “real” increase in cost of living between home and host countries. This may mean that their would be no increase in the COLA as a result of exchange rate fluctuations for some considerable time. During this time the employee’s purchasing power decreases. But it is important to remember that until the cost of living difference becomes positive, the individual will still have a higher purchasing power than they do in their home country.

It is advisable to stipulate a currency protection rule, rather than reacting to every fluctuation in the exchange rate. For example the rule may state that COLA will be reviewed if exchange rates or local inflation move by more than +10% during a year. It is important to keep in mind that the prices of goods and services are unlikely to drop in local currency. This would only occur in a period of deflation (negative inflation). Therefore the currency protection rule would normally make provision for upward adjustments in COLA and not downward adjustments during an employee’s assignment. Downward adjustments to an existing COLA due to exchange rate fluctuations without a corresponding drop in the prices of local goods and services puts immense pressure on an employee’s host currency budget commitments and can lead to the employee experiencing financial difficulty.

Using an independent service provider provides an independent, objective basis for determining an employee’s COLA.

We recommend therefore that a COLA is calculated by applying the specific (customized) cost of living index to the net spendable salary at the beginning of the assignment and monitoring exchange rate fluctuations thereafter in addition to the annual salary review.

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