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How a COLA (not the soft drink kind!) Could Save You Money and Prevent Headaches

February 2, 2016 2:00:00 PM EST | By: Michelle Dopps

Have you ever relocated an employee or new hire from a lower cost of living location to a higher cost of living location within the U.S.?  If you have, it’s likely that the employee voiced concerns about how to maintain their standard of living in the new location.  Career advancement is often the reason for accepting a relocation, but if the employee (and their family) cannot afford to live in the new location, then they may be forced to decline the position. 

Cost of Living AllowancesNot only could the employee feel “stuck” in the current location – and possibly in their current role – but your company also misses out in talent advancement or utilizing the employee’s skills to promote business goals.  So what can you do?

For U.S.-specific relocations, one common solution is to increase the employee’s salary to accommodate for the higher cost of living. But this isn’t always the best route because of a few reasons:

  1. The employee may end up being overpaid compared to similar levels within the organization in other locations. If the employee moves back to a non-high cost of living location and is offered a promotion and salary increase based on industry or organizational averages in that area, he or she could potentially take a pay decrease - defintely not an appealing option for the employee and and not in line with best practices.
  2. In many high cost of living locations (such as NYC, Los Angeles, D.C., Boston and San Francisco), employees may not live in the city where the office is located, resulting in a lengthy commute via public transportation.
  3. In other cities where the public transportation infrastructure may not be sophisticated enough for a relatively easy commute, the employee may have no choice but to drive for an hour or more. While this is a “way of life” for people who are already living in those locations, it can be a difficult transition for someone who is accustomed to a shorter commute.

Considering the commute time in addition to the higher cost of living, it may be best to offer a cost of living allowance (COLA) for a limited amount of time following the relocation. 

Here’s a practical example:

You’re relocating an employee with a spouse and two children from Kansas City, MO, to Washington, D.C.  The family lives in a 2,000-square foot home in Kansas City, valued at $216,000. A similar-sized home in D.C. would cost around $812,000 – a significant increase to the cost of living. 

Consider also the cost difference between such items as utilities, property taxes, consumables, transportation, health care and payroll taxes. Before you know it, the employee who could afford a comfortable home and lifestyle in Kansas City would need an additional $40,000/year to mimic that same lifestyle in Washington. 

Of course, when relocating to such a high cost of living area from a low cost of living area, the family needs to consider their priorities: 

  • Do they prefer to live closer to the office, or can they commute from a farther distance?
  • Is the school system near the work location adequate, or does the family prefer a school district elsewhere?
  • Is the family willing to sacrifice home space by living in a 2-bedroom apartment in Washington, D.C., or can they find a more suitable home in the suburbs?

When you consider that the employee working in D.C. will likely have a farther and more expensive commute than the one in Kansas City, many variables for the family’s personal preferences come into play.  Most companies would not bridge this gap by providing an additional $40,000 in salary – not only would this practice compromise the integrity of the job evaluation system within the company, but this increase in salary would not accurately reflect the value of the position. Suppose he or she is relocated laterally back to a low cost of living location; does it make sense to decrease the salary by $40,000 to adjust for that cost of living difference?

Account for cost increases with COLAInstead, providing a COLA for a certain amount of time to soften the financial impact to the family may be a better option. COLAs are not meant to financially enrich the employee’s lifestyle over that of the origin location. Also, there is no obligation to cover the entire $40,000 deficit for the duration of their time in D.C. so that the family lives exactly how they did in Kansas City.

Instead, your policy could pay 100% of the differential in the first year, 66% in the second year and 33% in the third year to allow the family to ease into their new lifestyle.  Be careful about issuing too generous of an allowance over time – you don’t want to encourage employees to purchase a home outside of their price range. If that happens, once the allowance stops, the employee might come back asking for more compensation to cover the mortgage.

What if a relocation from D.C. to Omaha, NE – an area that is similar in cost of living to Kansas City yet slightly higher – happens during the time the employee is receiving the COLA? COLA would be terminated with the Omaha relocation, and the same consistent salary structure stays in place.

Using a COLA model, employers are able to assist those transferees at highest risk for excessive financial burden, while simultaneously restricting the provision and controlling costs. In addition, COLAs can be issued to both homeowners and renters, ensuring that regardless of the home situation, assistance is provided to those who meet the qualifications.

Does your company have a COLA policy in place? Are you interested in learning more about how this would fit into your own U.S. domestic relocation program? Click below to speak with someone on the Lexicon team about it!

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Topics: employee relocation, HR, cost savings, COLA

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