Guidelines for global employee benefits program cost-of-living adjustments (COLA)
Forma Research releases guidance for handling LSA program cost-of-living adjustments internationally and converting funds in an equitable manner.
Forma Research releases guidelines for LSA program cost-of-living adjustments
Forma helps companies deliver competitive benefits packages while reducing costs and inefficiencies while giving employees a delightful experience and flexibility in how they spend their benefit allowances. The Forma platform provides ultimate flexibility in its Lifestyle Spending Account (LSA) program design under which employers can choose from a list of products/services and any amount of stipends. The product has a global reach, supporting every country in the world and its local currencies.
Enterprises of all sizes take steps to provide competitive benefits and funds to support employees–with HR leaders tasked to ensure programs fit what employees need and are utilized properly. Given the complexities of diverse, personal workforce needs, the effort to disseminate employee benefits and funds has its challenges–especially on a global scale.
Not surprisingly, the cost of living varies from state to state, country to country. As such, a common difficulty international businesses face is a lack of effective methodology to allocate a reasonable stipend amount for benefits programs in an equitable manner for a worldwide workforce. Adding on to that, developing such methods requires a substantial investment in resources, research, and time.
As a global solution, Forma is offering guidelines for cost-of-living adjustments (COLA) to help employers design employee benefits programs equitably for a worldwide workforce. Included are three methods for handling cost-of-living adjustments for Lifestyle Spending Accounts (LSAs) internationally with insight into Forma’s approach, implementation paired with the recommended LSA programs aligned best to each conversion method.
Guidelines for cost-of-living adjustments
There is no single approach for converting an LSA stipend internationally. For example, the mechanism of currency conversion of how you allocate the food program stipend globally might not be the same as the student loan or a commuter program. As such, it’s best to start by considering the nature of each program when making the cost-of-living adjustment.
Given the variances, Forma recommends three different COLA methods for global enterprises to convert funds equitably at scale.
Method 1: Direct conversion
Many products and services available worldwide already have standards in place for pricing. When offering an LSA program where the eligible expenses have similar cost standards worldwide, it’s best to use a nominal conversion rate.
An International Travel LSA: The costs of international travel don’t vary much based on consumers’ nationalities or locations (e.g., airline tickets cost almost the same regardless of location).
An App/Online Membership LSA: Most online app stores and memberships provide the same prices to all consumers. This is because these kinds of products don't require distribution or storage.
Protip: Use a direct conversion methodology for LSAs with products/services available worldwide.
At Forma, we have a comprehensive database of nominal currency conversion rates that we update regularly to ensure accuracy. You only need to determine the baseline funding amount for one country - such as the USD amount for U.S. employees - during the onboarding process. We’ll take care of the rest by converting the amount to the local currency of each respective country, saving you time and effort.
Method 2: Purchasing power parity (PPP) conversion
Purchasing power parity (PPP) considers the purchasing power in different countries and local currencies. Therefore, it reflects the pricing differences in general. When offering an LSA program that includes a vast selection of goods, we recommend using PPP conversion. The International Monetary Fund (IMF) and The Organisation for Economic Co-operation and Development (OECD) provide verified data references that can be applied directly.
A Food LSA: Some of Forma’s customers provide LSAs that cover the cost of food while overtime work or during team building events. In general, food programs cover the cost of dine-in restaurants, food delivery, grocery, etc. Our research finds that the cost of food-related expenses generally aligns closely with the PPP index. For example, using the PPP conversion rates on IMF, $100 Food LSA in the US would convert to:
- Taiwan: $100*14.91 ≈ 1,500 TWD
- India: $100*23.43 ≈ 2,300 INR
A Wellness LSA: Many employers offer wellness programs to incentives workforce well-being, fitness, and health. Eligible expenses are extensive from gym fees to fitness classes, athletic shoes, supplements, and more. As such, we recommend applying PPP conversion rates for a Wellness LSA and other expansive programs.
Protip: Use PPP conversion for LSAs with expansive products/services eligibility parameters.
During the onboarding process, if we determine that the PPP conversion method is the most suitable approach, we will provide you with a list of conversion rates pulled from IMF. All you need to do is decide on the baseline funding amount for one country, such as the USD amount for U.S. employees. We’ll take care of the rest, ensuring that the conversion rates are applied accurately across all countries.
Method 3: Baskets of goods
For LSA programs with a specific purpose in mind (e.g., childcare, mental health, or commuter programs), it’s best to calculate precise expense amounts. The essence of this method is first to select a handful of items or a “basket of goods” that you expect employees will want to purchase with LSA funds. Then, use the information to estimate how much funding is needed to cover the cost of the eligible LSA expenses by country.
There are several resources online where you can find the price levels of different product types. You can also have local offices research pricing for the basket of goods.
A Childcare LSA: Many Forma customers offer Childcare LSAs that cover the cost of childcare centers. With this in mind, it’s reasonable to include a monthly preschool kindergarten fee in the basket.
When factoring in cost, Numbeo’s data set provides benchmark funding guidelines. Using the information, a program with a monthly spend of $1,000 in the US would convert to:
- UK: The nominal conversion rate is 1:0.82. The monthly stipend should be $1422/1140*1000*0.82 ≈ 900 GBP.
- Singapore: The nominal conversion rate is 1:1.36. The monthly stipend should be $1123/1140*1000*1.36 ≈ 1,340 SGD.
- Canada: The nominal conversion rate is 1:1.36. The monthly stipend should be $804/1140*1000*1.36 ≈ 960 CAD.
Protip: Use online resources to benchmark COLA guidelines for specific LSA programs.
Get help with COLA
Taking the steps covered can be incredibly helpful in planning for COLA. When in need of support, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts.
About Forma Research
Forma Research provides benchmark reports, best practices guides, data tools, and other resources to help HR professionals and brokers expand their understanding to become experts on flexible benefits and Lifestyle Spending Accounts (LSAs).