What is Cost-of-living adjustment (COLA)?

A Cost-of-living adjustment (COLA) is a company-wide compensation increase that corresponds to a rise in the cost of living. Initiated in 1975 by the U.S. Social Security Administration, COLAs are calculated based on changes in the prices of essential consumer goods and services.

Governmental organizations and unions regularly incorporate COLAs, while independent businesses only occasionally do so. A privately-sector company, for example, may decide to implement a COLA for employee relocation in a more expensive city. However, private companies typically rely on merit increases, promotions, and the market value to determine salary raises.

To calculate an annual cost-of-living adjustment:

(annual salary) x (annual % COLA increase) = amount of increase amount of increase + annual salary = COLA

Why should HR leaders care about COLA?

Though only 11% of U.S. employers integrate COLAs, HR leaders should still consider the regional cost of living when designing competitive compensation. An enticing salary that enables an employee to live a high-quality lifestyle can attract, help engage, and retain talent.

What can HR leaders do to implement COLA?

Though it may not be practical for HR leaders to implement an official annual COLA, HR leaders can take into account the local cost of living to develop desirable salaries. Here are some practices HR can implement to offer wages that compensate for the cost of living, and then some:

  • Consider the basics. The cost of living includes housing, food, healthcare, transportation, and energy. HR leaders must ensure that employee wages cover at least these necessities in their city of residence. An ideal income should enable employees to survive and to thrive.   
  • Look at the whole picture. To ensure that wages can support the cost of living, HR leaders should look to two other components: market value, and internal value. Analyzing these three aspects aids HR professionals to understand each employee’s value to their employer and within the greater context of the job market.
  • Be transparent with employees. Rather than solely depending on COLAs, businesses can implement a compensation system that suits the needs of their employees, accurately reflects the job market, and fits the company budget. HR leaders can create a thorough compensation philosophy that aligns with the company’s strategy and objectives, and also promotes equitable and attractive wages. 

How can implementing COLA improve company culture?

Developing wages based on the annual rise in the cost of living, as well as employees’ internal and external values, helps HR leaders to establish attractive salaries. Competitive wages allow employees to maintain a financially stable lifestyle, which in turn contributes toward a robust company culture of happy and engaged individuals.