What is a Cost of Living Pay Increase?

What is a cost of living increase?

A cost-of-living increase is an increase in pay, designed to keep up with the rising costs of standard goods and services, due to inflation. The main purpose of the increase is to help keep your employees earnings and living costs in proportion. It may also be referred to as a cost of living adjustment or COLA.

Is it required?

If you are a business owner with employees, chances are you’ve probably wondered if you are actually required to give your employees a cost of living pay increase. The short answer is no. Employers are not required to offer a cost of living pay increase. The question is whether you want to and if so, when you should. 

When to award and how much?

If you choose to give employees a cost of living pay increase, it should be given when the cost of living in their area has increased. If the average cost of living goes up by a certain percentage, businesses typically increase employee wages by the same or a similar percentage.

Unlike a typical raise or merit increase, all employees should receive an annual cost of living increase at the same time and at the same percentage. For example, if senior management employees receive a 3% cost of living increase, their subordinates receive 3% as well.

Some businesses have adopted a standard practice of awarding this increase every year, similar to the Social Security Administration, which awards a COLA each year based on the Consumer Price Index (CPI).

What if there’s no inflation?

If the CPI happens to drop, a trend known as deflation, a business may decide not to offer a cost of living increase but there would not be a pay cut? Most cost of living adjustments only go one way.

In the private sector, there has been a reduction in contracts with cost of living increases over the past several decades. Lower levels of annual inflation, the waning power of unions, and employees’ focus on other benefits, like health insurance seem to be common factors.

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Why should you offer a cost of living increase?

As an employer, it’s essential to offer reasonable salaries and wages to your employees. A competitive salary based on the cost of living in your company’s city is appealing to both applicants and current employees. It also promotes a healthy work-life balance when your employees are able to afford their basic life necessities such as food, housing and transportation.

Conclusion

In addition to regular raises, cost of living increases can help you retain the talent you have invested in and keep up with business competitors who offer them. If your employees’ cost of living goes up but their pay does not, it’s possible they might begin to search for new employment elsewhere. 

If you’re offering a competitive salary and providing them with regular raises, you will see an increase in employee satisfaction and the likelihood of them staying at your company will continue to grow.