What Has Happened to Traditional Cost-of-Living Adjustment?
This might not be shocking news, given the up-and-down state of many nations’ economies, but the traditional cost-of-living adjustment (COLA) (1) for base pay has just about disappeared. A recent study by WorldatWork (2), a global human resources association that focuses on compensation, benefits, work-life balance and other rewards, determined that only 11 percent of U. S. employers even offer a cost-of-living adjustment for stateside employees.
So why don’t more employers offer what used to be considered an annual entitlement?
By the Numbers
The WorldatWork Study, found that COLAs can actually be a demotivating tool for high-performing employees, as they don’t appreciate having the same base pay as average, or worse, low performers. Rather, the study showed that employers prefer to increase wages based on promotions and/or added responsibility (96 percent) or for superior work/merit (95 percent). A vast majority of employers (77 percent) said, however, that they do adjust base pay according to the market in which the employee works, meaning a person who makes a lateral move to a more expensive city, for example, would receive an adjustment. But less than half of the increases are given for differentials related to things like special skill sets, hazardous work environments or atypical schedules.
The study also found that 71 percent of the respondents report their base salary increases are determined by individual performance as compared to job standards. This is a clear indication that organisations are moving away from pay increases that do not discriminate between the various levels of performers.
Similarly, in Payscale’s (3) 2015 Compensation Best Practices Report (CBPR) it was found that the main reason organisations, regardless of size or geography, adjust base pay is in response to performance. Whereas cost-of-living adjustments accounted for just 21 percent of pay increases, and market and internal equity base pay adjustments accounted for just 10 percent, combined.
With expatriate employees, it’s important to consider more than just the Consumer Price Index (CPI) when figuring out the cost-of-living adjustment. While you do calculate the difference between the cost-of-living of the current and new locations, you also consider family size and what that family would spend on average on goods and services each year. Then, there are the housing costs. Sometimes, there is tax assistance, not to mention spousal assistance, for example, paying for job-finding costs. All of this is on top of the Foreign Service Premium that is generally paid. Sometime, there is even a location premium to figure in, that is, you pay someone more to live and work in the Middle East than in London. In these respects, the COLA is a true “adjustment,” rather than an “allowance,” which is how some organisations define the “A” in COLA.
Organisations, according to the CBPR, need to, on a regular basis, perform both market analyses and compensation analyses. Doing so will help them understand the changing dynamics of the respective talent markets, as well as help them stay ahead of the competition for talent. Being mindful about getting compensation right, at home and abroad, will ensure you both attract and retain crucial employees.