Salary Increase Planning: Don't Be Tempted by COLA Figures

by Marillyn Tefft, Senior Researcher 19. September 2012 10:32

Annual cost-of-living adjustments, also known as COLA increases, become headline news in October when the Social Security Administration releases its benefits figures for the upcoming year. In 2012, the increase was 3.6%, while predictions for 2013 range from 1.3% to 1.8%. 

Coverage surrounding the figures may prompt HR professionals to consider how their company’s compensation increases compare. Traditionally, annual compensation increases have sometimes been justified as COLAs. This rationale is now less relevant to setting appropriate wage levels than in the past. Employees often expect salary increases at least equal to the “cost-of-living” increase, as measured by the federal government’s Consumer Price Index (CPI). But recent CPI numbers are now less than average wage increases, currently projected from 2-3%.

From July 2011 to July 2012, consumer prices increased at an annual rate of 1.4%. Simply matching the change in CPI for salary increase planning doesn’t work in today’s labor market. Salary increase planning varies dramatically from employer to employer and is typically based on industry and geographic area.

Furthermore, what employees spend – their specific cost of living – depends on how they choose to spend their money. What they earn, on the other hand, depends on what they do for a living and where they perform their job.

Although the CPI measures prices of a fixed market basket of goods and services over time, no single cost figure accurately measures an individual employee’s expenses. Employees may make different choices if costs for goods and services increase. While CPI figures may be useful in measuring changing costs in the economy, they do not specifically reflect spending habits.

Even more important, companies pay salary and wage levels for certain skills because of the labor market. If companies don’t pay enough, they lose good employees, and many have difficulties hiring new ones. If they pay too much, they risk losing profits.

Basing salary increases only on COLA or CPI data just doesn’t work. Although an across-the-board increase is easily understood and appears equitable, wage increases must reflect the market for labor or companies won’t remain competitive.

For salary data based on industry and location, download a demonstration version of our Salary Assessor® & Survey software.  Participate and purchase our 2013 Salary Increase Survey for your annual compensation planning.