Think Twice Before Calling It a Cost of Living Increase

I've ranted on this before, I know.  But the salary planning challenges presented to us by the economic downturn have produced a resurgence of talk about cost of living increases - much of it by people who may not have thought through the implications of their choice of terminology - and so I beg your indulgence one more time.

With salary increase spending at record lows, a number of employers are considering the path of least resistance for 2010 ... simply spreading the available dollars evenly across their employee population.  That's fine, just please don't call it a cost of living increase, unles that is what you truly intend.

There is a critical difference between paying "cost of living" and paying "cost of labor".  Cost of living reflects the cost of goods utilized by a typical consumer, including items such as housing, groceries and transportation.  Cost of labor reflects what a particular geographic market offers as compensation for a specific type of work.  I advise my clients to be very, very clear about what their compensation philosophy is, and what their compensation program is designed to deliver, relative to this distinction.  In other words, is the purpose of the compensation program:

a) To reimburse employees for their cost of living?

or

b) To pay employees a competitive wage or salary for the particular jobs they perform and the specific skill/capability sets that they offer to the organization?

It isn't simply a philosophical distinction; the numbers themselves can be quite different.  Look at the chart below.  The blue line reflects the increase in the Consumer Price Index as reported by the U.S. Bureau of Labor Statistics for all urban consumers for the 12 months ending in each of the years shown (2000 through today) - our proxy for the cost of living.  The red line reflects the average salary increase across all employee groups as reported by WorldatWork's salary budget survey for each of the years shown - our proxy for the cost of labor.

   

Not exactly the same, are they?

That's why it's important that your words match your intent.  If the CPI spikes 7% over the next 12 months and the average salary increase only rises to 3.5%, do you intend to deliver a 7% raise to all your employees?  No?  Then you'd better watch your language. 

 

Comments

[Barry Brown]

Amen, Ann! I've been preaching this same sermon for years, but still have clients 'thinking about' cost-of-living increases. The only thing a COLA does is increase payroll. It does not reward performance. It does not attempt to correct pay equity issues. It certainly does not motivate employees. Kill the COLA's!

- Barry

[Ann Bares]

Barry:

Thanks for the comment ... and corroboration!

[E James (Jim) Brennan]

For those who need more refrains to the song, see this ancient short article which updates one from decades earlier: http://www.erieri.com/index.cfm?FuseAction=NewsRoom.Dsp_Release&PressReleaseID=111 ... and I have two more, if this isn't enough to educate your senior management.

It drives me crazy to hear HR folks or (even worse!) comp people talking Cost of Living when they mean Competitive Wage or Salary; it's like a chemist talking about phlogiston. They shouldn't be trusted with matches, much less human resources.

[Ann Bares]

Jim:

My experience would suggest that we can't talk about this enough ... and our HR/Comp compatriots could use all the ammunition we can provide. So thanks much for the article links! Readers, check them out for more good info.

[Paul Weatherhead]

Agree on all accounts, Ann!

For readers who want to read more about these issues check out the Workspan article "Why CPI-Based Pay Policies Are Not the Answer" (http://www.worldatwork.org/waw/adimLink?id=29395); and

"Pay Primer" (http://www.govexec.com/story_page.cfm?filepath=/dailyfed/0909/090309pb.htm ) where Government Executive magazine is trying to get people to stop mischaracterizing federal pay adjustments.

[Ann Bares]

Paul:

Thanks for the great article links ... and for agreeing with me!