What Is a COLA: Cost of Living Adjustment Guide for Employers

You’ve probably heard a lot about inflation lately. With rising prices for everything from groceries to gas, your employees are feeling its effects. That’s where a cost of living adjustment (COLA) comes into play.

Think of a COLA as a way for businesses to help their employees maintain their purchasing power when everyday expenses start to climb. So, how exactly does it work, and why should employers pay attention?

Let’s explore all the answers, as well as how Mosey can help you manage state compliance.

What Is a Cost of Living Adjustment (COLA)?

A cost of living adjustment (COLA) is an increase in wages to offset inflation, which helps employees keep up with the rising costs of goods and services.

If inflation causes prices to go up by 5%, and your employees’ salaries stay the same, they’re technically making less money than before because their dollars don’t stretch as far. COLAs help close that gap by adjusting wages to better match the current cost of living.

However, a COLA isn’t a universal solution. The adjustment can vary based on several factors, such as where your employees live or what data you use to determine the increase. A standard tool employers use to calculate a COLA is the Consumer Price Index (CPI), which measures changes in average price over time for various goods and services.

Why Should Employers Care About COLAs?

As an employer, you might be wondering, “Is offering a COLA necessary?” The short answer is that it depends. Here’s why it’s worth considering:

Employee Retention and Satisfaction

With inflation rates pushing up prices everywhere, employees are more likely to stay loyal to companies that help them maintain their standard of living. By offering a COLA, you’re signaling to your team that you recognize their financial challenges and are committed to supporting them.

Attracting New Talent

In today’s competitive job market, offering a COLA can be a powerful recruiting tool. Potential hires want to know that their salary won’t lose value over time, and providing a COLA gives you an edge over companies that don’t offer this benefit.

Boosting Productivity

Employees who feel financially secure are less stressed and more focused on their work. It’s hard to concentrate on projects when you’re worried about how to cover your rent or healthcare costs. With a COLA, you help alleviate some of that financial burden, allowing your team to bring their best selves to work.

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How Do COLAs Work?

How do you go about calculating a COLA for your employees? The most common method involves the Consumer Price Index, which tracks the average change in prices paid by urban consumers for a basket of goods and services.

There are different versions of the CPI, but the one often used for COLA calculations is the CPI-W, which measures the prices experienced by urban wage earners and clerical workers. This is the same index the Social Security Administration (SSA) uses to adjust Social Security benefits.

Each year, the SSA compares the CPI-W from the third quarter (July through September) of the current year to the third quarter of the previous year. If the index shows that prices have increased, Social Security beneficiaries, including retirees and those receiving Supplemental Security Income (SSI), will see a COLA increase to their monthly benefit amounts.

In the private sector, employers aren’t required to use the CPI-W, but many do because it provides a clear, consistent measure of inflation. For example, if the CPI-W shows a 3% increase in prices, an employer might decide to give all employees a 3% raise to account for the higher cost of living.

How To Calculate a COLA for Your Workforce

Let’s say you’re ready to offer a COLA, but you’re unsure how much to give. Here’s a simple way to think about it:

Start With the CPI-W

Check the Bureau of Labor Statistics (BLS) website to find the most recent inflation data nationally or for your region.

Decide on the Percentage Increase

If inflation rose by 2.5% over the past year, you could match that with a 2.5% salary increase for your employees.

Apply the COLA Across the Board

Once you’ve settled on a percentage, apply the COLA to all your workers. For example, if an employee is making $50,000 in a calendar year and you offer a 2.5% COLA, their new salary would be $51,250.

It’s pretty straightforward, but there are still some nuances to consider, especially if your workforce is spread across different cities or states. The cost of living in New York, for instance, is likely higher than in a small city, so you may want to adjust your COLA based on location to ensure equity across your team.

Is a COLA Mandatory for Employers?

No, offering a COLA isn’t mandatory for most employers. Unlike the Social Security COLA, which is built into the system, private companies can choose whether or not to provide a cost-of-living increase.

However, if you’re part of a unionized workforce, your employees may have COLA provisions in their contracts, requiring regular adjustments based on inflation.

What Are the Benefits of Offering a COLA?

While offering a COLA does come at a literal cost, it also brings significant benefits. Here are a few reasons why you might want to implement a COLA program:

Increased Loyalty

Employees who feel valued and supported are more likely to stay with your company long-term. By offering a COLA, you show that you’re not just focused on short-term profits but are invested in your team’s financial stability.

Higher Morale

It’s no secret that money is a major source of stress for many employees. Giving them a COLA can alleviate some of that stress, leading to happier and more engaged workers. Higher morale often translates to higher productivity, which benefits everyone.

Improved Public Image

Offering a COLA can enhance your company’s reputation as an employer that genuinely cares about its people. In the modern world, where transparency and corporate responsibility matter more than ever, this can make a big difference when attracting top talent.

What Are the Challenges of Offering a COLA?

Like any compensation strategy, there are potential downsides to offering a COLA. For one, it can be expensive, especially during periods of high inflation. If inflation dramatically spikes, you could find yourself making significant wage increases that strain your budget.

There’s also the issue of expectations. Once you offer a COLA for the first time, employees may come to expect it every year, even during periods of low inflation. Managing these expectations is key to maintaining a sustainable compensation program.

How Does a COLA Affect Retirement Planning?

COLAs aren’t just for active employees. It also plays a significant role in retirement planning, especially for those relying on Social Security benefits.

Each year, retirees see an annual COLA increase based on inflation data from the previous year. This adjustment helps seniors and other Social Security recipients maintain their purchasing power as prices rise.

The SSA is expected to announce a COLA increase in 2024 based on third-quarter data from 2023. This increase will affect millions of Americans who rely on Social Security, SSI, and other retirement benefits, helping them keep up with rising healthcare costs, housing, and other essential expenses.

What Are the Best Practices for Implementing a COLA?

If you’re considering offering a COLA to your employees, here are other best practices to follow:

Be Transparent

Explain to your employees how their COLA is calculated and why you’ve chosen that particular percentage increase. Transparency builds trust and helps prevent confusion or dissatisfaction.

Review Regularly

Make sure to review your COLA on a regular basis — annually or semi-annually — to ensure that your employees’ wages keep up with inflation. Regular reviews help avoid sudden, large increases that could strain your budget.

Customize by Location

If your workforce is spread across multiple states or countries, consider offering location-specific COLA adjustments to reflect varying costs of living.

Avoid Over-Reliance

While a COLA is an excellent tool for maintaining wage fairness, it shouldn’t replace performance-based raises. Use a COLA in conjunction with other compensation strategies to fairly reward employees for their contributions.

Master Compliance With Mosey

As inflation continues to drive up the cost of living, offering a COLA is one of the most effective ways to support your team. It can help your employees maintain their standard of living, boost morale, and sustain retention.

By staying informed about inflation trends, regularly reviewing your compensation strategy, and communicating openly with your workforce, you can make sure your business remains competitive and your employees feel valued.

If managing payroll and HR compliance sounds overwhelming, Mosey can help. Our platform streamlines the process across multiple states and ensures you’re on top of the latest regulations. Let us handle the challenges so you can focus on growing your business. Get started with Mosey today.

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