Survey: Only 11% of Companies Still Giving Cost of Living Increases

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This won’t be a surprise to most of you given all the bad stuff that happened during the recession and ongoing economic downturn, but it still bears noting: the traditional annual cost of living increase is just about dead and gone.

A new survey by WorldatWork has found that only a small percentage of U.S. employers – 11 percent – are still giving out annual cost of living (COLA) pay increases to employees.

“From a rewards perspective, it doesn’t make sense to base pay raises solely on the Consumer Price Index,” said Kerry Chou, compensation practice leader at WorldatWork, the global human resources association that focuses on compensation, benefits, work-life and integrated total rewards.

“Pay raises are a tool to motivate and retain employees, Chou said in a press release accompanying the survey. “How motivating can it be for a top performer to receive the same base pay increase as a low or average performer?”

Good question, and that cuts to the heart of the longstanding problem with cost of living raises: they don’t discriminate or reward workers based on performance. A hard-working top line performer gets the same pay increase as a weak player just doing them minimum to get by in an organization where COLAs are the name of the game. How motivating can that be for a top performer?

New trends that are popular

The WorldatWork study, titled Compensation Programs and Practices, found that as COLAs go the way of the dodo, other types of pay increases are gaining traction. For example:

  • 94 percent of employers give promotional increases as the result of result of higher or greater level of job responsibility;
  • 92 percent give merit increases for superior work;
  • 76 percent give market adjustment increases;
  • 64 percent give internal equity adjustments; and,
  • 42 percent have pay differentials (usually related to atypical schedule, hazardous or unsecure work environment, special skill set or responsibilities, etc.).

There’s also this: When survey respondents were asked how base salary increases are determined, a vast majority (89 percent) of respondents selected individual performance against job standards and/or Management By Objectives (MBO) without selecting general increase (where everyone receives the same increase regardless of job performance). Again, this is another huge indicator that companies are moving away from mindless COLAs that don’t discriminate between an organization’s good and not so good performers

Why COLAs don’t work

“Eight out of 10 employers assess performance either formally (65 percent) or informally (15 percent),” said Alison Avalos, research manager for WorldatWork. “Given the prevalence of tying pay to performance, we expect the number of employers awarding COLA to stay flat if not dwindle in the coming years.”

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That’s probably a good thing given how cost of living raises generally turn into entitlements in the minds of most workers – something they get no matter how they perform – and often can turn into something that actually demotivates employees who are unhappy at the size of the annual increase.

I doubt that has been the case in many (if not most) American workplaces over the past few years given the onslaught of pay freezes, salary rollbacks, furloughs, and outright layoffs and cutbacks that most organizations have struggled with, but it seems now that annual cost of living increases are just another victim of the longest recession since World War II.

Another sign of the changing economic times

The Compensation and Program Practices study has a lot of great data in it, especially if you are a compensation wonk who really gets into this kind of research. For most of you however, this survey will be just another sign of our changing economic times.

Yes, the cost of living increase probably served its purpose for a long time, but standard raises that everyone gets regardless of  their contributions to the overall enterprise are as old school as hula hoops and episodes of I Love Lucy. The only surprising thing here is how long they have stubbornly held on.

So goodbye cost of living increases, and RIP. You’re a compensation strategy that is more than ready to be retired.

John Hollon is Editor-at-Large at ERE Media and was the founding Editor of TLNT.com. A longtime newspaper, magazine, and business journal editor, John has deep roots in the talent management space. He's the former Editor of Workforce Management magazine and workforce.com, served as Editor of RecruitingDaily, and was Vice President for Content at HR technology firm Checkster. An award-winning journalist, John has written extensively about HR, talent management, leadership, and smart business practices, including for the popular Fistful of Talent blog. Contact him at johnhollon@ere.net, connect with him on LinkedIn, or follow him on Twitter @johnhollon.

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