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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12 Comments on “Survey: Only 11% of Companies Still Giving Cost of Living Increases

  1. John,

    I think that's the right approach. Pay should be based on value of work to the organization and in the labor market. Of course, take care of your people. But just increase pay annually because of COL… I'm not sure that makes sense.

    – Chris

    1. The confusion is cost of living increases vs. higher raises based on merit.

      It makes sense to give cost of living increases otherwise the AVERAGE workers pay would be what was paid back in the 80’s (four to seven dollars) and hour. No one can live on that and the working poor drive up government handouts because their low wages qualifies them for expensive programs like Food stamps and free medical insurance.
      Also keep in mind that the value of work is sometimes in the eyes of the beholder and is not always accurate.

      It would be more practical to lay off or fire deadbeats and give cost of living increases to everyone who remains and when the company has made triple profits..

  2. I didn't even know about this. I'm glad that employers are “retiring” cost of living increases. This seems like it only creates lazy unmotivated workers due to the fact that there is no bonus for going above and beyond. I can half-way do the job and get it done or I can go all out and bend over backwards to do a job well done. Either way I still get paid the same, so why not save my energy? That's probably how most of those employees who get cost of living increases think.

    By the way, I really liked your ending. It really drove your point home. Now if only I could learn to do that…haha

    1. The company that I have been with most of my working life stopped giving raises and bonuses when the recession/depression started and still don’t.
      This has been the negative talk among employees since profits have been going up over the last few years and the employees still allow this to happen. I don’t see anyone working any less than they ever did in fact more work has been delegated to most. It does look like changing jobs is the only way to prosper.

      1. Your comment is proof the propaganda from the ELITE AND SUPER RICH one percent is alive and well to blind most clueless workers into thinking a cost of living is the same as a raise based on merit.

        In reality cost of living increases were designed to keep up with inflation and nothing else which IS NOT TO BE CONFUSED WITH A PAY RAISE BASED ON MERIT.

    2. I could not disagree with you more. If everyone gets an evaluation and then it is determined they have not met the goals of the company then lay them off or fire them but to deny cost of living increase is going backwards to the day of Shanty town poverty and no middleclass. The article says only 11 percent are giving cost of living increases, not to be confused with bigger raises.

  3. COL may be on its death bed, however it need not be vilified as it's dying. Remember, failure to keep up with the COL, means a decrease in consumption or even t right cessation of consumption. Decreased or ceased consumption, particularly across all employees regardless of company or product, puts all companies at risk of failure as consumers cannot consumer without cash. This unpleasant little slice of reality was acknowledged by companies who chose to issue bare minimum COL to their basic employees.

    Remember, cash compensation is not always sole or even the main motivator for employees; especially for top performers. Perks, privileges, rank, recognition, etc. usually are bundled with that cash as part of the whole top performer motivation matrix. A smart company takes the time to research & create the appropriate compensation packages, such that top performers get what they need to continue their top performance, whether or not they also issue a COL to employees who at least met expectations. A wise company does that and keeps issuing a minimal COL so that its employees can remain consumers.

    1. The bottom line is when companies don’t keep up with the cost of living it wipes out the middle class as the rich get richer and the poor get poorer and no one has any money to circulate and buy any consumer goods.

      The working poor are also an expensive lot because if they are not paid enough to climb out of poverty they then qualify for expensive government handouts to get by, as in Food Stamps, free healthcare and costly low income housing programs.

  4. I agree that it is better for a company to give performance-based raises instead of identical raises to all workers. However, I work for a private school system with schools all over the U.S. and recently moved from AK to FL. We are not given performance raises, but some district offices throughout the U.S. give COLA. My district office in Alaska gave COLA to its teachers; my district office here in Florida does not–and there are NO pay raises of any kind. So while it might sound nice to get rid of COLA and only give performance-based raises, it also gives companies a way out of giving any recognition the hard work of their employees. One of the excuses my district office gave when I questioned the lack of COLA was that, “…not many businesses offer that anymore.” If businesses are going to take COLA away, then they should offer some other monetary incentive so employees have some way to earn a little extra.

  5. In reality how do you judge top performers to reward with a raise when everyone knows there is a fair amount of Supervisors that don’t do didly squat and don’t know their ass from a hole in the ground. The reason some Supervisors/Managers land their promotions are in reality based on the fact they are good bull sh—t artist who go to happy hour with the right bosses and either take credit for the work of others or sabotage the real hard workers!

  6. I have been working for the same company for 13 years. Have not had a raise of any size shape or form in 11 years. All other employees are in the same boat. NO raises ever!

  7. Employers think raises should only be performance based which is ridiculous because the price of food and heating does not go up based on performance!

    Inflation drives up the cost of virtually everything and our salaries should follow that trend. It should not even be called a “raise”… it’s simply status quo really. If you think about it, not getting “COLA” would be considered a reduction in pay since the wages you earned this year don’t cover as many expenses as they did last year.

    So…

    1) If you DON’T do your job, you should get fired.
    2) If you DO do your job, you should get your “COLA” and
    3) if you do your job BETTER than expected, you should get your COLA plus a performance raise.

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