Cost of Living Adjustments (COLA) traditionally boost the pay grid or portions of the pay grid by the amount of inflation, usually as the Federal government’s Consumer Price Index measures it.
COLA is not attached to performance, but is given in order to keep an organization’s pay competitive with other like companies for recruiting purposes and to limit the amount of job turnover do to non-competitive pay.
An organization has several options for boosting the pay grid. A simple solution is to provide each point on the pay grid a certain dollar amount, such as $500 per month. Another method is to provide each point on the pay grid a certain percentage, such as 2%.
Here are some problems with each. If the certain dollar amount is used the jobs in the upper classifications suffer, because the grid becomes more compact, and if the certain percentage method is used the lower level classifications suffer, because the grid becomes skewed to benefit the upper level classifications.
To help overcome these problems some companies use the certain percentage method one year and the certain dollar amount the following two years.
Remember providing COLA is not mandatory, it may be a sound competitive strategy to attain and keep outstanding employees.