What is a Cost-of-Living Adjustment (COLA)?
Rising inflation and economic uncertainty aren’t just financial challenges — they’re also talent challenges. As the cost of living rises, employees expect their wages to keep pace. If not, they’re more likely to leave for a better opportunity.
Companies often incorporate a structured cost-of-living adjustment (COLA) into their
compensation strategy to help employees navigate challenging economic conditions. Some companies proactively offer COLAs to support retention and morale, whereas other cost of living raises are required by law or mandated in collective bargaining agreements. Understanding what a cost-of-living adjustment is and the benefits of offering it can help employers maintain a dedicated workforce.
What is a cost-of-living adjustment?
COLAs are periodic wage increases that offset inflation. Unlike merit-based bonuses that reward top performers, COLAs apply to the entire workforce and focus on keeping compensation in line with the national average cost of living. They help guarantee employees can maintain purchasing power despite cost-of-living increases.
Companies often apply COLAs on an annual basis or in response to significant spikes in inflation. Government institutions also use COLAs to adjust payments for people receiving Social Security benefits or public pensions.
How does a cost-of-living adjustment work?
Typically, employers calculate a COLA using economic indicators like the
Consumer Price Index (CPI), which measures the average price for a representative sample of goods and services in urban communities.
Although many industries and organizations factor the CPI into their COLA calculations, they apply these increases in various ways depending on the sector.
Public sector. COLAs are common in union-negotiated contracts, military pensions, and federal
employee benefits. Although they aren’t always required by law, these COLAs are usually more frequent and predictable than those in the private sector.
Private sector. Business leaders weigh federal indicators like the CPI alongside company-specific factors, such as company performance, industry benchmarks, competition, and regional cost differences, when setting an average raise per year.
Companies with employees in major metropolitan areas might offer location-based annual raises to attract and retain talent. Rather than guaranteeing COLAs every year, some companies may only implement these measures when inflation reaches a certain level. This flexibility helps businesses balance financial sustainability with the need to support employee well-being.
How much is a cost-of-living raise? How COLA is calculated
There isn’t a universal method to calculate COLAs, but the Social Security Administration’s formula is widely followed.
In the SSA’s equation, analysts find the difference between the average CPI-W in Q3 of the current year and the average CPI-W from the same quarter in the previous year. They divide this number by the Q3 CPI-W for the previous year and multiply the value by 100 to get a percentage increase.
For example, the average CPI-W for Q3 2023 was 301.236, and the same metric in 2024 was 308.729. Subtracting these two values yields 7.493. Dividing 7.493 by 308.729 and multiplying by 100 leads to an inflation rate of roughly 2.4%.
Businesses don’t always use the SSA’s formula, but many consider this inflation rate alongside internal factors — such as budget constraints and competitive positioning — when analyzing their compensation strategies. Instead of using national CPI-W data, some organizations might choose other metrics, like the
CPI for All Urban Consumers (CPI-U) or
regional CPI figures, to calculate COLA increases.
Why are cost-of-living adjustments important?
The benefits of COLAs extend to employers as well as employees. Beyond reducing the pressure of rising prices, these compensation adjustments offer companies many competitive advantages.
Maintain employee financial stability
Organizations use COLAs to ensure employees can maintain their lifestyle as inflation raises the cost of essentials like housing and food. Without these adjustments, the real value of an employee’s wages erodes over time, leading to financial strain and weakened morale.
Still, COLAs are only one way employers can promote financial wellness within their teams. Complementary benefits like
EarnIn can help provide much-needed flexibility with on-demand
access to earned wages — up to $150 per day, with a max of $750 per pay period.
Employees can access their pay in minutes starting at just $2.99 per transfer.
EarnIn also offers tools like
Credit Monitoring and Tip Yourself
to help employees stay on top of their credit score and effortlessly set aside savings from each paycheck. Pairing COLAs with EarnIn empowers employees to take control of their finances.
Retain employees and attract new talent
Routine COLAs signal that employers recognize the challenges employees face and are committed to supporting their well-being. This commitment often translates into higher retention, improved morale, and a stronger bottom line. In addition, by offering competitive compensation, COLAs can attract high-quality candidates.
Ensure fair compensation
COLAs support pay equity across all employee groups. Because COLAs are universal rather than merit-based, they reinforce a sense of fairness and transparency within a company’s culture. They also help protect long-tenured employees from falling behind newer hires who may enter at higher salaries during periods of high inflation. This approach reduces internal pay disparities, supports employee morale, and strengthens the company’s reputation as a fair and equitable employer.
The business impact of cost-of-living adjustments
The benefits of COLAs are undeniable, but they’re also a financial commitment. Companies must carefully prepare for these adjustments before offering this benefit.
Business budgeting
The most immediate impact of a cost-of-living adjustment is on a company’s annual budget. Adjusting salaries for inflation inevitably increases
overall payroll expenses. Leaders should weigh these increased labor costs against the potential benefits
To prepare, businesses should forecast inflation rates and factor corresponding COLAs into their financial planning. They may implement COLAs gradually or cap them at a certain percentage to manage expenses more predictably.
Payroll planning
COLAs are typically calculated using data-driven percentages to adjust wages, so companies need flexible payroll systems that can seamlessly implement increases across the workforce. HR and finance departments are responsible for ensuring COLAs are implemented accurately and on schedule.
Workforce stability
Although implementing COLAs may require careful planning, they give employees a valuable sense of security. When team members are fairly compensated, they’re less likely to seek employment elsewhere, leading to lower turnover, reduced hiring and training costs, and stronger team cohesion. In the long run, retaining experienced employees contributes to higher productivity and organizational stability.
Help support employee financial stability with EarnIn
Cost-of-living adjustments provide crucial financial support for employees, but they’re just one piece of the puzzle. When inflation impacts household budgets, employers can do more by offering
financial wellness tools that help employees take control of their finances and plan with confidence.
With a suite of tools that includes
on-demand pay,
credit monitoring, automated savings, and more, EarnIn helps employees navigate financial challenges with more control and less stress. With on-demand pay, employees can access up to $150 per day, with a max of $750 per pay period
in minutes, starting at just $2.99 per transfer
— and use features like Credit Monitoring,
which helps them track changes to their credit report, and Tip Yourself
a tool that lets them effortlessly save with every paycheck, for additional support.
Best of all, EarnIn is simple to offer: no employer cost, no payroll integration required, just added value for your team.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
EarnIn is a financial technology company not a bank. Banking Services are provided by Evolve Bank & Trust, Member FDIC. The FDIC provides deposit insurance to protect your money in the event of a bank failure. More details about deposit insurance
here.
A pay period is the time between your paychecks, such as weekly, biweekly, or monthly. EarnIn determines your daily and pay period limits (“Daily Max” and “Pay Period Max”) based on your income and financial risk factors as outlined in the Cash Out Maxes section of our Cash Out User Agreement. EarnIn reserves the right to adjust the Daily Max and Pay Period Max at its discretion. Your actual Daily Max will be displayed in your EarnIn account before each Cash Out. EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the
Lightning Speed Fee Table and
Cash Out User Agreement for details and eligibility requirements. Tips are optional and do not affect the quality or availability of services.
Lightning Speed is an optional service that allows you to expedite the transfer of funds for a fee. Depending on the product, the fee may be charged by EarnIn or its banking partner. Lightning Speed is not available in all states. Restrictions and terms apply. See the
Lightning Speed Fee Table and
Cash Out User Agreement for details.
Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0.
Learn more.
Tip Yourself Account funds and Tip Jars are held with Evolve Bank & Trust, member FDIC and FDIC insured up to $250,000. Tip Yourself is a 0% Annual Percentage Yield and $0 monthly fee service deposit account. For more information/details visit
Tip Yourself Account Terms. The FDIC provides deposit insurance to protect your money in the event of a bank failure. More details about deposit insurance
here
