Inflation has been soaring over the past few years.  According to Bankrate, consumer prices in the US have increased 20.8% from February 2020 – June 2024.  The Social Security Administration’s annual cost of living increases have averaged 5.9% since 2021 (compared to an average 2% per year from 2001 to 2020).

The combination of inflation with a tight labor market is making it difficult for employers to attract and retain talent.

Since salaries make up the largest part of any organization’s expenses, getting salaries correct is extremely important.  There are three predominant ways to manage salary increases:  cost of living adjustments, merit increases and salary range adjustments.

What is a Cost of Living Adjustment?

A cost of living adjustment (COLA) is an increase in salary that is linked to the rising costs of goods and services.  These adjustments are intended to allow employees to maintain their standard of living as inflation rises.

What is a Merit Increase?

A merit increase is a way for organizations to recognize top performers by increasing their salary at higher rates.  The intention is to motivate employees to perform at their highest level of productivity.  To be effective, merit increases need to be combined with a well-structured performance evaluation methodology that is fair, clearly defined and transparent.

What is a Salary Range Adjustment?

Using salary benchmark data, employers provide salary range adjustments to ensure that each employee is being paid appropriately for their role and the work they perform relative to the market.  The goal is to pay a person fairly for a job based on what other employers are paying for the same job. Using benchmark data allows you to see what is being paid for similar roles at other companies, reducing the chance of losing employees to higher pay somewhere else.

Before determining salary range adjustments, however, a company must first structure all jobs within formal ranges, and establish salary minimums, maximums and midpoints based on third-party salary survey data.

What’s the best approach to salary increases for your organization?

There is no simple answer.

If your company’s goal is to drive productivity and reward your top talent, merit increases may be a good choice.  Be aware that objectivity and clearly defined performance review processes are key to achieving your desired outcomes.  If managers give merit increases subjectively or with any personal bias, this type of increase may end up being harmful.

Conversely, using only cost of living, you risk your top performers will not feeling valued.  You may also discover that you are paying less than the market for critical roles.  Not to mention that until recently, the increase in cost of living was very low.

In general, salary range benchmarking tends to happen in larger organizations that have resources to manage this data year over year.  For small companies, salary ranges may be out of reach.  It is often costly to buy accurate survey data, employees in small businesses often take on multiple roles, so benchmarking becomes difficult and finally it is time consuming.  On the positive side, if you are paying within the salary range, you can be assured that you are paying fairly.  On the negative side, depending on salary market volatility and when you gathered the benchmark data, you may be out of sync with the market and risk losing people to competitors offering a higher wage.

A simple and effective hedge would be to use two or all three of these methodologies in your annual salary review process.  For example, factor in a cost of living increase for all employees with a merit increase on top of that to recognize your high performers.  It all comes down to your company’s objectives, so have these discussions with senior management to determine the best way forward.

Use a best-of-breed compensation planning solution

Rather than using unsecure, error-prone spreadsheets and email chains, or a less than perfect compensation planning solution built into your HRIS,  using a best-of-breed solution such as TalentComp for salary planning makes it easy to divide salary pools based on complex criteria, route recommendations, and secure approvals. TalentComp also allows organizations to consolidate salary benchmark data from multiple sources in one solution.  Reach out to CWS Software or schedule a demo to see how we can help.