A:

Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. Cost-of-living adjustment, or COLA, features are awarded at the discretion of the employer. Union contracts usually require a cost-of-living adjustment; one famous example is the COLA required for U.S. Postal Service workers.

The computation involved in cost-of-living adjustments can vary from organization to organization. One standard way is to provide an annual increase in worker salaries that is equivalent to the prior year's rise in the Consumer Price Index, or CPI.

There is another type of cost-of-living adjustment not directly tied to the rate of inflation. Sometimes an employee may transfer to a new city while maintaining the same job and receive a salary increase to offset the higher cost of living in the new location. An example is an employee who receives a salary increase because he is transferred from Chicago to New York City where consumer goods and services are more expensive.

Why Employers Offer Cost-of-Living Adjustments

Salary adjustments may be built into some union contracts; however, most American workers do not belong to a union. Still, employers use COLAs to attract and keep valuable employees – and make them more willing to accept job transfers. A company that does not offer salary adjustments to offset inflation might find itself at a competitive disadvantage to companies that do offer this type of benefit to employees. Another name for a cost-of-living adjustment is a "cost-of-living allowance."

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