Understanding the Difference Between a Raise and a Cost of Living Adjustment (2024)

In the corporate world, it is important to understand the difference between a raise and a cost of living adjustment (COLA). These two terms are not interchangeable, and using them as such can lead to confusion and dissatisfaction among employees. In this article, we will explore the differences between a raise and a COLA, the importance of clear communication, and the potential consequences of conflating the two.

A raise is an increase in an employee's salary or hourly wage that improves their spending power. This means they can afford more goods and services, or save more money, with their increased income. A raise is typically merit-based and reflects an employee's performance or contribution to the company.

On the other hand, a cost of living adjustment (COLA) is an increase in an employee's salary or hourly wage designed to keep their spending power consistent with inflation or other economic factors. COLAs maintain an employee's ability to afford the same goods and services over time, ensuring that their pay doesn't lose value as prices increase. A COLA is not merit-based and does not enhance an employee's purchasing power.

Example: If it takes an employee one hour of labor to earn enough to buy a cheeseburger, a COLA would ensure that it still only takes an hour in the future, whereas a raise would reduce the time required, such as to 45 minutes.

It's crucial for employers to be transparent about the difference between a raise and a COLA. When businesses attempt to control the narrative by using these terms interchangeably, they risk eroding employee trust and loyalty. Employees can typically discern the difference between a raise and a COLA, even if they're not familiar with the specific terminology.

If a company cannot afford to provide COLAs or raises, it's important for leaders to be honest with their staff about the financial situation. In lieu of monetary adjustments, employers can offer alternative benefits such as flexible working hours or remote work options. This helps maintain team alignment and prevents talent drain.

Some companies attempt to portray raises as merit-based rewards exclusive to white-collar jobs and COLAs as automatic adjustments for blue-collar workers. This deceptive practice not only obscures the true difference between the two terms, but it also perpetuates false social constructions of class. Authentic leaders prioritize honesty and transparency, as resorting to manipulative tactics can ultimately harm the company and its stakeholders in the long run.

Understanding and clearly communicating the difference between a raise and a cost of living adjustment is essential for maintaining employee trust and satisfaction. Employers must avoid conflating the two terms, and instead focus on honesty and providing alternative benefits if necessary. By doing so, companies can foster a positive work environment and pave the way for long-term success.