Cost of Living Allowance (COLA)

What is cost of living allowance (COLA)?

Is COLA an effective motivational incentive?

It is fairly clear that COLA is closely connected to cost of things especially life's necessities. Life is becoming not only more complicated but more expensive by the day. This is why some organizations pay this allowance to employees.

In the United States, this payment is referred to as cost of living adjustment. This is to ensure that "Social Security and Supplemental Security Income benefits keep pace with inflation."

While talking about this particular incentive, spare a thought for the millions of people who are living in limbo, not knowing how soon they can or will have the next meal or whether they ever will. They will never come to know about COLA, what more enjoy it.

One can pose the question whether or not paying COLA is fair considering the millions of people who are not working, who are barely surviving with the meagre things that they have or earn.

Does COLA make employees happier?
COLA is part of cash compensation. Your organization may have decided to pay this allowance to employees. By doing this you are ahead of so many organizations who are not paying this allowance or cannot afford to do so.

Your organization hopes to make employees happier and thus more productive when it pays Cost of Living Allowance and other types of allowances. Ironically it is not definite that this makes employees more committed and more hard working.

In fact, their performance may not improve or may even deteriorate. And you wonder why.

How is COLA calculated?
Some organizations pay Cost of Living Allowance calculated as a percentage of employees' base salary. (Note the position in the US mentioned below)

If a flat percentage rate is used, highly paid employees get more. This means that the higher the base salary, the bigger the amount of this allowance.

Is this fair? Does this mean that the rising cost of living affect executives worse than those paid less? This is not true, of course.

Paying COLA calculated as a percentage of the base pay gives senior executives more. Junior people may get less unless calculation is made on a descending scale starting from the highest paid. But even this is not without problems.

Should you pay the same amount to every employee? Is this a better approach?

In the United States, Cost of living adjustments is calculated based on the Consumer Price Index. The increase for 2013 is 1.7%. This appears fairer and may provide more motivation for employees to improve their productivity.

Wikipedia explains, "Cost of living is the cost of maintaining a certain standard of living."

The standard of living varies from place to place. It may even vary from family to family within the same community. Thus, COLA is not truly motivational in nature. In fact, it may cause dissatisfaction among employees who perceive payment of COLA as discriminative. They know that senior employees are already paid a lot.

If your organization is thinking of motivational incentives, you may have to look somewhere else.

Cost of Living Allowance and Performance

Can organization withhold COLA from problem employees?
Organizations may believe that they can refuse paying COLA from employees who are performing poorly.

This is the wrong approach. Instead, make use of your disciplinary rules to take care of this. Pay the employee his or her COLA. And initiate disciplinary panel for non-performance or poor performance.

You may see that paying this allowance can lead to problems. What about retirees? Are they not also subject to the effects of inflation? What about the ordinary person in the street?

So, it is clear that a simple thing as payment of Cost of Living Allowance is not so simple after all.

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