Cost of Living Adjustment versus Market Pay Adjustment
In compensation, two types of adjustments are often discussed: Cost of Living Adjustment (COLA) and Market Pay Adjustment. COLAs are used for entitlements, such as the Old-Age Survivors and Disability Insurance Program (OASDI) administered by the Social Security Administration, while Market Pay Adjustment is utilized by employers to maintain competitiveness in the job market by adjusting pay structures and individual employee pay based on changes in the market.
Employers use pay structures to determine the appropriate pay range for a job and where within that range an employee should be paid based on their knowledge, skills, and abilities (KSAs), and their performance. The pay range is based on what other employers are paying for the job. For instance, the market pay for a Customer Service Representative may be $14.91 – $24.96. The market isn’t one number. It is a range of numbers from a low percentile to a high percentile.
Market Pay Range
To provide reasonable starting pay for employees who meet the minimum qualifications of the job and to also take into consideration the Living Wage, the employer sets the pay range minimum at $16.00 per hour. The employer sets the range maximum at $24.00 per hour which is 50% above the minimum and halfway between the market 75th percentile and the 90th percentile.
Employer Pay Range
If the employer’s pay range minimum is equal to or greater than the market 10th percentile and the pay range maximum is equal to or less than the market 90th percentile, the employer’s pay will be competitive in the market. The employer may want to be more competitive at the pay range minimum and may feel that a maximum less than the 90th percentile is also competitive. What the employer decides should be documented in their Compensation Philosophy.
The employer periodically evaluates the market to keep pace with changes in supply and demand and other factors that can affect employee pay. When the employer recognizes changes in the market, they may need to adjust the pay structure and individual employee pay to maintain competitiveness. Not all jobs are affected to the same degree by market changes, nor are they affected on the same time schedule. This reasoning is why adjusting pay structures cannot simply use the average market movement.
A more thoughtful adjustment will consider more than the Consumer Price Index (CPI) and will determine if some jobs or departments are farther below the market than others. The amount of the adjustment should not necessarily be the same for all employees, as not all employees are affected by changes in the market to the same degree. An across-the-board single percent adjustment will deliver more dollars to higher paid employees. A flat dollar amount will provide larger percentage increases to lower paid employees. It is not unusual to have an adjustment that is a percent of pay plus a specific flat dollar amount. Cost modeling can show how individual employees at different pay levels are affected.
In conclusion, while a COLA is a simplistic adjustment, a Market Pay Adjustment requires a more thorough analysis of market factors and individual employee KSAs and performance. Maintaining a competitive pay structure and pay equity is not a simple task, and adjustments should be made thoughtfully and effectively explained to the employer’s workforce. COLA is simplistic. Market Pay Adjustment is sophisticated.
