Cost-of-Living Adjustments and Contingent Pay

reward-systemsCost-of-living adjustments (COLA) imply the same percentage increase for all employees regardless of their individual performance. Cost-of-living adjustments are given to combat the effects of inflation in an attempt to preserve the employees’ buying power. For example, in the United States, organisations that implemented a COLA used a 2.1 per cent pay increase in 2003. This same percentage was only 1.4 per cent in 2001. Year-by-year COLA percentages can be obtained from such agencies as the Social Security Administration in the United States (i.e.,http://www.ssa.gov/OACT/COLA/colaseries.html).

Contingent pay is given as an addition to the base pay based on past performance. Module 11 will describe the topic of contingent pay in detail. But, in a nutshell, contingent pay means that the amount of additional compensation depends on an employee’s level of performance. So, for example, the top 20 per cent of employees in the performance score distribution may receive a 10 per cent annual increase, whereas employees in the middle 70 per cent of the distribution may receive a 4 per cent increase, and employees in the bottom 10 per cent may receive no increase at all.

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