Understanding Cost of Living Vs. Merit Pay Increases

By hrlineup | 26.04.2021

Businesses make great efforts to retain their top talent. The easiest way to do this is with a raise in their pay, or through bonuses. In addition to these incentives, businesses are also expected to raise the salaries of their employees over time. There are two ways that this can be done. One being an adjustment due to cost of living expenses, the other merit pay increases.

What is a Cost of Living Raise?

The cost of living raise is in place to help employees better cope with the increasing costs of inflation. Ideally, a cost of living raise should be applied every year and would be a percentage of the total earnings. The most common increase is approximately 3% of earnings.

What is a Merit Increase?

This is the reward that is given to the highest performing and productive workers within a company. By rewarding merit, the intention of the company is to motivate others to elevate their performance. In addition to serving as an incentive for the entire working team. To achieve the desired result, merit increases need to be done periodically and in a planned manner. This way, the employees within the organisation know what to work towards to benefit from a merit increase.

One way to manage the expectations of employees when considering a merit increase is to carry out a performance appraisal that clearly has a ranking system. Through this system, it will be easy to identify who are the strongest performers and who are the weakest.

When considering merit vs. cost of living raises, the key consideration should be the way that they are structured. The criteria need to be clear and concise, so that all employers view them to be fair. With a merit increase, the amount focuses on only well performing members of staff. With the cost of living increase, it cuts across everyone in the organisation. It is a planned elevation to ensure that employees can continue working comfortably.

Cost of Living vs. Merit Pay Increases -Which one is better?

Both methods of increasing compensation have their benefits. The overall goal for the company helps to determine which would be the better option. To elevate performance and morale, as well as maintain lower costs, the merit pay is a great option. This is because only the best performers are rewarded, serving to communicate that good work deserves reward. However, it should not be the only method employed over a long period of time. Every alternate year, the method can be updated to prevent feelings of resentment from other staff.

Cost of living adjustment to salaries is much easier to implement as it cuts across the board. This shares a message of equality and ensures that there is no backlash from the employees. The challenge would come in with the high performers, who may stop performing at peak level. This comes down to the way that they perceive reward for their efforts,

When making salary adjustments, there are always advantages and disadvantages to be considered. Rather than dwell on these, the key is to ensure that a step is taken.