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Dear Workforce How Do We Change COLA Dates Without Demoralizing People?

Employees at our company are accustomed to receiving an annual cost-of-living adjustment, or COLA, increase. However, we are implementing a new system linking pay to performance, and those employees will have to meet their yearly goals to be entitled to the COLA. They will also be awarded a bonus for exceeding goals. Currently, COLAs are awarded throughout the year based on each employee's date of hire. In the new system, we wish to have everyone eligible for the pay increases at the same time, in April. How do we change the timing without de-motivating those who would have been eligible for an increase under the old system, but now must wait anywhere from one to 12 months to become eligible?
May 4, 2011
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Related Topics: Compensation Design and Communication, Performance Appraisals, Tools, Dear Workforce, Compensation
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Dear Gathering Storm:
First of all, I must applaud your decision to move away from a COLA system for providing salary increases. Paying cost-of-living adjustments is always a bad idea. The reason: In any company, every employee's cost-of-living situation is unique and depends upon many individual demographic and lifestyle factors. Just because inflation went up 2 percent last year does not mean that every employee experienced a 2 percent increase in their personal cost of living.
What is critical from a company standpoint is cost of labor. The real issue is what the company must pay to attract talented and skilled individuals into specific positions within a certain geographic area. This is the cost of labor, and cost-of-labor systems are based on market data and competitive challenges.
Many companies that base their pay ranges upon the competitive market will—typically—provide performance-based salary increases. In addition, cost-of-living systems generally fail to make distinctions between performance levels, whether for teams or individuals. They assume one size fits all—a situation that ends up rewarding mediocre talent as much as high-potential employees.
It is also considered a "best practice" to align annual employee performance and compensation reviews to your company's business cycle. Anniversary-date pay systems are antiquated and disconnect the employee from any "line of sight" to annual business goals.
For companies that desire to make a smooth transition from an anniversary dates to common review date, a number of factors should be considered. The first is timing: When will you make the switch? It is best to choose a date around the end of the company's annual fiscal year to bring an end to anniversary-based increases. You must communicate this well in advance of the date so that employees and supervisors have adequate notice.
Second is the issue of proration: What will you do for those employees who, upon the cutoff date, must now wait from one month to 11 months to be eligible for their next increase? Will you "make them whole" with a prorated merit increase based on the number of months they have had to wait for the annual merit review? Or will you provide a single "settle-up COLA amount" for all employees based on the waiting period?
Finally, what will you tell your employees and supervisors? Communicating the specifics around the rules, and educating supervisors on these rules, is a key step. The more you tell employees, the better they will understand what you are doing and why it makes sense. Remember that you are not trying to get them to agree with what leadership is doing; you are aiming for understanding.
Speaking of good communications practices, one of your major challenges relative to implementation will be to change the mind-set of employees from a perceived "guaranteed COLA" to a performance-based merit increase/bonus system, where employees must earn their pay increases and bonuses. This is not going to be easy to explain, and so your company will need to have defined the specific business drivers behind this decision.
Management will need to be transparent with employees. It is critical for both senior leadership and first-line supervisors to be willing to explain in group and individual meetings the business reasons that make this change necessary. If you dissimulate or try to brush past the issue, employees will figure out pretty quickly that you are holding something back. Thus will end of any chance you have to make this program a success.
Explain how this will benefit both the company and the employee. The more you communicate, the more buy-in you will obtain.
SOURCE: Robert Fulton, Pathfinder's Group Inc., Glenview, Illinois
LEARN MORE: Please read why companies are starting to revisit their compensation strategies in anticipation of an economic rebound.
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The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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