A cost-of-living adjustment (COLA) is an increase in wages, salaries or benefits, usually based on an objective measure that estimates how much additional money a typical person or household needs to maintain their standard of living. With the current situation being that many companies will have a remote workforce through 2021, COLA has been top of mind for HR leaders recently.
Why COLA Matters Now We’re All Working From Home
Businesses in the US are not required to provide their workers with COLAs; however, most do in order to remain competitive in the talent marketplace. People costs are generally one of the top three expenses any company has, so any change in compensation structure typically doesn’t happen quickly. Because so many companies have had to reduce overhead costs and limit budgets due to COVID-19, companies are evaluating compensation based not only on cost of living, but based on the cost of living by geographic area for a dispersed workforce.
For example, in May Facebook CEO Mark Zuckerberg announced that the company’s workforce is likely to be 50% remote five years from now and its compensation structure will change to reflect it. Facebook already pays based on location, but Zuckerberg said employees working remotely must notify Facebook if they move to a new area before Jan. 1, 2021 and those who choose to work where the cost of living is less should expect to be paid less. “That means if you live in a location where the cost of living is dramatically lower, or the cost of labor is lower, then salaries do tend to be somewhat lower in those places,” Zuckerberg said, noting it will be necessary to take taxes into account. “There’ll be severe ramifications for people who are not honest about this.”
In a recent webinar with Compensation Consultant/Human Resources Strategist Melissa Bixby for UpskillHR, we talked about how COLA plays into working with remote employees – and why compensation data and research is essential for any company before making changes.
While we may want to be able to adjust salaries based on location, compensation is much more likely to be driven by our competitors. Because many companies, especially those in the tech sector like Facebook, have shifted to a remote work model, retaining and recruiting highly skilled employees is going to depend on what you have to offer. From an employee perspective, they’re performing their job just as well and just as productively as they did when in office. If their position becomes 100% remote and they choose to move to a location that has a lower cost of living, how will this be received? If early reaction to the Facebook decision is any indicator, the pandemic did not suddenly create a recruiter’s dream of endless talent funnels and candidates are still in the driver’s seat.
Marketwatch reported that Zuckerberg said that in a company survey, of the people who said they would want to work remotely full time, about 45% were “pretty confident” that they would move to another place if they had that opportunity, with an additional 30% saying they “might” move. About 60% of that total said they’d prefer to move to a smaller city or town. Unfortunately, the survey didn’t also ask if employees who would move to a smaller city or town are also willing to take a pay cut to do so, so Facebook skipped a crucial opportunity to gather more data before making the decision.
Bixby recommends considering how pay equity factors into any changes in compensation structure, not asking applicants salary history or what they expect to make in the role, get the best data you can – internally and externally – so that there are no adverse impact issues before making any changes or announcements about changing compensation or COLA. There are many areas to cut costs, but if you’re below the market when it comes to salaries you will lose employees and the impact of negative reviews and talent brand perception takes a lot longer to fix than it does to enforce.