Cost of living adjustment

A cost of living adjustment (COLA) increases employee compensation in proportion to inflation — maintaining the purchasing power of wages rather than increasing their real value. COLAs are most commonly tied to Consumer Price Index (CPI) changes and are particularly important in high-inflation periods where salary freezes or below-inflation increases represent effective real wage reductions even when nominal salaries are unchanged. The critical distinction from merit increases is intentional: a COLA compensates for external economic conditions and should apply broadly, while merit increases reward individual performance and are intentionally selective. Organizations that conflate the two — applying merit increase budgets as both performance recognition and inflation compensation — consistently underfund both purposes and produce neither adequate recognition nor adequate purchasing power maintenance.