Talking with Employees about the Cost of Living

One of your employees is bound to ask whether your company’s increase budget matches the Cost of Living. It’s a tradition in a down economy. Even though we are not experiencing inflation, employees who work for companies with limited merit budgets will be trying to assess the value of their newly downsized pay adjustments. Emotionally and literally, they really won’t know what to make of them even if you've warned employees that this was coming.

What They Say Isn’t Quite What They Mean
Here are the kinds of questions that will be worrying employees. Should I be satisfied under these economic conditions or am I being complacent? If I go along with what they are telling me – that they couldn’t afford to recognize my hard work – should I really feel like I play an important role here? How can I be working this hard and have trouble paying my bills this year? Should I just be glad I have a job and get back to work? How much trust do they really deserve?

While these are their private thoughts, the questions illustrate the type of dialogue these employees want to have with you. In other words, they are hoping you will help them figure out what to make of this. They want to hear your side and then they’ll size it up for themselves.

The danger is that most employees don’t really understand compensation. You know this from experience. It’s confirmed by research. And, if you check your own company’s past communication practices, you’ll see the evidence for yourself. So in a pinch, employees ask about the Cost of Living since they’ve heard the term used when salaries have been discussed in the past. It seems to comprise all the things they are worried about.

Watch Your Language
If your company has a pay-for-performance approach to compensation, it's likely that you have misled people in the past if you have used the term Cost of Living to describe your increase practices.  For one thing, the numbers don’t add up.  It is exceptional and almost odd for the Consumer Price Index (CPI) to match the Cost of Labor, as our Editor, Ann Bares, illustrates in the ten year chart in her post, “Think Twice before You Call It a Cost of Living Increase.”

These are macro measures, so keep that in mind. Cost of Labor refers to what employers pay employees for doing particular jobs at a particular time. Cost of Living or the CPI address a broader economic concept of the cost of goods purchased by “typical” consumers.  See the piles of apples and oranges?

Should you use the term, “Cost of Labor,” instead? Probably not, unless you have a good grasp of how to distinguish between the economics of each term. Remember, employees are trying to figure out whether they should trust you. Talk about what you really know.

You’ve Got Alternatives
Unless pay practices are influenced by Union agreements in your industry, try to put any employee concerns about Cost of Living behind you. Answer employee questions directly and accurately. Cost of Living refers to consumer practices in relation to goods. It’s just not pertinent to your compensation philosophy. The heart of your compensaion philosophy is to align your pay opportunities with competitive practices.

If your company has a salary structure, you can go further.  Explain that your company’s pay philosophy is to provide a salary range that offers minimum to maximum competitive pay opportunities based on market research. Employees can move up to maximum – which is more than the competitive pay target for their job – based on performance.

How Will This Help?
First of all, trust builds from a commitment to accuracy. If the CPI has nothing to do with your practices, then don’t linger on it, you’ll just muddy up the discussion. If employees are going to trust you, you need to lay out what’s actually going on.

Second, don’t fiddle with distractions when you need to get to the heart of the matter this year. Help employees assess the value of their pay in a realistic way. Help them feel motivated if they are not. Help them learn how to feel that their work is valuable, even when they can't rely on traditional reward methods like merit increases.

Margaret O’Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communication to the dialogue at the Café; before founding re:Think Consulting, she was a Principal in Total Rewards Communications with Towers Perrin.  Margaret earned her M.S. and Ed.S. in Instructional Technology at Indiana University.  Creative writing is one of her outside passions.

Comments

[working girl]

Employees that don't understand their own compensation may not feel better hearing that 'our company’s pay philosophy is to provide a salary range that offers minimum to maximum competitive pay opportunities based on market research.' Because if the idea is that they can move to the maximum of the range based on performance, they may conclude that means their performance is poor if they don't get a big raise.

But seriously, I couldn't agree more about being wary of COL increases, although as an employee I have no insurmountable objection to them. They're attractive because they're easy to understand and explain, but they also tend to drive expectations and costs up.

And so true about responding to what each employee is no doubt wondering but afraid to ask. It's important to help employees feel as comfortable as possible with what they get. That's good management.

[Margaret O'Hanlon]

WG, if you haven't yet, check out Darcy Dee's eye opening post on Oct. 27 on the unintended consequences of COL increases in Colorado. The appropriate link between COL and pay is very difficult to pin down. As Darcy points out, Colorado's example is one of really good intentions (but limited understanding) gone awry.

[Klaus]

Margaret,

Just some thoughts to consider:

You are right in staying away from the whole cost of living/cost of labor subject, because the argument and difference in the two concepts breaks down when you consider that people in high cost of labor locations, such as San Francisco get paid more because the cost of living drives the cost of labor.

However, this year is different in one respect. Most years the cost of living rises. This year it declined, making an argument for a raise based on the COL less persuasive.

[Margaret O'Hanlon]

Hi Klaus. Thanks for the clarification. You know that COL won't really matter this year and I know that COL won't really matter this year, but some employees are likely to misunderstand this. In my experience, because employees don't really understand COL, it's a term that actually means for many, "Am I being paid fairly." I thought it would help -- especially this year, as you point out -- to remind HR that when they hear the term, they should listen for what the employee is really asking.

[Klaus]

Agree. Best to avoid the term completely since people's feelings about it are unpredictable. Good post, BTW.

[Sean Conrad]

How many employees would except a COL adjustment DOWN in a deflationary environment?

Agreed that it's a touchy subject and employees are likely to have a different understanding of COL than a compensation pro.

[Margaret O'Hanlon]

Sean, great point! It's also a great "teachable moment" if you get caught in one of these discussions.

Thanks for your thoughts.