A cost-of-living adjustment (COLA) is an increase in benefits or salaries to counteract inflation. It is a company-wide compensation increase that corresponds to a rise in the cost of living. COLAs are increases in salaries or hourly rates to help employees maintain the value of their compensation against inflation. They are not viewed as merit increases resulting from good job performance, but rather as a way to maintain the employees earning power. A COLA is a standard, across-the-board increase for a group of individuals. Employers might give out a cost of living raise where each employee receives the same percentage increase. A cost of living increase is not mandated unless required by law or agreement, such as annual minimum wage increases, or stated in a union agreement, benefit plan document, or employment contract.

Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. Employers use COLAs to attract and keep valuable employees. A company that does not offer salary adjustments to offset inflation might find itself at a competitive disadvantage to companies that do offer this type of benefit to employees. Sometimes the term COLA is used to describe salary "adjustments" or allowances for workers, including military personnel, temporarily relocated to another city, region, or country.

Though only 11% of U.S. employers integrate COLAs, HR leaders should still consider the regional cost of living when designing competitive compensation. An enticing salary that enables an employee to live a high-quality lifestyle can attract, help engage, and retain talent. HR leaders can take into account the local cost of living to develop desirable salaries.

In summary, a COLA is a company-wide compensation increase that corresponds to a rise in the cost of living. It is an increase in benefits or salaries to counteract inflation and help employees maintain the value of their compensation against inflation. Employers use COLAs to attract and keep valuable employees. Though only 11% of U.S. employers integrate COLAs, HR leaders should still consider the regional cost of living when designing competitive compensation.