By Bash Halow, CVPM, LVT
The cost of living index is frequently used as a basis for a fair pay increase, yet that’s not it’s purpose, nor is it fair. Here’s why:
This year, many business owners will undertake an agonizing decision. How much of a raise should I give my employees? Two of the tools that employers turn to when making decisions about wage increases are the Cost of Living Index Adjustment (COLA) and the Consumer Price Index. To employers, these indexes appear to make sense, but to the employees they only make cents, since they typically adjust salaries up only marginally by a few percent. For those of you on the giving or receiving end of a COLA/ CPI wage increase, here are some straight-forward facts and reasons why they cannot wholly be relied upon as a basis for determining wage increases.
Fact: The Cost of Living Index Adjustment (COLA) is not a statistic designed for use as a basis for wage increases. COLA was enacted by Congress in 1975 to protect Social Security beneficiaries against the fast-rising inflation of the time. It is calculated using a report by the Bureau of Labor Statistics called the Consumer Price Index. It was not designed to maintain a standard of living, but to keep pace with changes in prices.
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Fact: Compensating for price changes is not the same thing as compensating for standard of living. Everyone reading this article knows that it’s not just how much we have to pay for our bills, it’s how many bills we have to pay and what bills we have to pay if we want to maintain our standard of living. As the Bureau of Labor Statistics itself cites:
‘The Consumer Price Index frequently is called a cost of living index, but it differs in important ways from a complete cost-of-living measure. A complete cost-of-living index would go beyond the changes in prices of goods and services and take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework.’
Cost of living indexes are available. They tell a consumer what the difference in the cost of goods and services is between one city and another, but do not provide a consumer with an understanding of how much additional money they require to maintain their standard of living.
Fact: The Consumer Price Index’s prices may not be your prices The Consumer Price Index is the average change in costs for all the goods and services that a typical urban American pays for in a period of time. The goods and services that are included in the average are called the Market Basket of Goods. The Market Basket of Goods is like an imaginary shopping cart filled with all of the goods and services that a typical urban American would purchase in a period of time.
The goods and services are categorized into groups consisting of the following
- Food and Beverages
- Housing
- Apparel
- Transportation
- Medical Care
- Recreation
- Education
- Other Goods and Services
But it’s interesting to note that the items in each group are determined by the Consumer Expenditure Survey in which only 7000 American families (out of 115 million) are asked to keep a detailed journal of their spending habits in two week or quarterly increments.
Fact: Cost of Living Index is an extremely broad review of a very large amount of data. Think of it in the same way you think of statistics on the average human life span; the larger the group, the greater the likelihood that the data will appear to be accurate, but it is unlikely that the final figures of COLA will be an accurate reflection of your personal needs as a consumer and a citizen.
Fact: Cost of Living Index raises have no lasting positive impact on employee retention. While dropping the ‘cost of living’ bomb may exempt you from an extensive debate about salary now, your employees are watching the American Dream slip further and further away with each credit card billing cycle. As we see too often in our practices, smart, sophisticated, and valuable employees are leaving veterinary practices (and the profession!) every day simply because they are not compensated enough to enjoy the standard of living for which they pine.
Fact: Genuine recognition for a job well done includes monetary compensation. There’s just no getting around it; valuable employees rightly expect to be recognized with both praise and money and in an industry whose entire future is predicated on team-driven service and client satisfaction, finding ways to adequately remunerate employees with both is essential. Rather than squeaking out of spending additional dollars in wage by dropping the Cost of Living bomb, throw yourself headlong into a discussion with your employee about investment…on both sides…in how the two of you can partner in your practice’s strategic goals for long-term financial success and longevity. That’s a business that will be enjoyable to work at and one in which a Mission of excellent patient and client care will ultimately be realized.