Entrepreneurs often contemplate initiating a second venture post-exit from their primary business. A common stipulation is to run a business that does not require managing employees or clients—a rather humorous expectation considering that employees are fundamental to any business' success. As such, questions about effective methods for reviewing compensation frequently arise. In this article, we focus on why businesses should reconsider adopting the traditional Cost of Living Adjustment (COLA) in compensation plans.
The Market Dictates Compensation, Not Individual Intuition
It is essential to understand that the market, not individual sentiments or gut feelings, dictates compensation. To remain competitive, businesses should utilize salary surveys and various market data sources, such as interviews and insights from employee exits. These tools assist in determining a market-aligned compensation range for each position.
The Importance of Transparent Dialogue
After determining the market range for compensation, the next crucial step involves open conversations with team members. At Simple Numbers, we advocate for changes in compensation based on shifts in either the market or an employee’s skill set. It is critical to clearly communicate the reasons behind any changes in compensation. Assess whether market conditions or newly acquired skills and responsibilities have led to the adjustment.
Why Saying No to COLA is Vital
One prevalent method of compensation review, which businesses should scrutinize carefully, is the Cost of Living Adjustment (COLA). While it may appear to be a straightforward approach, this method can lead to inconsistencies. Often, the Federal cost of living index might not accurately represent your specific market. Therefore, businesses that opt for a blanket COLA increase without rigorous market analysis may end up overcompensating some employees while undercompensating others. Instead, a focus on market-driven compensation is advisable.
Access to Salary Surveys for Comprehensive Compensation Planning
Our conviction in market-based compensation is underpinned by an exclusive service we offer to Simple Numbers clients: access to detailed salary surveys. If you are an existing client in need of these surveys, we stand ready to assist. For those who are not yet clients, we invite you to explore how we can collaboratively work on compensation planning and other best practices for running a profitable business.