A cost-of-living adjustment (COLA) is an increase to employee compensation to offset inflation or account for differences in living expenses across regions. It’s a bump in your employee’s paycheck meant to keep their spending power from shrinking when the cost of things goes up. Maybe a favorite takeout spot has quietly added $2 to everything on the menu. Maybe your employee moved to a new city where everything’s more expensive—say, from Kansas City to San Francisco. COLAs are a way of helping your talent still afford the essentials and the day-to-day. Rent. Coffee. A life.
Employers often use COLA to ensure salaries stay fair and competitive when inflation or local costs go up. And for global teams, COLAs can also balance pay differences between countries to ensure that all employees enjoy a consistent standard of living regardless of where they live.
COLAs aren’t a reward, they aren’t a bonus, and they aren’t about performance. They’re about economics. The world shifts, prices rise, and COLAs are how paychecks keep up.
Why companies use COLAs
Here are the four main reasons why you may consider offering COLAs to your talent:
- Inflation protection. COLAs help employees keep pace with the rising costs of essential goods and services—especially since 2021, the year when inflation rates began to rise across the globe.
- Geographic pay adjustments. COLAs align pay for employees working in cities, states, or countries with significantly different living costs.
- Retention tool. Giving a COLA to your teams demonstrates your commitment to your employees, which helps reduce talent turnover.
- Compliance. Some countries and industries require pay adjustments in line with inflation or labor agreements.
In sum, companies offer COLAs to keep their compensation competitive and show their employees that they value them.
How COLA works
Inflation-based adjustments
Many employers tie annual COLAs directly to recognized inflation indexes, such as the U.S. Consumer Price Index (CPI) or the Harmonised Indices of Consumer Prices (HICP), compiled by Eurostat, the EU’s statistics office. These indices track price changes across essential goods and services, like housing, food, transportation, and healthcare. As such, they provide a reliable benchmark for how much purchasing power has shifted—up or down. By linking adjustments to government data, you create a transparent, defensible approach to cost-of-living adjustments.
COLAs are typically applied at the start of a new fiscal or calendar year, making January 1 the most common effective date for these adjustments. This timing aligns with annual budgeting cycles and allows you to communicate changes clearly during year-end planning or performance reviews. In the U.S., the Social Security Administration (SSA) calculates the adjustment by comparing inflation rates from the previous year’s third quarter to the current year’s third quarter. Many organizations follow the SSA’s Q3-to-Q3 approach and roll out the increase as a percentage applied uniformly across eligible employees.
Geographic adjustments
Geographic COLAs account for the fact that a dollar, euro, peso, or really any currency doesn’t stretch the same way everywhere. When employees relocate to high-cost cities like Hong Kong, San Francisco, or Zurich, you may consider offering COLA increases to help them maintain their same standard of living despite higher housing and transportation costs, as well as daily expenses. This approach keeps compensation competitive with local market rates and ensures your team members aren’t penalized in the pocketbook for taking on roles in expensive locations.
Conversely, employees moving to lower-cost areas may see reduced compensation since their pay goes further in those markets. Some organizations group cities into geographic tiers based on cost-of-labor data, then apply differential percentages to base salary structures, such as a +15% adjustment for high-cost locations or a -5% adjustment for more affordable areas.
Collective bargaining agreements
Collective bargaining agreements (CBAs) often include COLA clauses to ensure unionized employees’ wages keep pace with inflation throughout the duration of a contract. Such provisions are most common in industries with large unionized workforces, like manufacturing, education, and public service, where steady wage protection plays a key role in employee satisfaction and retention.
Labor unions negotiate these provisions as a safeguard for workers, tying annual pay increases to objective measures like the CPI to prevent real wages from falling when prices rise. In many CBAs, such as the American Postal Workers Union’s agreement, COLAs are structured as automatic percentage increases or specified formula-based adjustments that activate when inflation surpasses certain thresholds.
Employer discretion
Not all COLAs are company-wide policies. Many employers use them selectively based on business needs and compensation strategy. Some organizations apply COLAs specifically to global mobility programs, offering adjustments only when employees relocate internationally or to high-cost domestic markets. Others reserve them for certain job families or roles where retention is especially critical.
Since most jurisdictions don’t legally require COLAs unless stipulated in contracts or CBAs, you have the flexibility to design a tailored approach that balances fairness, budget constraints, and strategic talent priorities. This discretion allows you to align COLA offerings or other benefits to offset inflation with your broader compensation philosophy—whether that means consistent across-the-board increases, targeted support for specific populations, or case-by-case decisions based on individual circumstances.
Global perspectives on COLA
U.S.
In the U.S., COLAs are most commonly tied to the CPI, which tracks price changes across what’s referred to as a basket of goods and services that urban consumers typically purchase. COLAs are frequently negotiated into union contracts and are a standard feature in government positions.
Social Security benefits recipients receive automatic annual COLAs based on the CPI for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the larger CPI. Federal employee pensions and many state and local government plans also include CPI-linked adjustments
Europe
Many European countries link COLAs to inflation rates, especially in the public sector, where wage increases are often indexed to official measures like the HICP. Governments set clear formulas that tie pay to quarterly or annual inflation data. Additionally, COLAs in Europe are routinely applied to a country’s minimum wage.
Notably, Belgium and Luxembourg have automatic wage indexation systems that adjust the salaries of both public and private workers when inflation hits certain thresholds. From 2021 to 2023, workers’ wages increased 15% in those countries due to steep increases in inflation.
While private-sector practices vary in countries other than Belgium and Luxembourg, many European employers follow similar indexation principles, either through CBAs or internal policies, to stay competitive and retain talent in markets where inflation protection is increasingly expected. Despite the progressive policies, real wages still lagged behind in 2022, a year when inflation rapidly rose.
Asia-Pacific
COLAs are most common in the Asia-Pacific region among multinational companies managing international assignments and expat programs. Employers often use COLAs to help relocated employees maintain their standard of living in high-cost cities where they are stationed, like Singapore or Sydney. These adjustments may be based on recognized cost-of-living indexes from providers like Mercer or ECA International.
Latin America
Inflation volatility across Latin America often makes COLAs a standard element of employment contracts. Employers regularly tie COLAs to consumer price index data from national statistics agencies such as the National Institute of Statistics and Censuses (INDEC) in Argentina, National Institute of Statistics and Geography (INEGI) in Mexico, and National Administrative Department of Statistics (DANE) in Colombia.
Stay COLA savvy
Although economists predict that global inflation rates will fall in 2026, it’s still essential to develop a fair, clear company policy regarding COLAs.
Here are five strategies for managing COLAs:
- Regularly review inflation trends and regional pay benchmarks. This keeps your compensation fair, competitive, and aligned with employees’ real cost of living
- Balance COLAs with performance-based raises. It’s a delicate balance, but important for protecting your talent’s purchasing power while also rewarding the efforts of individual contributors
- Communicate transparently. When sharing COLAs to payment, communicate as clearly and transparently as possible for best results
- Consider global payroll complexity when applying COLAs across multiple countries. This isn’t for the faint of heart, so consider partnering with an employer of record (EOR) to ensure you get it right
- Budget for COLA. Don’t forget to include COLA in your long-term compensation planning, especially in high-inflation economies
Get COLAs right in every country
Paying people fairly around the world is hard. You’ve got teams in Tel Aviv, Tokyo, maybe Lisbon. Suddenly, the cost of everything isn’t the same anymore.
That’s where Pebl comes in. Our global Employer of Record (EOR) service brings clarity and confidence to your global compensation strategy. We’re the quiet, behind-the-scenes partner who actually knows what it costs to live in more than 185 countries. Pebl helps you easily implement COLAs that reflect regional realities—so your teams stay supported from Tel Aviv to Tokyo.
With real-time cost data, expert local insight, and automated payroll tools, we take the complexity out of global pay management and keep your compensation both fair and competitive worldwide.
Because when it comes down to it, these aren’t just numbers on a spreadsheet. They’re about whether or not someone feels valued. Whether they stay. Whether they can afford rent—and dinner.
Let’s chat about how we can help you make those decisions with a little more confidence and a lot less guesswork.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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