SCORE

With consumer goods like groceries and household supplies going up more than 5% from August 2020 to August 2021, your employees might be asking for a cost-of-living increase to offset increased expenses. As a small business owner staring down the barrel of an ongoing labor shortage, increasing wages or salaries to meet the pace of inflation may be a good way to retain your workforce.

As we look ahead to 2022, now is a good time to consider whether your business can offer a cost-of-living increase.

How To Calculate a Cost-of-Living Increase

A cost-of-living increase also called a cost-of-living adjustment or COLA, is an annual percentage increase to a preplanned payment, like Social Security or a salary or wage. The goal of a COLA is to keep pace with inflation and the rising cost-of-living expenses for the next year. Unlike a bonus or raise, it’s not performance-based but instead given to every employee at a business.

While there’s no set formula for how to calculate a cost-of-living increase, the most commonly used metric is the Consumer Price Index (CPI). The Bureau of Labor Statistics compares the costs of a set of consumer goods, like groceries, clothing, and housing, to measure price changes over time. 

One simple way to calculate a cost-of-living increase would be to use the CPI, or whatever percentage you chose, and add that increase to your employees’ salaries. 

How To Afford a Cost-of-Living Increase

Figuring out how to pay for a cost-of-living increase can be challenging in any year, but especially when businesses are trying to bounce back during a fledgling recovery after pandemic restrictions. This year’s rising inflation rate may be eating into already slim profit margins, which may make a cost-of-living increase sound like an expense you can’t afford. 

But remember, finding a way to increase salaries in response to rising living expenses may help to make your business more competitive in attracting and retaining talented employees. With the hiring challenges businesses are confronting, finding a way to offer a cost-of-living increase could help your business remain competitive. 

While it may be tempting to use a loan or merchant cash advance for quick access to funds that can help you cover an increase, it is also risky because you could become trapped in a cycle of debt. A raise is also a permanent change to your payroll expenses, so covering it with a one-time influx of cash could leave you struggling in the future. Here are some alternative ways to find funding for salary increases:

  • Raise prices to increase revenue. Raising prices by a set percentage could be a straightforward way to absorb the additional expense of a cost-of-living increase. But don’t make this decision lightly, especially if you’re facing tight competition in an industry with your competitors offering comparable prices. You wouldn’t want to raise your prices so much that you’re too expensive to be competitive. 
  • Cut expenses by dropping a product that’s more expensive to manufacture or purchase. Instead of increasing your revenue to absorb the cost, consider cutting expenses. For example, if you run an ice cream business and find that blueberries are very expensive, consider dropping blueberry ice cream from the menu. You can still sell a scoop for the same price, but your costs will decrease because you’re no longer buying an expensive ingredient. 
  • Change operating hours or limit overtime. Though your business needs to be open to make money, you might be able to trim expenses by closing up shop during slow hours. A restaurant without a breakfast crowd? Open at lunch instead. An independent movie theater without daytime patrons? Limit your afternoon showings. Changing your hours can also help you avoid paying overtime to your employees, which federal law says must be at least the equivalent of time and a half. 

Sometimes, offering a cost-of-living increase just might not be possible for your bottom line. If that’s the case, there are other ways to attract and retain top employees at your business. Consider some alternative options:  

  • Offer additional fringe benefits. Depending on the number of employees you have, you might be required by law to offer health insurance. But by offering additional fringe benefits, you can show you value your employees’ health and well-being, as well as persuade employees to stay or accept a lower salary or wage. If you already offer a 401k or retirement plan for your employees, other optional benefits include child care discounts, fitness memberships or discounts, and even snacks and coffee in the office. These may not help employees directly with the cost-of-living increases, but they could help your employees save elsewhere. 
  • Offer employee loans. Offering loans from your business to employees may sound risky, but could actually promote greater productivity and employee loyalty. An employee loan is a loan that a business makes to their employee. As with other types of loans, the employee who borrowed the money is expected to repay the loan under a set term — only, in this case, the loan is repaid to the employer. 
  • Invest in your business. It may be that cost-of-living increases just don’t fit in your business’s bottom line this year. But maybe they can be a part of your payroll budget next year if you expand a profitable part of your business. Be open and transparent with your employees about your future plans. They’ll be more likely to stick around if they know you’re trying to incorporate salary increases into your business strategy. 

About the Author(s)

Ting Pen is a ValuePenguin Co-Founder. She previously evaluated corporate mergers and acquisitions as a Financial Analyst at Citigroup. Her experience in financial services combined with her entrepreneurial spirit allowed her to start her own fin-tech company.

Co-Founder, ValuePenguin
Young female entrepreneur reviewing finances and taxes with laptop in front of her