How to Calculate Employee Cost-of-Living Increase
During tough economic times, businesses may not have enough profit to provide employees with large annual increases, regardless of how well the employees have performed. If you are a business owner and have some operating capital available for raises, but a limited amount, then you should calculate employee raises as a cost-of-living increase. A cost-of-living increase will help maintain your employees’ lifestyles in the same financial position as the year before, by allowing for inflation over the previous year.
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Instructions
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Log onto the website for the United States Department of Labor, Bureau of Labor Statistics.
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Access the Consumer Price Index (CPI) tables on the website. Every month, the government measures the increases and decreases to prices of common commodities in order to establish a rate of inflation. The rate of inflation is the percentage amount by which the cost of the same item has increased over a set time period, or how much the cost has increased to maintain the same standard of living.
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Locate the CPI rate for the previous year.
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Multiply the CPI rate for the previous year times the employee’s base salary or per hour rate to determine an appropriate cost-of-living increase based on the rate of inflation for the U.S. For example, CPI for 2009 was 2.7 percent. If an employee makes $20k annual salary, then $20k times .027 equals $540. You should increase the employee’s salary by $540 in order to help the employee maintain the same standard of living as the previous year.
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Tips & Warnings
If your geographical region is more repressed economically than the rest of the country, check for local CPI rates and apply those instead to your employee’s pay rate, assuming you have the appropriate capital to absorb the cost.
References
- Bureau of Labor Statistics: CPI Detailed Report, December 2009
- “Principles of Accounting”; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991
