Human Resources Certification Institute (HRCI) Practice Exam

A cost-of-living pay adjustment is the best example of what type of compensation strategy?

1. Quartile

2. Entitlement

3. Performance

4. Equity

The correct answer is: Entitlement

A cost-of-living pay adjustment is fundamentally linked to the entitlement compensation strategy. This approach ensures that employees' pay keeps pace with inflation and changes in the cost of living, thereby safeguarding their purchasing power. Unlike performance-based compensation, which is contingent on individual or organizational achievements, entitlement compensation is viewed as a necessary adjustment that all employees receive, regardless of their performance. Entitlement strategies typically focus on providing employees with stability and security in their wages, reflecting a commitment to maintaining the economic well-being of the workforce. Companies that adopt this strategy recognize that employees should be compensated appropriately for the impact of economic changes on their day-to-day lives, making cost-of-living adjustments a prime example of this approach. In contrast, performance strategies would reward individuals based on their contributions and results, quartile strategies involve classifying employee salaries within competitive ranges, and equity strategies focus on internal and external fairness in pay structures. Thus, the emphasis on maintaining an employee's standard of living distinguishes cost-of-living adjustments as part of the entitlement compensation strategy.