Pay Raise Glossary: COLA, Merit Increase & Real Raise

July 14, 2026

Why This Vocabulary Matters

Employers use several distinct types of pay increases, and knowing which one you’re getting changes how to evaluate it. This glossary defines the terms behind a result from the pay raise calculator.

Cost-of-Living Adjustment (COLA)

A cost-of-living adjustment is a raise intended to keep pay roughly in line with inflation, rather than reflecting individual performance. COLAs are typically applied broadly across a workforce rather than being tied to any one employee’s results, and they’re generally the smallest category of raise — often in the 2–4% range.

Merit Increase

A merit increase is a raise tied to individual job performance, typically awarded during an annual review cycle. According to SHRM’s compensation surveys, U.S. employers have projected average total salary increase budgets around 3.5% for 2026, with the merit-specific portion of that budget typically running slightly lower — meaning a “good” merit increase is usually judged relative to that broader company-wide average, not against the COLA figure alone.

Promotion Raise (Market Correction)

A promotion raise — sometimes called a market correction — is typically the largest category of increase, often reflecting a genuine change in role, responsibility, or market value rather than incremental annual growth. These commonly run 8% or higher, and 10-20%+ raises aren’t unusual for a substantial role change.

Nominal Raise

A nominal raise is the raise percentage as stated, with no adjustment for inflation. If your salary went from $50,000 to $52,000, your nominal raise is 4% — regardless of what happened to prices during that period.

Real Raise

A real raise adjusts the nominal raise for inflation, showing the actual change in purchasing power. Real Raise % = ((1 + Nominal Raise%) ÷ (1 + Inflation%) − 1) × 100. See real raise vs nominal raise explained for the full derivation.

Consumer Price Index (CPI)

The Consumer Price Index, published monthly by the U.S. Bureau of Labor Statistics, measures the average change in prices paid by consumers for a basket of goods and services over time. CPI’s year-over-year percentage change is the most commonly used inflation figure for calculating a real raise — check the BLS’s CPI page for the current reading before running your own real raise calculation.

Salary Compression

Salary compression occurs when the pay gap between newly hired employees and longer-tenured employees in similar roles narrows or disappears, often because starting salaries for new hires rise faster than existing employees’ raises. It’s a common reason experienced employees cite for feeling underpaid even after receiving a nominal raise each year.

Pay Frequency

Pay frequency is how often you’re paid — weekly (52 periods/year), bi-weekly (26), semi-monthly (24), or monthly (12). The same annual raise translates to a different per-paycheck dollar amount depending on frequency, which is why the pay raise calculator breaks the increase down across all four.

Putting the Terms Together

Once you know whether your raise is a COLA, a merit increase, or a promotion raise, and whether you’re looking at the nominal or real (inflation-adjusted) figure, a result from the pay raise calculator tells the full story. See common pay raise mistakes for the errors that most often distort how people evaluate their own raise.