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a firm strategy will affect the pavements it offers to employees many companies are reconsidering the amount of base pay versus variable pay thats included in employee compensation packages and considering more incentive pay plans lets take a look at the compensation mix a problem with base pay is that it ties the firm to fixed dollar amounts that becomes larger as cost-of-living adjustments and merit pay are added to the base so before we discuss the compensation mix further we need to discuss the concepts of cost-of-living adjustment and merit increases these are two common methods of increasing employee base pay as a result of inflation many firms give their employees a cost-of-living adjustment known as colas to offset the increases in the prices of goods and services they purchase and keep salaries from legging behind the external market the Consumer Price Index or CPI is used as the basis for determining the amount of a cola merit increases are not automatic theyre awarded ba