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Merit Pay at 3%: Why Your Raises Don't Reward Anyone

By Glen Wilson

Illustration of a person at a desk working through payroll spreadsheets with a calculator, with bar and line charts in the background, in TrueCollab navy and orange.

Every major salary survey for 2027 is in, and they sit within three-tenths of a point of each other. If you’re setting next year’s raise budget for a company of 20, 60 or 140 people, that narrow band says more about your pay program than any one number in it.

Below is what the surveys found, why a 3% merit pool can’t separate your best people from everyone else, and where we’d put the money instead.

What the surveys say

U.S. salary increase budgets for 2027 land between 3.3% and 3.6% in every major survey we reviewed:

Survey 2027 projection
WorldatWork 3.6% (average)
The Conference Board 3.5% (median)
Payscale 3.5% (average)
Salary.com 3.5% (average)
Mercer 3.5% (average)
WTW 3.4% (average)
Gallagher 3.3%–3.4%
Korn Ferry 3.3% (average)

Sources: each firm’s 2026–2027 salary budget survey, as compiled by WorldatWork Workspan Daily (Oct. 1, 2026); WTW press release (July 15, 2026).

Nobody should be planning for a surprise year. Most merit programs were designed when the pool was large enough to create real gaps between ratings, and at 3.5% it mostly isn’t.

The $72 problem

Salary.com’s survey put the math plainly. Take two employees earning $75,000. The high performer gets a 5.5% raise and the solid performer gets 3.0%. On a biweekly paycheck that’s $159 versus $87, a difference of about $72 every two weeks.

The report concluded that a gap that size is too small to motivate anyone or to keep a strong performer from taking a recruiter’s call. We’d go further: a 5.5% raise is generous in this market. Salary.com found median merit increase budgets of 3.0% (average 3.2%) for the second year in a row, so in most companies the typical raise sits near 3% and the real spread between a top performer and an average one is narrower than the example.

Source: Salary.com 2026–2027 U.S. and Canada National Salary Budget Survey (818 organizations), reported by WorldatWork, Oct. 1, 2026. Biweekly figures as published by Salary.com: $159 and $87.

An employee who spent the year carrying projects and training new hires will notice that their raise and an average colleague’s differ by about $72 a paycheck.

Dropping across-the-board raises doesn’t fix it

Many companies are moving away from “peanut butter” raises, where everyone gets the same percentage. Payscale found 32% of organizations plan an across-the-board increase for 2027, down from 36% that gave one in 2026.

Moving away from uniform raises makes sense, but inside the same pool it changes less than it seems. Replacing a flat 3.5% with a rated range of 3% to 5% redistributes small numbers: the high performer gains a few dollars a paycheck and the solid performer loses a few. Payscale also found that 25% of organizations name perceptions of unfair pay as a top reason they lose talent.

Source: Payscale 2026–2027 Salary Budget Survey (1,266 organizations; U.S., Canada and select international locations), Aug. 4, 2026.

The half-point that matters more

The Conference Board’s survey splits the budget in two. The median merit budget for 2027 is 3.1%. The median budget for everything else, meaning promotions, equity adjustments, market adjustments, retention and critical skills, is 0.5%, and that smaller pool is where most real retention decisions get made.

Source: The Conference Board, U.S. Salary Increase Budgets 2026–2027, press release Sept. 3, 2026.

A company of 50 doesn’t have to accept that split. You can set your budget at 2.5% merit and 1.5% targeted, and no comp committee will stop you.

Four places to put the money

For a 15–150 person company, we’d look at four things before splitting a single merit dollar.

1. Fix compression first. Compression is when a recent hire earns as much as, or more than, someone with more tenure in the same job. It usually happens quietly: you paid market to fill a role in a tight hiring year, and the people already in that role never got the same reset.

Finding it doesn’t take software. Export every employee’s title, hire date and base pay into a spreadsheet, sort by title, and read down each group. You’re looking for any place where pay and tenure run in opposite directions. Then check each role against the range you’d post for it today, and fix first anyone who sits below the minimum of a range you’d publish.

Decide on timing too. Some fixes can wait for the normal raise cycle. Others, especially where the gap is large or the person is someone you can’t afford to lose, are worth an off-cycle adjustment now rather than an explanation later. Either way, fund compression fixes from the targeted pool, not by shaving merit raises for everyone else.

2. Name the critical few. List the roles and people you couldn’t replace within 90 days without real damage to the business. In a company this size it’s usually three to six names. Fund them deliberately, with a market adjustment or a direct retention conversation, rather than hoping a rating gets them there.

3. Budget promotions separately. When promotions come out of the merit pool, every promotion takes money from everyone else’s raise. In a Michigan survey by ASE, only 23% of organizations formally budget for promotions.

Source: ASE 2026/2027 Salary Budget Survey (196 employers, primarily Michigan), Aug. 2026. A regional sample, not a national figure.

4. Use one-time awards where they fit. A lump sum rewards a strong year without permanently raising base pay, and it works for people at or above the top of their range. The same ASE survey found 38% of organizations use lump sums in lieu of increases, mostly for that group.

Your pay decisions are more visible

Fourteen states and the District of Columbia require a pay range in job postings: Colorado, California, Washington, New York, Hawaii, Maryland, Illinois, Minnesota, New Jersey, Vermont, Massachusetts, Virginia, Maine and Connecticut. Delaware joins in September 2027 for employers with more than 25 employees. Coverage rules differ by state, and some reach remote roles, so if you hire across state lines, check each state before you post. The range you post for a new hire is also a range your current team can read, which is one more reason to run the compression check before the next posting goes live.

Source: state statutes; Connecticut Public Act 26-12 took effect Oct. 1, 2026; Delaware HS 2 for HB 105 takes effect Sept. 26, 2027.

Before the 2027 cycle

Have these in hand before raise letters go out:

  1. A compression report: every role, tenure against pay, with inversions flagged.
  2. A critical-roles list of three to six names, with a plan for each.
  3. A separate promotion budget, even a small one.
  4. A communication plan. If raises differ, employees will compare them, so decide in advance what you’ll say about why.
  5. Talking points for managers. The manager delivering a 3% raise to a strong performer needs to be able to explain what else is available, whether that’s a promotion path, a development plan, an award or a market review.

The merit pool can’t carry pay-for-performance on its own at this size. If everyone lands between 3% and 4%, you don’t have a pay-for-performance program. You have a cost-of-living program with a review attached.

Building your 2027 pay plan? We help leaders of 0–150 person companies audit compression, set ranges they can defend and decide where raise dollars actually go. Book Your Free HR Consult.

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