Employers Reaffirm Merit-Based Pay Raises for 2027 as Across-the-Board Increases Lose Favor

Employers are not abandoning performance-based pay raises, new survey data suggests. After facing backlash over the practice of distributing uniform, across-the-board salary increases—colloquially known as "peanut butter" raises—more organizations plan to move away from that approach in 2027.

The practice of spreading raises evenly gained prominence during the tight labor markets of 2021–2023, when employers moved quickly to retain workers amid widespread hiring competition and used uniform increases as a fast, administratively simple response. As those conditions have eased, companies are reassessing whether undifferentiated raises still serve their talent strategies.

Compensation research firm Payscale's latest data indicates that employers are shifting toward more differentiated, merit-based compensation structures. Only 32% of organizations are planning a peanut butter pay increase approach in 2027, down from 36% that implemented one in 2026.

"That's a significant drop-off," Ruth Thomas, pay equity strategist at Payscale, told Yahoo Finance.

Average pay increases are also expected to rise slightly. Employers plan a 3.5% average increase in 2027, up from 3.4% in 2026. That figure is roughly on par with inflation but remains far below the 4.8% average pay hike workers received in 2023, a period when inflation was running substantially higher and eroding real wage gains.

"We're starting to see some optimism — 30% of US organizations expect higher salary increases in 2027 from 2026," Thomas said.

The Case for Performance-Based Pay

Many employers have found that peanut butter raises are ineffective for retaining talent. According to Payscale's data, one in four organizations cited perceived pay unfairness as a leading reason for losing employees.

For many workers, performance-based pay serves as a strong incentive to consistently exceed expectations, and its absence can be discouraging—particularly when one's contributions are rewarded identically to those of colleagues perceived as less productive.

The shift also coincides with a wave of pay transparency legislation in states including California, Colorado, New York, and Washington, which requires employers to disclose salary ranges in job postings and has heightened scrutiny of how compensation decisions are made.

Certain industries will continue to use across-the-board increases, Thomas noted, especially organizations managing large workforces or those with step-pay structures, such as government agencies, higher education institutions, and employers with hourly workers.

"But we're seeing more organizations thinking less about just spreading raises evenly and more about 'who do I need with the skills in my business to make change and drive that transformation? They are the people that I need to allocate pay to,'" she said.

Payscale's findings align with data from other compensation trackers. Average salary increase budgets for US companies in 2027 are expected to remain stable at 3.4%, slightly lower than 2026's actual increase of 3.5%, according to the salary budget planning report by WTW, a global workplace consulting firm.

"Salary increase budgets appear to have stabilized, but workers shouldn't interpret that as employers pulling back on pay," Brittany Innes, senior director at WTW, told Yahoo Finance. "Instead, organizations are becoming more deliberate about how salary dollars are allocated. We're seeing strong interest from HR leaders in data on emerging and high-demand skills, reflecting the growing focus on aligning compensation investments with critical talent needs."

Employers are also placing greater emphasis on rewarding performance and retaining key skills, Innes added.

"Salary increases are increasingly being directed toward the roles, skills, and contributions that organizations view as most important to future success," she said.

Other emerging trends include hiring at higher salary ranges, increasing the use of bonuses or spot awards to retain key employees, and raising starting salary ranges.

Labor Market Trends and Wage Growth

Another factor that could push wages higher is a contracting labor force.

"If the labor force keeps contracting, then supply is going to go down. That is ultimately what pushes wages up," Thomas said.

While rising prices have outpaced rising wages for much of the year, that dynamic may be shifting. US consumer prices rose 3.5% for the 12-month period ending in June 2026, according to the Bureau of Labor Statistics.

However, all income cohorts are experiencing stronger wage growth than in 2025, according to a new analysis from the Bank of America Institute. Among high-income households, after-tax wage growth rose by 4.2% in July compared to a year prior. Lower-income households recorded the strongest growth at 5.2%.

Job Changers Gain an Edge

Robust wage growth continues to favor workers who change jobs.

"We're seeing strength in wages for job changers, which is up 7% from this time last year," ADP chief economist Nela Richardson said. "This is the highest job changer pay growth that we've seen since August 2025. Job changers are the most sensitive to real-time labor market conditions."

The premium for switching employers has historically been a hallmark of tight labor markets, and the current 7% figure suggests competition for talent remains firm even as headline hiring has moderated.

Job stayers, meanwhile, are holding steady. Pay gains for those remaining in their roles have ranged between 4% and 4.5% so far this year. "That's a remarkable steadiness to job stayer pay," Richardson said.

Richardson also noted a "step-up in new hire pay," suggesting that the labor market is not loosening and may even be tightening slightly.

Strategies for Securing a Raise

For employees looking to maximize their future pay increases, Thomas recommends several proactive steps:

Ask about the criteria. "Every employee should push their employer when it comes to merit review time and ask them directly, how are we allocating pay this year?" Thomas said. "Make sure you understand that. It helps you align around your perceptions of fairness."

Build a clear business case. Pay discussions have the best chance of success when employees can directly link their raise expectations to specific, measurable results.

Tell your story. Articulate the challenges met, actions taken, and outcomes that benefited the company.

Proactively add skills. "If you're in a business, for example, that's highly focused on AI transformation, and your employer is encouraging every employee to use Claude or something similar, you should be upskilling and learning those skills right now," Thomas said.