The long-standing promise that outperforming peers on the job would translate into meaningful pay increases and promotions is breaking down at a growing number of American companies. Instead of rewarding merit, some employers are turning to so-called "peanut butter raises"—uniform, across-the-board pay increases spread evenly over the entire workforce regardless of individual performance—and the practice is taking a toll on employee morale. The trend has taken hold against a backdrop of U.S. inflation that peaked at 9.1% in mid-2022 before moderating, leaving many workers scrutinizing whether modest annual increases are genuinely keeping pace with their cost of living.

According to a recent Payscale report, approximately 36% of U.S. companies say they distributed standard, across-the-board pay increases this year. These raises have been deployed as companies navigate persistent economic uncertainty. They are especially prevalent in sectors such as government and education—industries characterized by large workforces, hourly staff, and step-based pay structures, the report notes.

The consequences extend beyond wounded pride among high-performing employees. Roughly 25% of companies acknowledged losing talent in 2026 because wage increases failed to keep pace with employees' expectations and contributions, according to the Payscale findings. That retention challenge carries its own costs: widely cited human resources research estimates that replacing a departing employee can run anywhere from 50% to 200% of their annual salary once recruiting, onboarding, and lost productivity are factored in.

"Peanut butter pay is often framed as the fairest approach because everyone receives the same increase," Ruth Thomas, chief compensation strategist at Payscale, told Fortune. "But employees don't typically judge fairness by whether everyone got the same—they judge it by whether they were rewarded appropriately for their individual contribution. High performers want to know their extra effort mattered."

"When pay increases fail to reflect differences in impact, organizations risk sending the message that performance doesn't make a difference, and that's where motivation starts to erode," Thomas added.

A Shift Toward Rewarding Top Performers in 2027

Peanut butter raises remain a divisive issue among workers. Proponents note that the flat-raise model can help mitigate bias and ensures every employee receives a monetary boost—a meaningful support for many amid the ongoing cost-of-living crisis. Critics, however, argue the approach is "demotivating" for employees who go above and beyond, since their reward is identical to that of colleagues who do the bare minimum.

Looking ahead, employers appear to be pivoting back toward differentiation. While about 32% still plan to issue peanut butter raises next year, the Payscale report found that merit-based increases will account for 3 percentage points of the projected 3.5% total payroll budget for 2027—making it the largest single component. That shift reflects a broader recalibration of compensation strategies that accelerated after the post-pandemic labor market upheaval, during which record levels of voluntary job exits—widely dubbed the "Great Resignation"—gave workers unusual leverage to demand better pay and conditions. Companies that moved away from differentiated pay now face the question of whether a uniform model can sustain workforce engagement in a labor market where skilled employees increasingly have options.

Even as economic headwinds have dampened performance-based pay, a growing number of companies are recognizing the strategic importance of compensating their standout employees competitively.

"Organizations may receive more applications overall, but attracting and retaining people with the right skills remains challenging," Thomas said. "Competitive, well-informed pay is still one of the strongest signals that an employer values the contribution those employees make."

Economic Uncertainty and Shrinking Budgets Drive the Trend

Several factors explain the appeal of peanut butter raises for employers. Performance-based compensation has long been considered standard practice, with Payscale itself describing merit-based raises as a "best practice." However, flat raises can serve as a tool to ease financial pressure on the lowest-earning workers. As Payscale noted in an earlier report, peanut butter raises "alleviate administrative burden and reward workers equally," reducing complexity for HR departments.

As companies reassess their payroll strategies in an uncertain economy, a flat, standardized increase can appear to be the most pragmatic choice. Many U.S. employers have kept their average salary-increase budgets steady at approximately 3.5% in recent years, but a significant minority are now scaling back. According to a report from Willis Towers Watson, roughly a third of businesses planned to reduce their pay-increase budgets this year compared to 2025.

Employers cited a looming recession, declining financial performance, and a desire for tighter cost control as the primary factors constraining their payroll budgets—which helps explain the prevalence of smaller, uniform pay bumps.