Pay Raise Outlook 2027: Modest 3.5% Average Increase Planned

As employers map out 2027 pay increases, modest budget numbers mask the tougher challenges ahead: deciding who gets what money, and then communicating that effectively.

In Payscale’s 11th annual Salary Budget Survey, nearly a third (30%) of respondents said their salary increase budget for 2027 is expected to be higher than 2026, attributing the lift to:

• Improved economic conditions or improved business performance (30%)
• Increased competition for labor or labor supply shortage (27%)
• A change in compensation philosophy or competitive positioning (24%)
• Prior year increases being lower than usual (13%), and
• Other (5%). 

By comparison, just 8% of respondents said their 2027 salary increase budget is projected to be lower than in 2026. Of those, 42% cited concerns about future economic conditions or business performance.

Overall, average base pay increases at U.S. companies are expected to average 3.5% in 2027, up slightly from the actual 3.4% average in 2026. The survey projects raises will be distributed across the workforce, with 77% of each employee group – non-managerial exempt, managerial exempt and non-exempt – expected to receive raises.

Merit increases are by far the most common type of pay increase, with 89% of companies offering them. Other common types of pay raises include promotional increases (69%), salary structure increases (43%) and inflation/cost-of-living increases (31%).

Of the projected 3.5% total salary increase budget, the lion’s share – 3% – is earmarked for merit increases in 2027. 

“Organizations appear to be moving toward more thoughtful and differentiated compensation strategies — which is critical to attracting and retaining talent,” said Ruth Thomas, chief compensation strategist at Payscale. “When compensation budgets are limited, treating every employee the same feels simple and fair, but it can also fail to recognize the people, skills and contributions that are most critical to the business.”

But wanting to differentiate pay and having the budget to do so are two different things.

Tight Merit Budgets Make Pay Increase Decisions Harder

An approved merit budget tells managers how much money they have to work with for raises. But it doesn’t tell them how to distribute those dollars among employees, as new research from Syndio shows. 

In the 1980s and 1990s, typical merit pools were between 8% and 10%, which meant that managers had enough wiggle room “to give a solid performer 3% and an exceptional one 12%,” according to Syndio. 

In recent decades, merit budgets have dropped to between 3% and 4%, which leaves managers with less room to differentiate increases based on performance, Syndio’s research explains.

Giving a top performer a meaningful increase can mean giving another employee little or nothing. That can make pay conversations difficult, particularly when employees don’t understand why their increases differ. The reality is, managers need guidance on how to have those money conversations.

Over time, many organizations end up spending the merit budget correcting uneven raises from prior years rather than rewarding current-year performance, the study noted.  

Growing Demand for Pay Transparency

Pay decisions can also be harder to explain as employees expect more transparency around how compensation is determined. New research from G-P shows a widening gap between what workers want and what they say their employers provide. 

In a global survey of 4,000 participants, 82% of workers said pay transparency is important, yet just 34% said they work for an organization that practices it. Of those, 18% said they’d leave the company if the pay transparency policy were withdrawn. 

What Employers Can Do With Modest Pay Budgets

Unfair pay perceptions remain a talent risk. Payscale found that one in four organizations (25%) say perceptions of unfair pay are a leading reason they’re losing talent – a reminder that pay strategies need to be both competitive and seen as fair by employees.

That puts more pressure on managers to make consistent decisions about who gets what – all while employees increasingly expect employers to explain how those decisions are made.

Employers don’t necessarily need a larger budget to improve how they handle these decisions. They can start by strengthening the process around pay decisions: 

• Clarify your approach to pay transparency. Document what the law requires employers to disclose in each jurisdiction where they operate, and determine what the company will disclose beyond those legal obligations.
• Give managers compensation data before they make individual decisions. Show them how a proposed increase compares with increases for employees in comparable roles, including on other teams.
• Review manager recommendations before communicating individual increases. Look for patterns by department, role or tenure that weren’t visible when each decision was made on its own.
• Prepare managers to explain merit increases, particularly when an employee receives a small increase. Give managers consistent guidance on how to explain the decision and answer questions about differences in pay.