US salary budgets set to rise just 0.1% in 2027: Why bigger raises may remain elusive

About 25% of US organisations say they are already losing employees in 2026 because their pay increases are not enough to retain them. Another 22% are unsure whether their salary increases are sufficient, according to the survey.

This means almost half of US employers cannot confidently say that their current pay policies are helping them retain employees.

The problem with equal raises

One of the biggest issues is what compensation professionals call “peanut butter pay”. The term refers to giving roughly the same percentage increase to everyone, regardless of their performance, role or market value.

In the US, 36% of employers gave employees a standard, across-the-board raise in 2026. About 32% plan to follow the same approach in 2027.

The problem is that this system can make it difficult for companies to retain their strongest employees. A high-performing employee may receive the same increase as someone performing at an average level.

At the same time, companies are spending the same overall amount of money on salary increases.

Employers are more confident about 2027

There is some good news in the Payscale survey. Employers are more optimistic about their salary budgets than they were a year ago.

Around 30% of US organisations now expect their 2027 salary increase budget to be higher than their 2026 budget. That is almost twice the 16% who expected an increase a year earlier.

At the same time, only 8% expect their salary budgets to decrease in 2027. That is down from 16% a year earlier.

For companies expecting higher budgets, better economic conditions and stronger business performance were the biggest reasons. About 30% of these employers pointed to those factors.

Among companies expecting their budgets to fall, concerns about future economic conditions remained the biggest reason, cited by 42%. However, that is significantly lower than the 66% who gave the same reason a year earlier. So, while employers are feeling better about the economy, they are still being cautious about how much they spend on salaries.

Most of the money is going to merit raises

The 3.5% average increase expected for US workers in 2027 does not mean every employee will receive a 3.5% raise. Different types of pay increases make up the overall budget.

Merit increases are expected to account for about 3 percentage points of the total salary increase budget. Promotional increases account for about 1 percentage point.

Inflation or cost-of-living adjustments make up around 0.9 percentage points, while structural changes to pay scales account for about 0.6 percentage points.

This means employers are putting most of their salary budget towards performance-based increases rather than simply adjusting everyone’s pay to reflect inflation.

Some industries are doing better

The overall 3.5% figure hides major differences between industries.Business Services is one of the sectors expecting a significant increase. Its total salary increase budget is projected to rise from 3.9% in 2026 to 4.5% in 2027.

Legal Services is also among the stronger sectors, with an expected 4.2% total increase in 2027. Technology, however, is moving in the opposite direction.

The sector’s salary increase budget is expected to fall from 3.6% in 2026 to 3.4% in 2027. That is notable because technology companies have traditionally been associated with strong salary competition.

Manufacturing is expected to record a 3.6% increase, while nonprofit organisations remain among the sectors with the smallest increases, at about 3.3%.

There are also differences between states. New York employers are expecting a 3.6% total increase in 2027, while California and Florida are at 3.5%. Texas and Washington are slightly lower at 3.4%.

A labour market that is improving, but not booming

The salary figures come at a time when the US labour market is showing signs of improvement, but is still far from the hiring boom seen a few years ago.

Deloitte Insights said the US labour market improved in 2026 after a weaker 2025. However, it noted that the recovery has been uneven across sectors and remains vulnerable to setbacks. Deloitte also pointed to data from the Bureau of Labor Statistics. Private-sector compensation rose 3.4% year over year in the first quarter of 2026, almost the same pace seen during 2025.

That is in line with Payscale’s finding that salary increase budgets are moving only slightly higher. J.P. Morgan’s Senior Markets Economist Joe Seydl described the situation more directly. Speaking to Chase’s research team, Seydl said the labour market is “moderating, not collapsing”, with hiring remaining stable and wage growth contained.

That helps explain why companies are not making major changes to their salary budgets. The labour market is not weak enough to force widespread layoffs or pay cuts, but it is also not strong enough to push employers into large salary increases.

Workers are staying put

Another important factor is that fewer workers are changing jobs. Compensation-data platform Pave has described the current environment as “The Great Stay”. According to Pave, turnover at public companies fell from 21.2% in 2023 to 15.9% year-to-date in 2025. The decline was particularly sharp among managers and executives.

Workers appear to be more cautious about leaving their jobs because finding a new position has become harder in a less active hiring market.

Some HR commentators have described this behaviour as “job hugging,” employees staying in jobs even when they are unhappy because they are worried about what they might find outside. For employers, fewer workers leaving means less pressure to offer large raises or counteroffers.

Switching jobs can still pay more

There is one important exception. Workers who are willing to change jobs can still command significantly higher pay. Payroll processor ADP recently reported that wages for people who stayed in their jobs increased 4.4% year over year. That was higher than June’s 3.5% inflation rate. But workers who changed jobs received an average pay increase of 7%, according to ADP. It was the biggest job-switching pay premium recorded since August 2025.

The difference is important. Employees who stay may have greater job security, but those willing to move can still have considerably more bargaining power.

The 2027 salary data points to a labour market that has stabilised, but has not returned to the intense competition for workers seen during the pandemic-era hiring boom.

Employers are more confident than they were a year ago, but that confidence is not translating into dramatically higher salary budgets. The average increase is expected to move by just 0.1 percentage point.

For workers, the message is mixed. Staying in a job may offer stability at a time when hiring remains uncertain. But employees who feel underpaid may still find that changing jobs offers a much bigger financial reward than waiting for an annual raise. The gap between staying and switching could therefore become one of the defining features of the 2027 pay market.