Performance raises are back for 2027, but increases will be modest

Employers aren’t abandoning performance-based pay raises after all.

Following backlash over workplaces doling out across-the-board salary increases, also known as “peanut butter” raises, rather than providing raises based on individual performance, more employers plan to step back from that practice next year.

The new data from compensation research firm Payscale shows employers are likely to favor more differentiated, merit-based pay. Just 32% of organizations are planning a peanut butter pay increase approach in 2027, down from 36% that actually gave one in 2026. “That’s a significant drop-off,” Ruth Thomas, pay equity strategist at Payscale, told Yahoo Finance.

Even better: Average pay bumps are expected to tick up. Employers plan a 3.5% average increase in 2027, up from 3.4% in 2026. That’s on par with inflation but far below 2023, when workers scored pay hikes averaging 4.8%.

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

The upside of rewarding performance

Perhaps not surprisingly, many employers discovered that peanut butter raises are not so effective for retaining workers.

One in four organizations reported perceived pay unfairness as a leading reason they’re losing talent, per the Payscale data.

It’s hard to feel valued and motivated when your work is rewarded the same as that of other workers who might not be delivering the same results (at least in your opinion).

For many workers, performance-based pay is a strong incentive to consistently deliver above expectations, and it’s discouraging when that disappears.

Read more: What to do when your pay raises aren’t keeping up with inflation

There are still industries, of course, that will continue the across-the-board hikes, especially organizations managing large workforces or those with step-pay structures, such as government and higher education, and those with hourly workers, Thomas said.

“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 survey is in line with expectations about raises reported by 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, she added.

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

Other changes include hiring at higher salary ranges, increasing the use of bonuses or spot awards to help secure key employees, and raising starting salary ranges.

Trends in the overall labor market

Another force that could drive wages higher: people dropping out of the labor force.

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

Adding fuel to Thomas’s optimism: While the story so far this year has been that rising prices have been more common than rising wages, that could be shifting.

US consumer prices rose 3.5% for the 12-month period ending in June 2026, according to the Bureau of Labor Statistics.

Yet, all income cohorts are seeing 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%.

Have a question about retirement? Personal finances? Anything career-related? Click here to drop Kerry Hannon a note.

Job changers gain an upper hand

Robust wage growth is generally the case for workers who can change jobs, and that still rings true.

“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.”

Meanwhile, job stayers are holding ground. Pay gains for job stayers have been between 4% and 4.5% so far this year. “That’s a remarkable steadiness to job stayer pay,” Richardson said.

There has also been a “step-up in new hire pay,” she said. “Pay is being reflective of the labor market that is not getting looser, but maybe tightening a little bit,” she said.

What can you do to ensure your future pay raise?

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.”

Have a clear business case. Pay discussions have the best chance to be successful when you can clearly link your raise expectations to specific results. Tell your story. Challenges met, actions taken, and the result 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.

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.

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