Companies aim for more ‘strategic’ pay increases: WTW report

Dive Brief:

• Average salary budgets for U.S. companies will likely remain stable in 2027, increasing by 3.4% — slightly lower than the actual 3.5% increase in 2026, according to a new report from London-based advisory and broking firm WTW.
• Companies indicated they were taking a cautious approach to salary planning, citing cost management pressures, a tight labor market and inflationary concerns, according to the report.
• Employers are moving away from broad-based pay increases and taking more strategic pay approaches, with more than one-third of companies reporting adjustments to their compensation programs, WTW said. That includes providing higher salary ranges and bonuses or spot awards for key employees.

Dive Insight:

The findings were based on a survey between March and May of more than 34,000 companies across 156 countries, including 1,650 in the U.S.. In total, 32% cited cost management pressures as a reason for taking a cautious approach to salary planning, while 28% and 27% pointed to a tighter labor market and inflationary concerns respectively, WTW said.

Salary budgets in the report refer to the total amount that an organization sets aside for annual salaries across the workforce, while salaries refer to what individual employees actually earn, said Brittany Innes, WTW’s senior director of product strategy and rewards data intelligence in an email. 

That means a 3.4% salary budget increase does not translate to every employee receiving a 3.4% pay increase, she said. But salary budgets provide a better understanding of how the market as a whole sees its position six months in the future, which can be compared to actual budget amounts in time, she said. 

The salary budget increase in 2026 and projected increase in 2027 are higher than the 2.8% cost-of-living increase applied to Social Security benefits in 2026 by the Social Security Administration. But salary budgets are also not typically designed as direct adjustments for inflation like the way cost-of-living is, Innes said.

Salary budgets have remained in a “relatively narrow range” over the past few years after a period of unusually high increases following the COVID-19 pandemic, Innes said. Between 2022 and 2026, actual reported increases in the U.S. have consistently exceeded 3%, with the highest actual increase reported in 2023 at 4.3%, she said. 

After the pandemic, employers recalibrated to “a more sustainable compensation environment,” Innes said. Organizations continue to face talent-related pressures, she said, but many are now balancing those needs against ongoing cost management concerns.

“Compensation remains important, but employers are being more deliberate about their spend,” Innes said. 

More targeted approaches to salary compensation

Employers are moving away from broad-based pay increases and taking more “precise, performance-driven pay strategies” that target the roles, skills and talent segments that matter the most to them, Innes said. 

In total, 33% of companies are adjusting their compensation programs, and 15% are reporting future changes to it. The report added that 36% of companies are hiring at higher salary ranges, 34% are increasing the use of retention bonuses or spot awards to help secure key employees and 32% are raising starting salary ranges. 

When companies are competing for specific talent in a tight market, across-the-board raises become economically inefficient, Innes said. Long-term incentives or one-time spot bonuses, on the other hand, will not impact the annual budget the same way merit or market adjustments do, she said. 

“When salary budgets flatten, organizations are forced to confront the need for strategic compensation,” Innes said. “Employers are asking, ‘where does talent really move the needle for us?’ and they are concentrating their funds there. The budgetary constraint forces clarity.” 

The approach organizations take varies greatly depending on their business objectives, the product or service they are offering to the market, and their current talent situation, Innes said. Salary budgets cover new headcount, internal promotional activities, merit increases, and performance incentive payouts — areas that could also see adjustments, she said.

Retention levels are also remaining steady due to economic uncertainty and financial pressures, WTW said. In total, 69% of employees stated they are remaining with their current employers, while just 22% of companies reported adding headcount. 

Employers have also turned their focus beyond hiring in order to boost their employee value proposition, with 47% working to improve the employee experience, 40% expanding training opportunities, and 38% enhancing their health and wellness benefits, WTW said.