Key Takeaways

  • U.S. companies' average salary budgets are expected to remain stable in 2027, with an increase of 3.4%, slightly lower than the actual increase of 3.5% in 2026, according to a new report from London-based consulting and brokerage firm WTW.
  • The report notes that companies express caution in salary planning, primarily due to cost management pressures, a tight labor market, and inflation concerns.
  • WTW says employers are shifting from across-the-board pay increases to more strategic compensation strategies, with more than a third of companies adjusting their compensation programs, including offering higher pay ranges, bonuses, or spot awards for key employees.

Deeper Dive

The report is based on a survey of more than 34,000 companies across 156 countries conducted between March and May 2026, including 1,650 U.S. companies. WTW says a total of 32% of companies cited cost management pressures as a reason for cautious salary planning, while 28% and 27% cited a tighter labor market and inflation concerns, respectively.

Brittany Innes, senior director of product strategy and compensation data intelligence at WTW, explained in an email that "salary budget" in the report refers to the total amount an organization sets aside for annual salaries for all employees, while "salary" refers to the actual compensation an individual employee receives. She emphasized that a 3.4% increase in salary budget does not mean every employee will receive a 3.4% raise. However, salary budgets help gauge the market's overall expected positioning over the next six months and can be compared with actual budget amounts.

Both the 2026 salary budget increase and the 2027 expected increase are higher than the 2.8% cost-of-living adjustment (COLA) implemented by the U.S. Social Security Administration (SSA) for 2026 Social Security benefits. However, Innes noted that salary budgets are not typically used as a direct adjustment mechanism for inflation in the same way as COLA.

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

Post-pandemic, employers have readjusted to a "more sustainable compensation environment." Innes said organizations still face talent-related pressures, but many are balancing these needs with ongoing cost management considerations.

"Compensation still matters, but employers are being more deliberate with their spending." — Brittany Innes

More Targeted Pay Strategies

Innes said employers are shifting from across-the-board increases to more "precise, performance-driven compensation strategies," focusing on the roles, skills, and talent segments that matter most to them. A total of 33% of companies are adjusting their compensation programs, and 15% said they will make adjustments in the future. The report adds that 36% of companies are hiring at higher pay ranges, 34% are increasing the use of retention bonuses or spot awards to retain key employees, and 32% are raising starting salary ranges.

Innes noted that across-the-board raises are economically inefficient in a competitive talent market. Long-term incentives or one-time spot bonuses do not have the same impact on annual budgets as merit increases or market adjustments.

"When salary budgets flatten, organizations are forced to confront the need for strategic compensation. Employers are asking, 'Where can talent truly create the most value for us?' and concentrating funds there. Budget constraints force clearer decisions." — Brittany Innes

Innes said the approaches organizations take vary significantly based on business goals, market-facing products or services, and current talent situations. Salary budgets cover new headcount, internal promotion activity, merit increases, and incentive payouts—areas that may also see adjustments.

WTW says employee retention has also remained stable due to economic uncertainty and financial pressures. A total of 69% of employees said they plan to stay with their current employer, while only 22% of companies reported increasing headcount. Employers are also expanding their focus beyond hiring to enhance their employee value proposition: 47% of companies are working to improve the employee experience, 40% are expanding training opportunities, and 38% are enhancing health and wellness benefits.