A Step-by-Step Guide to Setting Merit Budgets
For HR and compensation leaders, planning next year’s annual salary increase should not wait until the new year. For example, for a common April 1 salary increase schedule, planning and compensation philosophy discussions begin in the fall. As soon as budgets and merit guidelines are finalized, they can be reflected in compensation tools. Tools like SecureSheet make this easier by pulling current benchmarking data and modeling scenarios in one place, so you’re not rebuilding your comp plan from scratch every fall.
Most organizations use the final months of the fiscal year to evaluate market data, business priorities, workforce needs, and available budget before setting compensation plans for the year ahead. Waiting too long can leave HR teams rushing through salary decisions without enough time to model different scenarios, secure leadership approval, or communicate guidelines to managers.
The good news is that compensation budgets have entered a more stable period after the unusually large increases seen during the post-pandemic labor market disruption. That stability does not mean every employee or role should receive the same increase. Instead, it allows organizations to make more deliberate decisions about where compensation dollars will have the greatest impact.
This guide walks through the current salary budget environment and provides a practical framework for building your 2027 compensation plan.
Where Merit Budgets Stand Going Into 2027
The good news is that budgets have stopped swinging wildly. Employers are projecting an average merit increase budget around 3.2%, with total annual salary increase budgets landing closer to 3.5%. That makes 2027 the third year in a row of relatively stable numbers, following the sharper corrections organizations made between 2021 and 2023 in response to inflation and a tight labor market.
Stability is useful, but it also raises the bar. When budgets aren’t shifting dramatically year over year, the pressure moves from “how much do we have to spend” to “how well are we spending it.” A flat 2027 salary increase number sitting around 3.2–3.5% doesn’t tell your leadership team anything about retention risk or pay equity. That part is on you to build into the plan.
A 3%–4% market benchmark does not mean every employee should receive a 3%–4% increase. Your final budget should account for factors such as:
- Current employee salaries compared with market rates
- Performance and contribution
- Critical or difficult-to-fill skills
- Internal pay equity
- Retention risk
- Promotion and career progression
- Geographic differences
- Business performance
- Available labor supply
- Inflation and broader economic conditions
The goal of salary budget planning is to establish an overall spending limit while giving HR and managers enough flexibility to distribute that budget strategically.
“Peanut Butter” Vs. Targeted Merit Increases
For years, the default approach to merit increases was what a lot of comp teams call “peanut butter spreading”: take the total budget, divide it more or less evenly across the workforce, and call it a day. It’s simple to administer and easy to explain, but it also means your best performers and your hardest-to-replace employees get roughly the same bump as everyone else.
That approach is losing ground. More organizations are shifting toward disciplined, targeted spend, directing a larger share of the budget toward business-critical roles, hard-to-fill skill sets, and employees who are genuine retention risks, rather than spreading it evenly across the board.
Here’s a quick side-by-side to make the trade-offs clear:
| Peanut Butter Approach | Targeted Approach | |
|---|---|---|
| Distribution | Roughly even across all employees | Weighted toward priority roles and flight risks |
| Administrative effort | Low, one number applies broadly | Higher, requires performance and market data by role |
| Retention impact | Weak for critical/high-demand roles | Stronger where it matters most |
| Employee perception | Feels “fair” on the surface | Can feel uneven if not communicated well |
| Budget efficiency | Spends the same on flight risks and low performers alike | Concentrates spend where it has the most impact |
Making the shift from peanut butter to targeted spend requires knowing where your dollars are going. SecureSheet’s role-level views make it easy to see who’s below market, who’s a flight risk, and where the budget will do the most good.
Industry And Role Variance To Watch
Averages hide a lot. Skilled trades and on-site roles are seeing premium wage growth as employers keep struggling to staff them, while tech and professional services growth has cooled off as hiring activity normalizes across those industries. Variances by role and industry can happen quickly.
If your workforce spans multiple job families, a single blended budget number probably won’t hold up under scrutiny. It’s worth pulling role- and market-specific data before you finalize anything, rather than applying one flat percentage across every department.
This means your annual salary increase strategy should not be based exclusively on a company-wide percentage.
Instead, consider creating different planning guidelines for:
- Critical and scarce skills
- Hard-to-fill positions
- High-performing employees
- Employees below market
- Employees already positioned competitively within their salary range
- Promotions and expanded responsibilities
- Roles with elevated retention risk
Your organization may still establish a single overall budget, but the allocation methodology can be more nuanced.
A 5-Step Framework For Locking In Your Budget
Getting from “we think it’s around 3.2%” to a defensible, board-ready number takes a process. Here’s a framework that holds up under pressure:
Pull Current Benchmarking Data
Start with market data for your industry, region, and job families, not last year’s assumptions carried forward. SecureSheet lets you import benchmarking data directly into your planning workbook so you’re working from current numbers instead of stale spreadsheets. And SecureSheet’s robust reporting capabilities allow you to analyze and review data by role, business segment, etc.
Model A Few Budget Scenarios
Build out at least two or three scenarios: conservative, moderate, and stretch, so you’re not walking into budget conversations with a single number and no fallback. SecureSheet’s scenario modeling makes it easy to see how shifting the total budget or the split between merit and market adjustments plays out across departments.
Layer In Targeted Allocation
Once you have a total number, decide how much of it gets weighted toward critical roles versus distributed broadly. This is where the peanut butter vs. targeted decision actually gets built into the plan.
Route It Through Approvals Early
Don’t wait until the number is “final” to get eyes on it. SecureSheet’s approval workflows let finance, HR, and department leaders weigh in as the plan develops, so you’re not stuck redoing work after the fact.
Document And Communicate The Rationale
Whatever you land on, write down why. A merit increase budget that’s easy to explain to leadership and to managers delivering the increases holds up better than one that just appears as a number on a spreadsheet. SecureSheets detailed audit trail capabilities tracks all user activity and provides detailed reports outlining all compensation change rationale.
Common Budget-Season Mistakes
- Starting too late. Organizations often start about 6 months prior to the annual review date. Waiting until the prior quarter or until final budgets and guidelines are set is often too late.
- Using stale benchmarking data. Comp data ages fast; a number pulled two years ago won’t reflect current market pressure.
- Ignoring role-level variance. A single blended percentage across every job family almost always over- or undershoots somewhere.
- Skipping scenario planning. One number with no fallback leaves you with nothing to fall back on if finance pushes back.
- Failing to document rationale. Managers can’t explain a decision they don’t understand, and neither can you, six months later, when someone asks.
Most of these come down to working from stale or scattered data. SecureSheet keeps benchmarking, scenario modeling, and approvals in one workbook so nothing falls through the cracks.
FAQs on Salary Budget Planning
What is a good annual salary increase for 2027?
Most employers are projecting total annual salary increase budgets around 3.2%–3.5% for 2027, though actual increases should vary by role, performance, and market position rather than applying a single flat number company-wide.
What’s the difference between a merit increase and a salary increase?
A merit increase is a raise tied specifically to individual performance, while “salary increase” is a broader term that can also include market adjustments, promotions, cost-of-living changes, and equity corrections.
When should companies start salary budget planning for the next year?
Most organizations begin salary budget planning in the final months of the current fiscal year, typically Q3 or Q4, so compensation philosophy, budgets, and guidelines are finalized before the new year starts.
Should every employee get the same percentage increase?
No. A single blended percentage (“peanut butter” spreading) is easy to administer but weakens the retention impact for critical roles. Targeted allocation weighting increases toward flight risks and hard-to-fill positions, making budget dollars go further.
How do you build a merit increase budget from scratch?
Start with current market benchmarking data, model a few budget scenarios (conservative, moderate, stretch), decide how much gets targeted vs. distributed broadly, route it through approvals early, and document the rationale behind the final numbers.
