May 10 2026
Pay and Merit Increases for 2027: An Early Outlook
2027 Salary Increase Forecast – Blue Whale Compensation
📊 Compensation Outlook

2027 Salary Increase
Forecast

As organizations begin preparing compensation budgets for 2027, the most likely scenario is continued moderation and stabilization of annual wage increases — not a sharp escalation or significant collapse in pay growth.

Based on major labor and economic factors — including labor-market conditions, inflation trends, compensation survey forecasts, and broader economic indicators — most U.S. employers should plan accordingly:

Expected Range
3.2–3.8%
Average salary increase budgets
Overall Midpoint
3.5%
Central planning benchmark
High-Demand Roles
~4%
Specialized / hard-to-fill
Planning takeaway: For most employers, 2027 salary increase planning should remain centered near 3.5%, with higher budgets reserved for competitive roles, hard-to-fill positions, and targeted internal equity needs.

Background Analysis

Over the last six years, wage increases in the United States have moved through three distinct phases.

1
Pandemic Disruption 2020–2021

The first phase occurred during the early pandemic years, when compensation patterns became highly distorted. Many organizations froze salaries or reduced compensation growth amid economic uncertainty and business shutdowns.

By late 2021, employers encountered one of the tightest labor markets in decades. Labor shortages, rapid inflation, remote-work disruptions, and elevated turnover created substantial upward wage pressure.

2
Accelerated Wage Growth 2022–2023

Compensation increases accelerated sharply, with many employers implementing salary budgets of 4–5% or higher — levels not commonly seen in decades.

Workers who changed jobs often secured much larger pay gains than those who stayed, creating additional pressure on internal pay structures and retention strategies.

3
Stabilization 2024–Present

Wage growth gradually cooled while remaining above pre-pandemic norms. Multiple compensation surveys now show average salary increase budgets stabilizing around 3.4–3.5% for 2025 and 2026 — still above the historical pre-pandemic range of 2.5–3.0%.

This signals a permanent upward shift in compensation structures following the post-pandemic labor shock.

Labor Market Conditions

One of the strongest indicators supporting this outlook is the Employment Cost Index, which continues to show compensation growth above pre-pandemic norms. While figures are lower than peak pandemic-era levels, they remain elevated relative to long-term historical averages.

At the same time, labor market conditions are clearly softer than in 2022–2023. Job openings have declined, hiring has cooled, and the premium for switching employers has narrowed considerably. Employers are seeing fewer emergency retention situations — but the market is not weak enough to drive compensation budgets materially lower.

Many organizations still face challenges filling specialist roles in healthcare, engineering, skilled trades, technology, and AI-enabled functions — making a return to pre-2020 budget levels unlikely in the near term.

Consumer Pressure & Affordability

Although inflation has moderated from peak levels, employees continue experiencing elevated costs in areas that matter most: transportation, housing, insurance, healthcare, utilities, and food.

Importantly, workers do not evaluate compensation solely on official inflation statistics — they evaluate compensation based on lived affordability. Even if headline inflation trends closer to the Federal Reserve’s target, employees may still feel financially strained because major household expenses rose sharply over the previous several years and have not meaningfully reversed.

In effect, workers are no longer reacting only to current inflation. They are reacting to the cumulative affordability reset that has occurred since 2021.

Pay Transparency & Internal Equity

As pay-transparency legislation spreads, organizations are increasingly compelled to address pay compression and inconsistencies across employee groups. While this doesn’t necessarily drive across-the-board wage inflation, it contributes to targeted adjustments and higher compensation governance activity — making thoughtful range management more important than ever.

What Employers Should Expect in 2027

These forces point toward a compensation environment characterized by stability rather than volatility. For 2027, most employers will likely continue operating in what compensation consultants describe as “the land of 3%” — slightly above traditional pre-pandemic norms.

High-performing organizations and industries facing specialized talent shortages may budget closer to 4%, while cost-sensitive sectors such as retail, nonprofit, and portions of healthcare may remain nearer to 3%.

While most employers focus on the size of salary increase budgets, the effectiveness of those budgets ultimately depends on how they are allocated and managed.

Best Practices for Salary Increase Budgeting

Salary increase budgets should be developed with more than annual merit increases in mind. Effective compensation planning also accounts for promotions, market adjustments, pay equity corrections, compression issues, and other targeted actions.

01
Take a holistic view of pay growth

Budget not only for annual merit increases but also for promotions, market adjustments, and off-cycle actions to sustain competitiveness and fairness.

02
Demonstrate commitment to pay equity

Reserve funds to correct pay equity gaps when audits reveal disparities. This protects reputation, mitigates compliance risk, and strengthens trust.

03
Protect long-term employees from compression

Ensure tenured staff are not disadvantaged when new hires enter at equal or higher pay. Addressing compression safeguards retention and engagement.

04
Align budgets with industry & peer-market realities

Different industries face distinct talent pressures and pay dynamics. Tailoring budgets to industry benchmarks ensures investments are competitive where it matters most.

05
Keep compensation market-driven, not inflation-driven

Anchor salary growth in competitive labor market data rather than inflation indices. This ensures pay remains aligned with actual talent demand.

06
Budget with full compensation visibility

Boards should expect management to analyze total compensation — salary, incentives, and benefits — relative to market benchmarks by role and level.

07
Secure Finance partnership

Well-supported budgets align with financial strategies, withstand scrutiny, and give the board confidence in their sustainability.

📐
Salary Ranges Are Critical

Learn the best practices for managing employee pay using salary ranges, including guidance on hiring rates, promotions, employee progression, and pay administration.

Read the Guide →

Conclusion

The most probable outcome is not a dramatic surge in compensation, but rather a prolonged period of moderate, persistent wage growth — shaped by lingering affordability concerns, selective labor shortages, pressure for pay transparency, and cautious economic conditions.

As employers enter 2027, they should prepare for compensation planning cycles that remain more demanding than those experienced before the pandemic, even if the extreme wage escalation of 2022 is unlikely to return in the near term.

“The land of 3%” is the new normal — and the organizations that manage it most effectively will be those with the strongest compensation structures and the most disciplined budgeting practices.
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Jun 6 2023
The Power of Incentives: How Bonus and Incentive Plans Propel Companies to Success While Controlling Payroll Costs

How to Develop Bonus and Incentives Plans that Get Results

A common denominator in companies that excel is comprehensive and impactful incentive and bonus plans that drive the organization’s growth and achievement of critical goals. A well-designed program can motivate employees, improve performance, and fuel organizational growth. In addition to their impact on success, bonus and incentive plan also serves as a great way to control payroll costs. In this article, we will delve into the top five reasons why US companies with bonus and incentive plans are far more likely to succeed than those without while effectively managing their payroll costs.

Performance-Based Compensation

Bonus and incentive plans provide a performance-based compensation structure that links rewards directly to individual or team achievements. This approach allows companies to reward high performers while ensuring that compensation aligns with the value created. By incorporating performance metrics and targets into incentive plans, organizations can control payroll costs by rewarding top performers who contribute significantly to the company’s success.

Cost-Effective Retention Strategy

Employee turnover can be a significant drain on an organization’s financial resources. According to a 2022 study by Keep Financial, 86% of employees would stay at the company for a period of time in exchange for a cash bonus. Bonus and incentive plans offer a cost-effective retention strategy by providing rewards and recognition to high-performing employees. By motivating and engaging employees through these programs, companies can reduce turnover rates and the associated costs of recruitment, training, and lost productivity.

Variable Compensation Structure

Unlike fixed salaries or traditional pay scales, bonus and incentive plans introduce a variable compensation structure that allows for flexibility in payroll costs. These plans can be designed to align with the company’s financial performance, ensuring that compensation expenses are directly tied to business results. During periods of economic downturn or financial constraints, companies can adjust the bonus and incentive payouts to control payroll costs without sacrificing employees’ overall motivation and performance. To best measure and calibrate a plan, companies should consider four key plan design principles:

1. Ensure accurate measurement

Align payout curves with organizational expectations and ensure that incentives for performance are aligned with accurate measures of financial results. Objectives, in addition to financial goals, can be qualitative in nature. For example, building customer loyalty, raising quality objectives, or elevating employee morale, can be key organizational goals.

2. Balance short-term and long-term incentives

Determine the proper mix of short-term and long-term incentives. Short-term incentives are usually aligned to annual revenue or profit objectives; long-term incentives, on the other hand, are generally linked to added shareholder value over a longer period of time.

3. Promote compliance

Plans must be designed to maximize tax benefits for the company (and its employees) and do not violate any IRS rules. This applies not only to public companies but also to private companies. Investors and/or company owners are demanding greater accountability on incentive plans and how they are aligned to value creation.

4. Keep the plan workable

Simplifying compensation plans is crucial to ensure their effectiveness, as overly complex plans can be incomprehensible for participants. The key is to maintain simplicity in goal setting, award calculation, and the number of metrics involved. Ideally, limiting the metrics driving awards to three to five is advisable.

From: The Controller’s Report (Issue 13-7)

Cost Containment through Goal Setting

Bonus and incentive plans enable companies to define specific goals and targets that align with the organization’s strategic objectives. By setting ambitious yet attainable goals, companies can channel employees’ efforts toward driving performance and achieving desired outcomes. This goal-oriented approach helps control payroll costs by allocating incentives to individuals or teams who meet or exceed predetermined benchmarks. It allows companies to focus on rewarding exceptional performance rather than providing across-the-board salary increases.

Return on Investment (ROI)

Bonus and incentive plans can be seen as an investment in driving employee performance and organizational success. When properly designed and implemented, these programs yield a positive return on investment. A study published in the Journal of Labor Economics found that incentive pay significantly increased productivity, with the average return on investment ranging from 30% to 50%. By strategically allocating resources to reward high performers, companies can control payroll costs while reaping the financial benefits of improved productivity and business outcomes.

Calibrate Budget and Payouts

When setting bonus levels, consider the 80/20 ratio: Set your payout at a level where only 20 employees reach no more than 80% of the payout. If more than 20% of employees get more than 80% of the projected payout, your goal is too low. Ideally, the rule is that the bonus budget should payout only 60% of the targetted goal.

Set Realistic Bonus Levels

In deciding the amount of a bonus, one should consider budgets, payout, number of employees in the plan, objectives, ROI, and the total cost at the end of the plan year. Additionally, the payout must be attractive enough to be meaningful to employees. Although there are a variety of plan models, the typical bonus amounts, expressed as a base of regular pay, are as follows:

Conclusion: In addition to their impact on motivating employees and driving organizational success, bonus, and incentive plans offer companies an effective way to control payroll costs. These programs provide a performance-based compensation structure, act as a cost-effective retention strategy, introduce variable compensation, allow for cost containment through goal setting, and offer a positive return on investment. By leveraging the power of incentives, companies can strike a balance between rewarding exceptional performance and managing payroll costs, ultimately propelling their success in the competitive business landscape.

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May 30 2023
Best Plans to Reward High-Performing Employees

How to REWARD HIGH-PERFORMING EMPLOYEES

Instead of a more traditional annual review focusing on equitable pay among staff members, employers should consider compensating their employees, especially high-performing employees, based on merit and job performance over a predetermined period.

Advantages

  • Increased motivation-employees will be incentivized and, as a result, become more enthusiastic about doing a job well done
  • Higher work standards will be set to meet performance
  • Differentiation between staff who is is over/underperform-higher performing employees will be recognized for their job well done
  • More clearly defined company goals and objectives- employees will understand and deliver on work expectations which will lead to increased productivity and retention
  • Recruitment- there will be further opportunities for pay and advancement, which will intrigue job applicants

Disadvantages

As your organization looks to implement a merit-based compensation plan, consider the downfalls, including increased employee competition and employee bias:

  • Without clear standards on merit pay may be awarded, merit-based pay is subject to interpretation and bias from each individual’s supervisor
  • Employees may begin to expect raises and forget about the performance aspect of pay
  • Instead of unifying the interest of the company, merit pay can bring competition within the workplace
  • Lack of communication and understanding- it is important for the supervisor to clearly define and explain to employees how the merit pay system works

Set up Merit-Based Pay

As listed above, setting up a merit-based pay structure has advantages, including increased employee motivation and retention. Before implementing a merit-based pay structure, there are important steps to take, as indicated below:

Consider budget implications

Before implementing the merit-based pay policy, to better understand and account for the future, establish a budget for pay that may be rewarded for employee performance.

Develop Policy

It is important to have a consistent, documented merit-based policy that clearly defines how employees will be awarded additional pay for their performance based on existing metrics and timetables.  This will help eliminate bias and inconsistent merit-based pay within the workplace.

Communicate

Once your organization has decided to implement the merit-based plan, set standards, and account for budget implications, develop a communication strategy to communicate with your staff what is expected of them clearly and the company standards.

Clearly Communicate:

  • Company Objectives and timeline
  • Merit Standards
  • How merit pay will be calculated
  • Departmental and individual goals

Software Consideration

To eliminate the risk of error and to streamline operations, it is recommended that your organization utilizes software to track salary data and the merit pay structure.  The software can also help your organization evaluate metrics and the success of the merit-based pay system. 

Summary

Merit pay can go a long way by showing your organization that you honor their hard work and dedication. Employees will begin to feel appreciated, work harder, and display higher retention levels.

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Oct 21 2022
Total Rewards: How to Find Compensation Strategies that Work

Raise your Company’s Engagement Index: Compensation Strategies That Work!

In today’s rapidly evolving employment market, it is imperative for organizations to place a strong emphasis on their compensation and benefits offerings to engage their existing workforce and attract prospective candidates effectively. Recent research conducted by the Society of Human Resources has highlighted the undeniable influence of compensation as a key determinant of job satisfaction among employees. A comprehensive and competitive package has a direct correlation with higher rates of employee retention and improved productivity. By minimizing turnover and fostering an environment of enhanced morale, productivity, employee satisfaction, and organizational culture, companies can optimize their financial resources and cultivate a more positive and flourishing work environment. So, what are the necessary steps that can help you raise your organization’s engagement index?

Find out what your employees want

Finding out what your employees prioritize will also help determine if your organization is in line with what employees are looking for to better capitalize on the funds utilized for compensation and remain competitive.

One method of determining your employees’ wants and needs is to distribute surveys among a wide variety of staff members. Alternatively, employers could coordinate interviews of focus groups to facilitate open discussion.

During this process, question what your employees’ value and account for variations based on different groups and demographics.

Do an Inventory of the latest Compensation Trends

Studies show job candidates and employees look for a key component: the compensation and benefits package.  In addition, several aspects that affect compensation can change over time, such as the size, revenue, or location of an organization or each employee’s role. Therefore, organizations must regularly review compensation and benefits to retain and attract employees. As you review the latest trends, highlight your comp and benefits program under a total rewards strategy. Employees may overlook the value of total rewards programs if they are not presented within the framework of a comprehensive total rewards strategy.

Leverage The Value of Your Employee Benefits

It is important to help employees better understand what benefits are offered to them in order to avoid dissatisfaction due to pay.  Once employees clearly understand their total compensation package, they will most likely focus on all the compensation and benefits offered. Remember, 40% of your labor costs are associated with your benefits package. The cost includes not only medical benefits but all employee insurance programs, time-off, pension, and mandated employer-related taxes

Develop A Strategy that blends your organization’s Culture and Value

Once recommendations have been accounted for, account for your organization’s values and pay philosophy.  Also, account for the return on investment and how changes could address attraction and retention.  Be prepared to act or explain why such benefits are or will not be offered.

Flexible Solutions

To stay relevant and reach a widescale workforce, it is recommended that your organization offers flexible benefits that are customizable to your workforce. For example, there are a lot of different options to choose from when it comes to selecting a benefits package.  Some options include health insurance, paid leave, retirement benefits, flexible scheduling, or tuition reimbursement.  Also, flexible work arrangements are highly priced by employees: They offer the flexibility and cost-saving options often sought by employees.

Top Performer Benefits

Lastly, consider adjusting your compensation strategy for top performers and those that exceed expectations to further incentive good behavior and increase attraction and retention.  Consider offering additional pay or an employee bonus. Employees are more likely to apply or stay at an organization that invests in their performance.

In conclusion, adopting a systematic approach to developing an engaged workforce can yield numerous benefits for companies. By implementing a well-defined process, organizations can create a culture of employee engagement that enhances productivity, fosters loyalty, and drives innovation. This process involves understanding employees’ unique needs and aspirations, aligning goals and values, providing regular feedback and recognition, promoting professional growth opportunities, and fostering a positive work environment. Investing in employee engagement improves job satisfaction and retention rates and directly impacts the company’s bottom line, as engaged employees are more committed, motivated, and willing to go the extra mile. By prioritizing the development of an engaged workforce, companies can position themselves for long-term success in today’s competitive business landscape.

10/15/2022

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Feb 1 2022
High-Impact Compensation Strategies to Include in your 2022 Plan

High-Impact Compensation Strategies for 2022

Is 2022 the best year to reset your compensation program? Absolutely.  

To prepare you for this year, Blue Whale Compensation has compiled a series of measures that can help companies best manage their labor and talent needs. 

We are living through a historical shift in the workplace with rising wages and inflation. At no other time in recent history has compensation taken a front seat as a means that companies can use to retain, engage, and attract new talent. A compensation strategy, however, should not be confused with solely giving employees aggressive increases. In fact, unwarranted increases with no other plan are likely to make issues worse.

The plan needs to be based on a comprehensive analysis of budgets, labor needs, current talent needs, future talent needs, and basic compensation planning.

A Market Analysis is a Must

Carefully examine market levels and set appropriate salary benchmarks. Based on that information, consider market adjustments. Market adjustments should generally be no higher than 2%. If more severe market adjustments are needed, consider another round of market adjustment increases in 12 months. When setting the market, consider that 2022 is not the year to be noncompetitive. Along with inflation eating away any substantial wage gains, recent surveys indicate that most employers a setting salary increases about their 2022 projections; in addition, about half of companies are actively implementing market adjustments to employees who are under competitive market pay. 

Merit-Base and Market-Driven Increases based on Performance

If you have ranges and midpoints, combine your performance management information with an employee’s market position. By using a merit-driven grid, you can justify larger, above-average increases to high-performing, underpaid employees.  Conversely, the matrix helps you develop a policy to slow down salaries that are way above market midpoints.

Download Matrix

Identify Employee at Risks

Mine your employee data and identify the employee population that is most at risk of leaving your company. Use your compa-ratios! Employees with the lowest compa-ratios are twice as likely to be looking for employment. Review your employee population via existing interview data: what departments, units, or types of employees are leaving at a faster pace and what trends can you derive from their exit interviews?  

Closely examine your labor stats and compare them to specific benchmarks. For example, voluntary turnover rates are trending between 10% and 17%. Are your higher or lower? Employee tenure is another key barometer to measure at-risk groups. Employees who have more than four years with a company as twice as likely to stay with the company for another three to four years. Employees who have less than two years are twice as likely to be looking for another job. In addition to critical stats, check data from your employee opinion or engagement surveys. They often contain valuable information that can help you identify at-risk employee populations.  

Implement a Basic Compensation Plan with Guidelines, Grades, and Ranges

The rapid movement in wages that are likely to be experienced in 2022 most likely will subside in 2023. It is, therefore, very important that beyond immediate increases, you carefully look ahead and implement basic compensation management guidelines. This includes grades based on job leveling; ranges reflecting reasonable hiring salaries; policies addressing promotions, demotions; and most importantly, a basic outline of your company’s compensation philosophy.

View Sample Comp Philosophy

Upgrade Your Performance Management System 

Over the last few years, AI-driven solutions have come into the marketplace with innovative technologies that have simplified the often complex and disliked world of performance management tools. Many tools exist to offset the great challenges companies have with their existing program. Most app-based solutions tend to be affordable, flexible, and easy to deploy.   

Recalibrate Your Pension Vesting Provisions and Enhanced Your Time-Off Policies

As employee tenure decreases, employers may want to re-think the existing model of pension benefits vs. time-off benefits. For example, most employers allow an employee to join their 401k plan in less than six months. Less than 30% wait a full year to allow them to join. If your retention and data show a pattern of employees decreasing tenure, then, employers may want to extend the waiting time before an employee signs and increase the vesting from three to five years. This needs careful consideration as 401K is a premium recruiting vehicle and care should be exercised to dilute the recruiting value that your current company offers. However, for companies that shift pension costs, to additional flexible some of the cost to enhanced time-off policies.

Consider Bonus for High Paid Employees, Not Increases

For high-paying employees versus additional salary, examine the market, and follow the following strategic budget: For employees over the midpoint, offer them a one-time bonus; for employees under the midpoint, add to their base.  Over time, this strategy will keep your costs even with the market and you can target at-risk employees, and perhaps even keep them. 

Selling your Plan

The biggest challenge in resetting your compensation program should not be illustrating the company can be more productive, efficient, and ahead of the curb in the long run. The biggest challenge is bringing the organization the information they need – from your C level to your middle management, and all the way to employees. This requires a significant public relations effort – one that cultivates the needs of the organization not only for the immediate future but for long-term success. 

Is Job Hopping Here to Stay?

It used to be that most employees would stay in a position on average of four to six years. That is no longer the case. The fact is that most employees are no longer considering long-term employment with your company.  

The leaders of the job-hopping movement are, to no surprise, millennials. They are now aptly called the “job-hopping generation” because they display a significantly higher willingness to switch careers than previous generations. The long-tenured career employee is essentially over.   

Employee mobility with employment options, and the opportunity to get more money with the next move, have resulted in decreasing employee tenure. Social media is saturated with narratives about getting a 20% increase by going to a new company. The fact is that strategy works for people. In previous years, job jumping was frowned on – now, that tactic is part of the challenges that employers must seriously account for.  

Given that employees are less likely to stay with your company for a long period, you need to develop shorter and more impactful training procedures to make up for time lost in the hiring process. Shorter employment also makes companies question their pension and retirement benefits. Instead of benefit and tenure keeping in immediately waiting 6 to 12 months longer and increasing vesting provisions from 3 to five years. 

Hire Part-Time Employees to Fill the Labor Gap

One driver of the current resignation wave is that employees are looking to shift their work schedule and work with more flexible work type arrangements. Often, even a full-time WFH arrangement is not enough. Employees are also looking for a shorter, flexible work schedule.  Part-time employment may be an option for them and many employers.  

Beyond the cost economics – which may help the employer – part-time employees often have the experience and the technical agility that employers often require from new employees.  Given the new dynamics in work arrangements, part-time employees, when properly structured, can add the stability that the current environment lacks.  Managers will be key. Managers can resist the perception that part-time employees are supplemental and not worthy of long-term investment in terms of training to development. HR must bring considerable company culture efforts to show how part-time employees can be more than a short-term for the organization. Employees now place a high value on the ability to control their work/life balance, so they are likely to appreciate the opportunity to earn income while being able to accommodate to their lifestyle.  

High Demand for Interns Expected in 2022

Intern season is coming up! A well-managed internship program is a great way to identify potential long-term talent against the wave of resignations. If you have been on the fence about hiring interns, this may be the year for you to jump into developing an internship program.  A properly vetted internship program offers a variety of solutions that can quickly fill the labor gaps most employers are experiencing. 

Hiring interns is a great way to get specific skill-based labor that can support critical key functions and relieve areas with entry-level support. A good program should also be able to help you identify potential long-term talent. If you target and recruit specific skill sets, you may be able to bring some support to key projects that might be stuck due to a lack of resources.  

Most of the jobs that are being lost, besides retail and health, are office administrative classifications where minimum wages have not kept up with inflation. That means interns and part-time employees could provide much-needed relief during the late spring and summer months. 

February, 2022

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