For 2026, a typical merit increase runs about 3% to 3.5% of your base salary, with the average landing near 3.2%.1Mercer. Most US Employers Plan to Keep 2026 Salary Increases Flat Your actual number depends on your performance rating, where your pay already sits in your salary range, how large a merit pool your employer funded, and the industry you work in. Unlike a flat cost-of-living bump, a merit increase rewards individual performance and becomes a permanent part of your base pay, compounding for the rest of your time with the company.
Typical Merit Increase Percentages
Major compensation surveys put the average 2026 merit increase at roughly 3.2%. Total salary increase budgets, which bundle in promotions, cost-of-living adjustments, and other raises, come in closer to 3.5%.1Mercer. Most US Employers Plan to Keep 2026 Salary Increases Flat A separate survey of about 1,569 U.S. organizations found employers delivered an average merit increase of 3.2% in 2025 and are projecting total increases of 3.5% for 2026.2SHRM. Employers Eyeing Flat Salary Increases in 2026
The average hides a wide spread. Employees who meet expectations usually land in the 2% to 3% range. Strong performers often see 4% to 5%. Underperformers may receive 1% or nothing at all. The pattern of paying top contributors disproportionately out of a limited pool holds across most companies, even when the tiers are labeled differently.
The Bureau of Labor Statistics Employment Cost Index showed private-sector wages and salaries rising 3.3% over the 12 months ending in December 2025.3Bureau of Labor Statistics. Employment Cost Index Summary – 2025 Q04 Results HR departments use that figure as one benchmark when deciding how generous their merit budgets need to be to stay competitive with other employers.
How Your Performance Rating Sets the Number
Most companies use a tiered rating system, often a 1-to-5 scale, that links each rating to a specific raise percentage. An employee rated “meets expectations” (a 3 on a five-point scale) generally receives the company-wide average. Those rated “exceeds expectations” or “outstanding” qualify for progressively larger raises. Employees rated below expectations may receive a reduced increase or nothing at all.
Performance goals are typically set at the start of the review period and tied to measurable outcomes: sales targets, project completions, customer satisfaction scores, or other role-specific deliverables. Documenting your accomplishments through the year, instead of trying to reconstruct them at review time, strengthens your case for a higher rating. The written appraisal is the justification your manager uses when assigning your percentage.
How the Merit Pool Limits Your Raise
Companies set aside a fixed percentage of total payroll, called the merit pool, to fund all raises in a given cycle. If the pool is 3%, the combined raises across a department cannot exceed 3% of that department’s total base salaries. Managers distribute from this shared pot, which means your raise doesn’t get decided in isolation.
A manager who gives one employee a 5% increase typically has to give another 1% or 2% to stay within budget. Profitable years tend to expand the pool. Downturns can freeze it entirely or shrink it below the previous year’s level. Larger organizations often enforce these ceilings rigidly, while smaller employers may have more flexibility to make exceptions.
Even outstanding performance can only pull so much from a finite budget. That’s worth knowing before you walk into a review expecting a specific number.
Where You Sit in the Pay Range
Many organizations assign each job a salary range with a minimum, midpoint, and maximum. Your position relative to the midpoint, sometimes called a compa-ratio, often influences the size of your merit increase independently of your rating.
If you’re paid well below the midpoint, you may receive a larger-than-average raise to bring your compensation closer to market for your role. If you’re already near or above the midpoint, the increase may be smaller, because the company wants to avoid pushing your salary past the range ceiling. In some cases, employers offer a one-time lump-sum payment instead of a permanent base pay increase. A lump sum recognizes your performance for that year without permanently raising your salary above the range maximum.
Asking HR where your salary falls within the range for your position gives you a clearer picture of how much room exists before you hit the cap.
How Industry Affects the Percentage
Merit budgets vary meaningfully by sector. For 2026, financial services, energy, and technology companies are planning higher total increases of around 3.7%, while healthcare and retail are budgeting closer to 2.9% for merit and roughly 3.3% to 3.4% for total increases.1Mercer. Most US Employers Plan to Keep 2026 Salary Increases Flat
These differences reflect each industry’s labor market. Sectors competing hard for specialized talent (software engineers, data scientists, financial analysts) tend to offer more aggressive raises because replacing someone who leaves is expensive. Industries with tighter margins or larger pools of available workers keep budgets leaner. If your raise feels low compared to friends in other fields, the industry gap may explain more than your individual rating does.
Merit Increase vs. Cost-of-Living Adjustment
A merit increase rewards individual performance. A cost-of-living adjustment (COLA) is a flat percentage applied broadly to offset inflation and has nothing to do with how you performed. Some employers combine both into a single annual raise, which can make it hard to tell what portion actually reflects your work. Others separate them, giving everyone a COLA and then layering merit on top.
When a company advertises a “3.5% average increase,” that number often bundles both.2SHRM. Employers Eyeing Flat Salary Increases in 2026 If inflation is running near 3% and your total raise is 3.5%, only about half a percentage point reflects merit-based recognition. Knowing the breakdown helps you evaluate whether your employer is genuinely rewarding performance or simply keeping your purchasing power close to flat.
Turning the Percentage Into Dollars
To find the dollar value, multiply your current annual base salary by the merit percentage. If you earn $60,000 and receive a 3.2% merit increase, that adds $1,920 per year, or roughly $160 more per month before taxes. At 5% on the same salary, the gain jumps to $3,000 annually.
A raise also means slightly higher federal income tax withholding, since your employer adjusts the amount withheld based on your total income and your W-4.4Internal Revenue Service. Tax Withholding for Individuals Only the additional dollars that cross into a higher bracket are taxed at the higher rate. For 2026, a single filer pays 10% on income up to $12,400, then 12% up to $50,400, and 22% up to $105,700.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A typical merit increase of a few thousand dollars is unlikely to push you into a meaningfully different tax situation.
Some employers calculate raises against the midpoint of your pay grade rather than your actual salary. Under that method, two people with different salaries in the same grade could receive the same dollar amount. If your offer letter or compensation statement doesn’t spell out which method your company uses, ask HR.
What to Do If Your Raise Is Low or Zero
No federal law requires an employer to give merit increases. A raise is a business decision, not a legal obligation, so receiving nothing is not grounds for a legal claim on its own. Practical options include:
- Ask for specific feedback on what goals or metrics would justify a higher rating next cycle, and get that in writing if possible.
- Keep a running record of completed projects, positive client feedback, and measurable outcomes through the year instead of relying on memory at review time.
- If your salary is near the top of your current pay range, look at whether a promotion or role change would reopen room for a larger adjustment.
- If a base pay increase isn’t available, ask about a one-time bonus, extra paid time off, remote work flexibility, or professional development funding.
- Start the conversation early. Discuss expectations and goals months before the review cycle rather than waiting until the raise has already been decided.
Some employers use a delayed merit increase instead of denying a raise outright. A manager may give you three to six months to improve specific areas, with a raise effective after that period if the improvement materializes.
One Edge Case: The FLSA Exempt Salary Threshold
Under the Fair Labor Standards Act, salaried workers must earn at least $684 per week ($35,568 per year) to qualify as exempt from overtime pay. A 2024 federal rule tried to raise that threshold, but a federal court in Texas vacated the rule in November 2024, reverting the enforceable standard to the 2019 level.6U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption
For most salaried workers earning well above $35,568, this doesn’t affect anything. But if your salary sits near that floor, a merit increase (or the absence of one) could affect whether your employer can legally classify you as exempt. Some states set higher thresholds of their own. If your pay is anywhere close to these limits, confirm with HR that your classification and overtime eligibility are correct.