Peanut Butter Raises: Why Employers Are Ditching Merit-Only Pay in 2026

For most of the last decade, “compensation strategy” meant merit pay: rank employees, size the raise to the rating, repeat annually. That model is fraying in 2026. A wave of coverage — from HR Dive’s reporting on a new WTW pay-increase survey to SHRM, Payscale, and CBS News — has centered on what practitioners are now calling peanut butter raises: spreading pay increases evenly across the workforce rather than concentrating them on top performers.

What are peanut butter raises?

Peanut butter raises are across-the-board salary increases applied evenly to most or all employees, regardless of individual performance rating. The name comes from the idea of spreading a fixed budget thinly and uniformly, the way peanut butter spreads across bread, instead of concentrating it where merit pay would put it.

Payscale’s 2026 compensation preview puts a number on the shift: 44% of organizations are using or actively considering this approach for the current cycle, and the pattern is strongest among companies that beat their 2025 revenue targets — 56% of over-performing companies report using or considering flat, uniform increases rather than merit-weighted ones.

Why are employers moving away from merit-only pay in 2026?

Employers are moving away from merit-only pay because performance-rating systems have become harder to defend internally, employee trust in “merit” has declined, and flat increases are administratively simpler to explain and roll out across a large, distributed workforce.

HR Dive’s coverage of the underlying WTW research adds a second driver: broad economic uncertainty. Nearly a third of employers plan to lower their total compensation-increase budget compared with last year, citing softer financial performance and a desire for tighter cost control. When the total pool shrinks, spreading it evenly is often the path of least internal conflict — a uniform 3% raise draws far fewer appeals than a merit matrix that hands some employees 1% and others 6%.

Are companies abandoning targeted pay entirely?

No — most companies are running peanut butter raises and targeted pay increases side by side, not choosing one over the other. WTW’s research found 43% of organizations have increased their use of retention bonuses or spot awards, and 37% have applied targeted base-salary increases to specific employee groups, even as broad raises spread more evenly elsewhere.

This is best understood as a barbell strategy: a flat, defensible increase for the broad workforce, plus a separate, smaller, and more selective pool reserved for roles the company cannot afford to lose — commonly AI, data, and specialist technical talent, where external market pay is moving fastest. HR Dive’s reporting frames this as employers becoming more “strategic,” not more generous — the same dollars are simply being aimed more precisely at retention risk instead of spread by performance rating.

The practical effect is that “average increase” as a single headline number is becoming less useful for benchmarking. Two companies can both report a 3.4% average increase for 2026 while running very different programs underneath it — one spreading it uniformly, the other concentrating most of it on a small group of critical roles and giving everyone else close to nothing. HR leaders comparing notes across companies this cycle need to ask about the distribution, not just the headline average, or they risk drawing the wrong conclusion about how competitive their own program actually is.

How does this connect to what workers actually say they need?

This connects directly to a widening gap between what employers plan and what workers report needing: HR Dive’s same reporting cycle found employers may be underestimating how anxious their workforce is about personal finances, with nearly 7 in 10 workers questioning their ability to retire comfortably.

That is a retention risk signal HR teams cannot solve with a compensation philosophy alone. A flat 3.4% raise will not close a retirement-confidence gap of that size. It does mean that total rewards communication — explaining retirement benefits, financial wellness tools, and non-cash compensation clearly — is becoming as important as the raise number itself in 2026 engagement surveys.

What should HR and compensation teams do differently this cycle?

HR and compensation teams should decide deliberately whether a flat or merit-weighted approach fits their retention risk profile this cycle, rather than defaulting to whatever was used last year, and document the reasoning so managers can explain it consistently.

A practical checklist for this compensation cycle:

1. Map which roles carry genuine external retention risk before setting the split between broad increases and targeted spot awards.
2. Decide on a flat-vs-merit philosophy explicitly, in writing, rather than letting individual managers improvise explanations.
3. Pair whatever base increase is chosen with clear pay transparency communication, since flat raises raise different fairness questions than merit pay does.
4. Check the plan against the underlying pay structure to confirm a uniform percentage increase does not quietly widen existing pay compression between levels.
5. Address financial-wellness and retirement-confidence gaps separately from the base-pay conversation, since HR Dive’s data shows this is where the real anxiety sits.

Does this trend hold across company size and industry?

The trend is strongest at larger, revenue-over-performing companies and less pronounced at smaller organizations with tighter, more individualized pay bands. Industry coverage from SHRM and Payscale both note that budget-constrained sectors are more likely to adopt flat increases specifically to avoid the internal conflict merit differentiation creates when the total pool is small.

For smaller employers without a dedicated compensation function, the practical takeaway is the same barbell logic at a smaller scale: pick one or two roles where losing someone would be genuinely costly, protect those with a targeted increase, and apply a simple, flat, easy-to-explain increase everywhere else.

How should managers explain a flat raise to a high-performing employee?

Managers should explain a flat raise by separating two conversations that used to be combined: the pay decision, which is now largely uniform, and the performance conversation, which still needs to happen on its own merits through recognition, development, and career-path discussion.

The biggest manager-training gap HR teams report when rolling out flat increases is that managers default to old scripts — “you got 4% because of your rating” — when the rating no longer drives the number. That mismatch is what erodes trust fastest. A short, direct script works better: state the company-wide increase percentage plainly, explain the reasoning (budget certainty, fairness, administrative simplicity), and then have a separate conversation about performance, growth, and any targeted award the employee may also be eligible for. Conflating the two conversations is the single most common rollout mistake compensation teams report after a first cycle of flat increases.

What does this mean for compensation benchmarking and market data?

For benchmarking, it means external market-pay data now matters more at the point of hire and for targeted retention pools, and less as the sole justification for annual increase size, since annual increases are converging toward one company-wide number regardless of role-level market movement.

Practically, this pushes compensation teams to run two separate benchmarking exercises instead of one blended annual review: a broad, lighter-touch check to confirm the flat increase keeps the company roughly competitive overall, and a much sharper, more frequent benchmarking cycle for the specific roles being fed by the targeted spot-award pool — typically AI, data, cybersecurity, and other fast-moving specialist markets where a once-a-year snapshot is already stale by the time it is applied.

Frequently Asked Questions

Do peanut butter raises save companies money compared to merit pay?

Not necessarily. The total budget is usually similar; what changes is the distribution. Some companies use flat raises specifically because the total pool has shrunk, but the approach itself is about distribution, not the overall size of the increase.

Will peanut butter raises hurt retention of top performers?

They can, if used alone. That is why most 2026 adopters pair flat base increases with a separate, targeted spot-bonus or retention-bonus pool aimed specifically at high-risk, high-value roles.

Is this trend expected to continue into 2027?

Compensation forecasters expect the barbell pattern — flat broad increases plus targeted spot pools — to persist as long as overall salary-increase budgets stay in the 3–3.5% range and economic uncertainty keeps pressure on total compensation costs.

Does pay transparency legislation change how flat raises should be communicated?

Yes. In jurisdictions with pay-transparency or pay-equity reporting requirements, a flat increase is generally easier to defend in an audit than a merit matrix, since it removes rating-based variance as a potential source of unexplained pay gaps — but it still needs to be documented as a deliberate policy choice, not left informal.

Last updated: July 26, 2026. Sources: HR Dive news feed (Willis Towers Watson pay-increase report coverage), Payscale 2026 Salary Increase Preview, SHRM compensation and benefits reporting.