Average merit increase in 2026: what employers actually budget and what to expect

Quick answer: The average merit increase budget for 2026 is 3.5-3.9% of payroll, according to Mercer, WTW (Willis Towers Watson), and Aon salary budget surveys. That is the budget -- what the pool of money is. Individual merit increases within that pool range from 0% (below expectations) to 8-12% (top performers). The median individual merit increase for a satisfactory performer is 3.0-3.5%. If your company gave you 2% and called it a merit raise, they gave you below-median. If they gave you 5%+, you are in the top quartile.

Merit increase and cost-of-living raise are not the same thing, even though companies sometimes use the terms interchangeably. A cost-of-living adjustment (COLA) maintains your purchasing power; a merit increase recognizes performance above baseline. In practice, many "merit increases" in 2026 are partly COLA and partly merit -- but understanding the distinction helps you evaluate whether what you received is actually a performance signal or just baseline maintenance.

This guide covers what the 2026 merit increase data actually says, how it breaks down by industry and company size, why the budget number and the individual number diverge so dramatically, and how to use this information in a raise negotiation.

What the 2026 salary budget surveys say

Three major consulting firms run annual salary budget surveys with data from thousands of employers:

Mercer's 2025/2026 US Compensation Planning Survey:

• Average total salary increase budget: 3.8% (2026)
• Average merit increase budget: 3.5%
• Promotional increase budget (separate from merit): 0.3-0.5% of payroll
• Industries highest: Technology (4.2%), Life Sciences (4.1%), Finance and Insurance (3.9%)
• Industries lowest: Hospitality/Retail (3.1%), Education (2.9%), Government contractors (3.0%)

WTW (Willis Towers Watson) 2025/2026 Salary Budget Planning Report:

• Projected total increase budget: 3.9%
• Merit-only budget: 3.6%
• Observations: Budget projections have stabilized after the 2022-2023 spikes (when some industries hit 4.5-5.5%); 3.5-4.0% is now the "new normal" range
• High-performing employees receive 1.6-2.0x the average merit budget (historically consistent)

Aon 2026 Salary Increase Survey:

• Average total budget: 3.7%
• Merit budget specifically: 3.4%

The range to use: In practice, the three surveys converge on 3.5-4.0% as the 2026 merit budget median. This is the pool your employer is drawing from when determining your raise.

Merit budget vs. what you actually receive

The budget number is not what most employees receive. Here is why they diverge:

Differentiation: Most large employers operate a "pay-for-performance" distribution model. The merit budget is an average, not a floor. A company with a 3.5% merit budget might distribute it as:

| Performance rating | Typical merit increase | |---|---| | Exceeds all expectations (top 10%) | 6-10% | | Exceeds expectations (next 20%) | 4.5-6% | | Meets expectations (middle 60%) | 2.5-3.5% | | Below expectations (next 8%) | 0-1.5% | | Does not meet expectations (bottom 2%) | 0% |

If you received 2.5% with a "meets expectations" rating, you are in line with the median. If you received 2.5% with an "exceeds expectations" rating, your employer distributed the merit pool unevenly, and you likely underperformed relative to peers or were constrained by a manager-level budget cap.

Manager discretion: Most companies give individual managers a budget (their team's share of the overall merit pool) and discretion to allocate within it. A manager with a $50,000 merit budget for a 10-person team can give $10,000 to two high performers and $4,000 split evenly among the rest -- or can give $5,000 to everyone. The allocation reflects both company philosophy and manager judgment about relative performance.

Budget compression: In years with budget pressure, even top performers see compressed merit increases. If the company-wide budget is 3.5% and your manager was running a 2.5% budget for your team (because of cost center decisions), there is no mechanism to close that gap without the manager going to bat for an out-of-cycle adjustment.

Merit increase vs. cost-of-living adjustment

These terms are used inconsistently and the distinction matters.

Cost-of-living adjustment (COLA): Maintains your real (inflation-adjusted) purchasing power. With 2025 CPI at approximately 3.2%, a 3.2% COLA kept your purchasing power flat. It did not reward performance; it prevented a real wage cut.

Merit increase: Rewards individual performance. A true merit increase should move you toward or above the market rate for your role and level, not just keep pace with inflation.

In practice: Many companies combine COLA and merit into a single "salary increase," particularly when inflation is moderate. In 2022-2023, when CPI was 7-9%, companies that gave only 4% increases were giving a real wage cut while calling it a raise. In 2026, with inflation closer to 3%, a 3.5% "merit" increase that is actually pure COLA leaves you at the same real wage for another year.

How to distinguish: Ask your manager or HR whether the increase includes a COLA component. "Is any portion of this increase tied to cost-of-living, and what portion is merit-based performance recognition?" This is a reasonable question and should get a direct answer. If the answer is "it's all merit-based" but the amount equals CPI, take that with skepticism.

Industry and company size variation

Merit increases are not uniform. Key variations:

By industry (2026 average merit budgets):

| Industry | Avg merit budget | |---|---| | Technology (software, cloud) | 4.0-4.5% | | Life sciences / biotech | 3.9-4.2% | | Financial services (non-banking) | 3.8-4.0% | | Banking / insurance | 3.6-3.9% | | Professional services | 3.6-3.8% | | Manufacturing / industrial | 3.4-3.6% | | Healthcare (non-profit) | 3.0-3.4% | | Retail / hospitality | 2.8-3.2% | | Education | 2.5-3.0% | | Government / public sector | 2.0-3.0% |

By company size:

• Companies with 10,000+ employees tend to use formal salary band structures and are more rigidly tied to the budget percentage.
• Companies with 200-2,000 employees have more manager discretion and are more willing to make exceptions for retention.
• Companies under 100 employees have the most flexibility but also the least budget predictability.

By role level:

• Entry to mid-level (IC1-IC3): Merit increases closely track the average budget; there is less room for exceptional allocation.
• Senior and staff level (IC4-IC5): More differentiation; high performers at this level capture 1.5-2.0x the budget average.
• Director and above: Often on separate compensation planning tracks; merit increases may be decoupled from the broad employee pool.

How to use merit increase data in a negotiation

The survey data gives you a benchmark number, not a negotiating position. Three ways to use it:

Reframe a low increase as a process question. If you received 2.5% with a strong performance rating: "I know the company's merit budget runs around 3.5-4%. Given my [exceeds expectations / top 10%] rating this year, I was expecting something in the 5-7% range. Can you help me understand what drove the 2.5% decision?" This is not a confrontation -- it is asking the manager to explain the mechanics, which often reveals either (a) a fixable manager-level constraint, or (b) a performance perception problem you did not know existed.

Separate COLA from merit. "Inflation ran about 3% this year. If the 3.5% increase is 3% COLA and 0.5% merit, I'd like to talk about the merit component, because my [specific wins] represent above-average contribution to the team." This reframe makes explicit what the employer would prefer to leave implicit.

Use it to set expectations before the review. Having the conversation after the decision is harder than having it before. Six to eight weeks before your review, a productive framing is: "I want to make sure we're aligned on what my performance would justify in terms of merit increase. Based on [specific wins], I was thinking I should be in the top quartile of the merit pool this cycle -- does that match your view?"

For the full step-by-step raise conversation playbook, see How to ask for a raise in 2026. For whether the raise you already received is good relative to market, see Is my raise good?.

Why "above 5% is a big ask" -- and when it's not

A 5% merit increase requires your manager to allocate roughly 1.4-1.5x the average budget to a single employee. On a 10-person team with a $50,000 merit pool, giving you $7,000 means someone else gets $3,500 less than they would otherwise. This has real team dynamics implications, which is why managers often resist.

The cases where above-5% merit increases happen without team friction:

• You are being retained against a real outside offer
• You have taken on scope that was previously a separate role (effectively a promotion)
• You are in a role where the market moved significantly (certain AI/ML and infrastructure roles saw 15-25% wage inflation in 2024-2025)
• You are newly off a promotion that reset your base below market

If none of these apply, a 5%+ merit increase is achievable but requires exceptional performance documentation and a manager willing to go to bat for you with their own manager. It happens; it is not routine.

See where your raise sits in the market

If you want a quick AI check of your specific raise against 2026 merit data and typical market ranges for your role, try SalaryCheck at salarycheck.ai. Paste your salary, raise percentage, industry, location, and experience -- get an inflation-adjusted view, a percentile placement against the 2026 merit budgets, a market-range comparison, and draft talking points if you want to push back. One-time $9.99, no account, no subscription. Informational only -- not financial advice.

Frequently asked questions

What counts as a "good" merit increase in 2026?

A merit increase of 3.5-4% lands at the 2026 median for satisfactory performers; 4.5-6% reflects an "exceeds expectations" rating at most large employers; 6%+ is typically reserved for top-decile performers, retention situations, or roles where market rates moved significantly. Below 3% with a positive performance rating is below median and worth questioning.

Is the merit budget the same as the cost-of-living adjustment?

No, though companies frequently combine them. A cost-of-living adjustment maintains your purchasing power against inflation; a merit increase recognizes individual performance above baseline. When inflation runs 3% and your "merit" raise is 3.5%, you are receiving roughly 0.5% in real merit recognition -- the rest is just keeping you whole.

Why did I get less than the merit budget average?

Most commonly: (1) your performance rating placed you in the middle or below-median tier, (2) your manager had a smaller team-level budget than the company average, (3) you are already at the upper end of your salary band, or (4) the company applied a separate promotion budget that you didn't qualify for this cycle. Asking your manager to explain the breakdown is reasonable and often reveals the actual constraint.

How does my merit increase compare across industries?

In 2026, technology and life sciences companies budget 4.0-4.5%, financial services 3.6-4.0%, manufacturing 3.4-3.6%, healthcare and education 2.5-3.4%, and government 2.0-3.0%. A 3% raise in tech is below median; the same 3% in education is at or above median. Industry context matters when evaluating your number.

Can I negotiate after the merit increase has been announced?

Yes, but the leverage is lower than negotiating before. The most effective post-decision moves: ask the manager to explain the rationale (often reveals a fixable misperception), separate COLA from merit explicitly, and frame any ask around specific wins the manager may not have considered. An out-of-cycle adjustment is harder to get but does happen, especially in retention situations.

Editorial methodology

Salary budget data in this guide draws from Mercer's 2025/2026 US Compensation Planning Survey, WTW's Salary Budget Planning Report, and Aon's Salary Increase Survey, all reflecting 2026 planning cycles. Industry breakdowns are approximate; actual figures vary by company size, region, and specific subsector. All data reflects U.S. employers. This guide is informational, not compensation consulting advice. Last reviewed: 2026-05-13.