Got Exceptional Employees? Here's How to Budget for Annual Raises

Benchmark Ledger Solutions

5 days ago

3 min read

Annual raises are one of the most predictable expenses in your business, yet many businesses still treat them as a surprise every year. Building a raise budget doesn't require guesswork. It requires knowing where the market actually sits and building a number your business can commit to in advance.

Start with what employers are actually budgeting

Every year, several major compensation research firms survey thousands of organizations to track salary increase budgets. Recent data from these surveys has landed in a consistent, narrow range: employers are budgeting salary increases of roughly 3.4 to 3.7 percent for the year, a slight pullback from the higher increases seen in recent years. This figure typically includes both merit increases tied to performance and general increases meant to keep pace with the broader labor market. Starting your budget from this range, rather than an arbitrary number, keeps you grounded in what similar businesses are actually doing.

Understand what's driving that number

The federal Employment Cost Index, published quarterly by the Bureau of Labor Statistics, tracks how the cost of wages and benefits changes over time across the economy. Recent data shows private industry wages and salaries rising a little over 3 percent year over year. This is useful context: it tells you the floor most businesses are working against just to keep employee pay from falling behind inflation in real terms. A raise budget that falls meaningfully below this pace risks quietly shrinking your employees' real income even while their paycheck grows.

Separate merit increases from market adjustments

Not every raise means the same thing, and your budget should reflect that. A merit increase rewards individual performance. A market or equity adjustment corrects pay that's fallen behind what the role is worth, regardless of performance. Blending these into one undifferentiated raise pool makes it hard to explain decisions later and makes it easy to underfund the adjustments that actually need attention, like a role that's become harder to hire for since you last set its pay.

Build the number into your budget before the year starts

Waiting until raise season to figure out what you can afford puts you in a reactive position, deciding case by case rather than working from a plan. Set your total raise budget as a percentage of your payroll during your annual budgeting process, using the current market range as your starting point and adjusting up or down based on your business's actual financial position. This turn raises it from a once-a-year scramble into a routine, predictable line item.

Leave room for the exceptions

Even with a solid overall budget, some raises won't fit neatly inside it. A key employee who's received a competing offer, or a role where the market has clearly moved, may need an adjustment outside your standard cycle. Build a small reserve into your budget specifically for these cases, so an unplanned but necessary raise doesn't force you to shortchange everyone else's increase that year.

Make sure you're raise ready

Budgeting for annual raises comes down to anchoring your number to real market data, distinguishing merit increases from market corrections, planning the number before the year begins, and keeping a small reserve for exceptions. This turn raises it into a predictable, defensible part of your annual planning instead of a source of last-minute stress.