Merit increases, promotions and market adjustments each fix a different problem, so each should get its own budget. When all three come out of one pool, promotions and pay corrections eat into the money meant to reward performance. A typical split for 2027 is about 3% for merit, plus smaller separate pools for promotions and market adjustments.
Three Raises, Three Different Jobs
A merit increase rewards how well someone did their job this year. A promotion increase pays for a bigger job. A market adjustment corrects pay that has fallen behind what the market pays for the same role.
These are three different decisions with different owners and timing. Merit follows the performance review. Promotions follow a change in role. Market adjustments follow benchmarking data. Funding all three from one number makes it impossible to tell which goal you actually paid for.
What Goes Wrong With a Single Raise Pool
Suppose a 500-person company sets a single 3.5% salary increase budget. During the cycle:
- A manager promotes two engineers and gives each a 10% raise.
- Benchmarking shows the customer success team is 6% below market.
- The rest of the team still needs merit increases.
The promotions and the market fix come out of the same 3.5%. By the time managers reach merit, there’s maybe 2.5% left. The strongest performers on the team get a raise that barely beats a solid performer’s, and they notice.
This is the problem Salary.com’s 2027 survey points to. With a median merit pool of 3.0%, the gap between a high performer at 5.5% and a solid performer at 3.0% is about $72 per biweekly paycheck on a $75,000 salary. Shrink that pool further with promotions and corrections, and the gap all but disappears.
Why Your Merit and Promotion Budget Should Be Separate
Amee often explains it with an investment portfolio. A bank doesn’t fund its long-term holdings, new bets and corrections from one undifferentiated account. Each has its own allocation, its own expected return and its own review. Salary budgets work the same way.
Separate pools give you three things a single pool can’t:
- Clear accountability. You can show leadership exactly how much went to performance, career growth and pay corrections.
- Protected merit money. Top performers get meaningful raises because promotions and corrections don’t drain the pool.
- Better retention spending. Market adjustments go to the roles and people most likely to leave, rather than being spread thin.
How to Set Each Budget
Merit budget
Start with market data. Most US companies plan a merit budget of about 3.0% to 3.2% for 2027 (Mercer, Salary.com). Adjust for your industry, your performance distribution and how much differentiation you want between ratings. A merit matrix turns the pool into guidelines managers can follow.
Promotion budget
Base it on how many promotions you expect and the average promotion increase you give. Mercer expects 8.4% of the US workforce to be promoted in 2027. If you promote 8% of a 500-person company with an average 10% increase on a $90,000 average salary, the promotion pool is about $360,000. That’s around 0.8% of a $45M payroll. Use your own promotion rate and average increase from the past two years.
Market adjustment budget
Size it from your benchmarking. List roles more than a set distance below their band midpoint, and calculate what it costs to bring them up. Salary.com’s 2027 survey shows companies budget an average of 0.8% for equity and market adjustments. Many keep part of this pool for adjustments during the year. Mercer found 64% of organizations plan off-cycle salary changes in 2027.
An Example Merit and Promotion Budget for 2027
For a company with a $45M annual payroll:
| Scenario | Budget | Full-year cost | What it buys |
|---|---|---|---|
| Hold | 3.2% | $1.44M | Matches the merit market. Little room to reward top performers. |
| Recommended | 3.5% plus 0.5% market adjustments | $1.80M | Market-level merit plus fixes for the roles most at risk. |
| Stretch | 4.0% plus 0.5% market adjustments | $2.025M | Real differentiation for top performers. |
These percentages are an illustration. Your own split depends on your promotion rate, how far behind the market you are, and your budget. The structure matters more than the exact numbers.
Common Questions From Finance
Finance teams often see three pools as a bigger budget. The total may well be higher than one 3.5% pool. Be upfront about that, and show what each part buys: retaining top performers, filling bigger roles from inside, and avoiding the cost of replacing people who leave over pay.
If the total has to stay fixed, splitting it still helps. You decide in advance how much goes to each goal, and managers can’t accidentally spend the merit money on promotions.
Running Separate Budgets Without More Spreadsheets
Three pools sound simple until you track them across 40 managers in a spreadsheet. In Stello, HR sets each budget, and managers see how much they have left in each pool as they plan. Iconic can answer a question like “How much promotion budget does the sales team have left?” in seconds. [Confirm with Stello: separate merit, promotion and market adjustment pools per manager]
Ad hoc increases during the year come out of the right pool too, so the market adjustment money you held back stays visible.
Frequently Asked Questions
What is a merit and promotion budget?
A merit and promotion budget is the money set aside for pay raises in a cycle. The merit budget funds raises for performance. The promotion budget funds raises for people moving into bigger roles. Many companies also set a third budget for market adjustments.
How much should a promotion budget be?
Multiply your expected promotion rate by your average promotion increase and average salary. For many companies this comes to about 0.5% to 1% of payroll. Mercer expects 8.4% of the US workforce to be promoted in 2027.
Should promotions come out of the merit budget?
It’s better to keep them separate. When promotions come out of the merit budget, there’s less left to reward performance, and top performers who weren’t promoted end up with smaller raises.
What is a market adjustment?
A market adjustment is a pay increase that brings someone’s salary in line with what the market pays for their role. It’s based on benchmarking data rather than performance or a change in job.
How much do companies budget for market adjustments in 2027?
Salary.com’s 2027 survey shows an average of 0.8% of payroll for equity and market adjustments, on top of a 3.2% average merit budget.
