The numbers come first.
Around 36% of U.S. companies handed out identical, across-the-board pay increases in 2026, according to a recent Payscale report. The practice — nicknamed 'peanut butter raises' because the bump is spread evenly regardless of individual performance — has gained traction as businesses navigate economic uncertainty, tighter cost controls, and the threat of a looming recession.
The consequences are already visible on the balance sheet of human capital. Some 25% of companies admitted they were losing talent in 2026 due to insufficient wage increases, the same Payscale data shows. Meanwhile, roughly a third of businesses planned to lower their pay-increase budgets this year compared to 2025, according to a separate report from Willis Towers Watson, citing recession fears, dwindling financial performance, and a desire for tighter cost control.
Flat pay, eroded incentives
The mechanics are straightforward. Many U.S. companies have held average salary-increase budgets near 3.5% for several years running. When that pool is divided equally among all staff, the high performer and the underperformer collect the same check. Ruth Thomas, chief compensation strategist at Payscale, told Fortune the model is 'often framed as the fairest approach because everyone receives the same increase.' But she warned that employees do not judge fairness that way.
'High performers want to know their extra effort mattered,' Thomas said. 'When pay increases fail to reflect differences in impact, organizations risk sending the message that performance doesn't make a difference, and that's where motivation starts to erode.'
Peanut butter raises are most common in sectors with large workforces, hourly staffers, and step-pay structures — government and education chief among them, the Payscale report notes.
A course correction is priced in — barely
Employers appear to recognize the damage. Looking ahead to 2027, merit increases are projected to account for 3% of the 3.5% total payroll budget, representing the largest single chunk of planned compensation spending. Around 32% of companies still plan to distribute flat raises next year, but the directional shift toward performance-linked pay is measurable.
Thomas added that while economic headwinds have swelled the applicant pool, the talent problem has not gone away: 'Attracting and retaining people with the right skills remains challenging. Competitive, well-informed pay is still one of the strongest signals that an employer values the contribution those employees make.'
CEO Times take
The free-enterprise model runs on a simple compact: produce more, earn more. 'Peanut butter raises' invert that compact, rewarding mediocrity and taxing excellence through a bureaucratic averaging mechanism that would feel at home in the public sector. When a quarter of employers are already watching their best people walk out the door, the market has already voted.
The lesson is not complicated. Capital — including human capital — flows toward the clearest reward signal. Companies that restore merit-based pay will attract the performers who move the needle; those that persist with flat structures will find themselves staffed, eventually, by the workers who could not get hired elsewhere. The data is in. The correction is overdue.
