Here’s What Employees Say Is a Fair Annual Pay Increase

Employees say a sizeable annual merit pay bump — at least above 5% — is only fair from their companies at the same time that their organizations are pumping the brakes on salary increases.

U.S. workers believe that, on average, an annual 8.2% pay increase is fair and reasonable, according to a recent labor market report from San Francisco-based finance company NerdWallet. The median, however, is lower at 5%, according to the company’s January survey of 2,087 U.S. adults.

Those figures also vary greatly by generation: Generation Z workers say a 10.5% annual pay increase is fair, Millennials say 11.2%, Generation X workers think 7% is fair, and Baby Boomers consider 5.6% to be fair.

Although it’s the first time NerdWallet has asked employees what they consider to be a fair annual pay raise, Elizabeth Renter, senior economist at NerdWallet in Durham, N.C., said it wouldn’t surprise her if that figure has increased in recent years because of the impact of high inflation. 

“Prices began rising dramatically in 2021 and into 2022 — you have to go back 40 years for a comparable period of inflation,” she explained. “And while some people’s income growth has kept pace or caught up with these price increases, that’s not true for everyone. Further, paying noticeably more for the things you buy every day will come with discomfort, even if you’ve received decent annual raises.”

Although inflation has stabilized in the past year — the latest consumer price index found inflation decreased 0.1% in March and rose 2.4% for the 12 months ending in March — sustained high costs of living have resulted in financial stress for significant proportions of employees.

It’s important to note that the concept of fairness in regard to pay — specifically annual increases — can be complicated, said Justin Ladner, senior labor economist at SHRM. Employees’ idea about what’s fair “incorporates lots of information that doesn’t really relate to whether or not their wage is ‘fair’ in the sense of being competitive in the labor market for their specific occupation,” he said. “For example, a young worker with a relatively low wage may view high annual pay increases as ‘fair’ because their current wage is insufficient to cover living expenses.” Plus, he added, the median figure of 5% might be closer to realistic expectations.

Renter agreed. “How respondents define fair can really vary. It’s important to remember that respondents use their own beliefs, history, and interpretation to determine what they deem is fair,” she said. “A fair annual raise, as interpreted by me, an economist in the middle of her career, is likely to be quite different from a fair annual raise as interpreted by a recent hire into the labor market or a single mother who is struggling to make ends meet after a period of high inflation.” 

Still, Ladner said, the figures are important for employers to pay attention to — especially as employers slow down the annual pay hikes they are giving out to employees.

Is It a Problem for Employers?

NerdWallet’s figures are all higher than actual wage increases. Wages and salaries increased 3.7% year-over-year, according to the latest statistics from the U.S. Bureau of Labor Statistics. Meanwhile, various other estimates show that employers are eyeing smaller raises this year, as well. A report by Seattle-based compensation firm Payscale in March found that on average, organizations are reducing pay increases by 0.3% — planning for 3.5% pay raises in 2025, compared to the 3.8% given in 2024.

That discrepancy between what employees want from their pay and what employers are offering could present a problem, experts said. But employees also have to be realistic about the shifting labor market. 

“If they truly believe a 10% raise every year is realistic, they may doom themselves to disappointment,” Renter said. “If workers had the upper hand in this labor market, as they did a few years ago, employers might want to be aware that their greatest resource is out there looking for higher wages elsewhere, but in the current, more balanced market, that’s far less of a problem.”

The Big Finding: Employees Think Pay Is Unfair

The biggest problem that the data reflects, Ladner said, is that employees aren’t satisfied with their pay.

NerdWallet’s survey results “provide strong, albeit somewhat indirect, evidence that many workers feel that they are paid at a level that is unfair, given factors like inflation and the overall cost of living,” Ladner said.

Indeed, other reports indicate that employee pay satisfaction is waning. A recent BambooHR report found that 33% of employees feel negatively about their current financial remuneration — a significant jump from 23% in 2023 — and 50% struggle to make ends meet due to rising costs.   

Payscale’s report indicated that employees continue to have higher expectations for their compensation, thanks in part to more pay transparency and pay fairness initiatives, as well as the high cost of living. Overall, Payscale’s data found that employees are feeling less positive about their compensation at the same time organizations have pulled back on compensation spend — leading to contention between employers and employees.

Although experts said it makes sense that employers would pull back on high pay increases given the changing economic picture and a shifting labor market, HR and benefits leaders cannot underestimate how important competitive pay is for attraction and retention.

“If I am an employer looking to attract talent, these survey results suggest that the ability to offer competitive wages is of paramount importance,” Ladner said. “This is not at all surprising, but worth noting given the amount of attention that has been paid to making total compensation packages more competitive via ancillary benefits. I don’t mean to say that wages are all that matters, but for many workers, high wages remain the most persuasive tool for attracting and retaining talent.”