Nearly half of U.S. employers are rethinking how they hand out raises — spreading salary increases evenly like peanut butter across the whole workforce rather than tying them to performance. At the same time, a subdued labor market has employees staying put in jobs they might otherwise leave. These two forces are colliding in ways that carry significant long-term risk for organizations.
Peanut butter pay increases and job hugging
A “peanut butter” pay increase is an across-the-board salary raise spread evenly across all employees in an organization, regardless of individual performance, role criticality, or market competitiveness. These increases apply the same percentage bump to everyone. According to Payscale’s 2026 Compensation Best Practices Report, this approach is gaining traction as organizations seek to reduce the administrative complexity of performance-based compensation, minimize perceptions of bias, and navigate economic uncertainty — particularly for large frontline or lower-wage worker populations.
Job hugging describes the behavior of employees who stay in their current positions not out of genuine engagement or satisfaction, but because the external labor market offers few attractive alternatives. In a sluggish hiring environment, employees “hug” their jobs — staying put, but not necessarily performing at their best, investing in their future at the company, or feeling motivated to go beyond the minimum. As Payscale’s reporting from HR Transform 2026 notes, job hugging is a defining characteristic of the 2025 labor market — and it is masking significant underlying workforce risk.
Together, these two trends are creating a workplace dynamic that deserves more attention than it is getting. Payscale’s 2026 Pay Increase Preview Report shows that pay increases are holding steady at a median of 3.5% — unchanged from 2025. Yet within that flat headline number, the distribution of how those dollars are being allocated is shifting in a meaningful way.
The case for peanut butter pay increases: Simplicity, fairness, and administrative relief
The appeal of peanut butter pay increases is not hard to understand. For HR teams already stretched thin, eliminating the annual performance calibration marathon — the ratings debates, the manager coaching, the bias reviews — sounds like a relief. And for employees in lower-wage or frontline roles, the perception of fair, uniform treatment can feel more equitable than a merit system that often disadvantages those least able to advocate for themselves.
Performance-based pay has long faced valid criticism. Ratings systems are notoriously subjective, prone to recency bias, halo effects, and managerial favoritism. In a distributed workforce, where many managers have limited visibility into day-to-day contributions, tying compensation tightly to performance scores can feel arbitrary and demotivating — particularly for employees who suspect the deck is stacked against them.
There is also a cost-of-living argument. As Joey Price, CEO of Jumpstart HR, explained at HR Transform 2026, peanut butter pay increases function as a kind of economic floor: “Your plane tickets are higher, your gas prices are higher, and your Oreo cookies are getting smaller, but the price is staying the same. It seems like an effort by employers to navigate the reality of a pretty tough economy.”
For organizations with large, homogeneous workforces — retail, manufacturing, hospitality — where roles are similar and performance differentiation is genuinely difficult to measure, the across-the-board approach can also feel more defensible and transparent. It removes the uncomfortable conversation about why one employee got 2% while their neighbor got 5%.
So, do peanut butter pay increases make performance-based pay obsolete? Certainly not. Payscale’s data shows that 48% of organizations still plan to differentiate pay increases based on performance in 2026. Performance-based pay remains the majority approach for good reason.
The risks: When equal isn’t equitable
The case against peanut butter increases is just as compelling — and arguably more urgent in the current climate. We are living through a period of record corporate profitability alongside growing tension between employers and their workforces. Against that backdrop, an undifferentiated raise signals something troubling: that performance doesn’t matter, that going above and beyond is unrewarded, and that the organization cannot — or will not — distinguish between its contributors.
Jessica Winder, Chief People Officer at Winder Law, put it plainly at HR Transform 2026: “It demotivates people. It makes people feel like, well, this person isn’t doing as much as me, but we’re getting the same increase. Some might think it fair in theory, but I’ve never seen it work out in practice.”
Payscale’s own research echoes this concern. Ruth Thomas, Payscale’s Chief Compensation Strategist, noted: “The peanut butter approach spreads pay increases evenly but also spreads accountability thin.” When everyone receives the same raise, the implicit message is that individual output and organizational contribution are interchangeable — a message that top performers hear loudly and clearly.
Payscale research shows that while 60% of employers feel confident their pay increases are competitive for retaining talent, that confidence may be masking the risk of top-performer flight once the labor market shifts. Confidence without differentiation is a fragile strategy.
There is also the compounding math problem. An across-the-board 3.5% raise applies equally to a $40,000 entry-level employee and a $200,000 senior engineer. In absolute dollar terms, the latter receives a much larger reward — but the percentage is identical. Over time, this can create internal pay equity distortions that are costly and complex to unwind, while doing nothing to close the gap between what the market pays for critical roles and what the organization is actually offering.
Finally, there is the question of what a peanut butter strategy signals about organizational values. In an era when pay transparency is expanding rapidly and employees increasingly compare notes on compensation, a flat raise policy may read not as fairness, but as a lack of investment in people.
Peanut butter pay creates flight risk for critical talent
Here is where the two trends intersect — and where the real danger lies. Right now, in a slow labor market, employees are staying put. Regrettable turnover is down. The attrition numbers look manageable. It is easy for employers to conclude their compensation strategy is working.
But that apparent stability is a mirage. Job hugging means employees are staying in roles they may not be thriving in, waiting for the market to improve before they move. Underneath the surface of low turnover is a workforce that may be disengaged, underpaid relative to their market value, and quietly planning their next move.
Joey Price framed the danger with striking clarity at HR Transform 2026: “Peanut butter pay increases are a dangerous strategy to lean into because while employees are job hugging now…when that pendulum swings, people are going to go looking for the jelly somewhere else.”
The “jelly” in this analogy is what the market can offer that the current employer cannot: competitive pay, clear performance rewards, and a sense that exceptional contribution will be recognized. When a better labor market arrives — and it will — the employees who have been quietly accumulating grievances about flat, undifferentiated raises will be first out the door.
And the employees most likely to leave are the ones organizations can least afford to lose. High performers are, by definition, the most marketable. They have options. When the job market opens up, they will exercise them. The workforce left behind may disproportionately consist of those with fewer external opportunities — not necessarily the talent profile that drives competitive advantage.
Low voluntary turnover feels like workforce stability, but it can mask growing disengagement. Organizations that mistake a tight labor market for employee loyalty are setting themselves up for a wave of departures when conditions change — precisely at the moment when attracting replacement talent will be most competitive and expensive.
Payscale advises organizations currently using the peanut butter approach to ensure that performance is being recognized in other ways — through bonuses, promotions, long-term incentives, or movement through the pay band tied to skills attainment. The base-pay increase need not be the only lever. But if it is the only lever an organization is pulling, the risks accumulate quietly until they become very loud very quickly.
Competitive pay backed by real data
The right answer for most organizations is neither a blanket peanut butter policy nor a rigid performance rating system. It is a nuanced compensation strategy that uses real market data to ensure every role is paid competitively for its location and function — and that differentiates where differentiation matters.
That means starting with the market. Before an organization can confidently give raises, it needs to know whether its base pay is already competitive. An across-the-board 3.5% increase applied to roles that are already 10% below market does not solve the underlying problem.
For organizations that find peanut butter increases administratively necessary — whether due to limited HR bandwidth or genuine pay equity goals — Payscale recommends offsetting the lack of merit differentiation in base pay with other performance mechanisms: variable pay tied to organizational results, clear and transparent promotion criteria, and skills-based recognition that rewards capability development.
To make the most informed pay increase decisions, your salary budget must be backed by real data. We invite you to participate in Payscale’s 2026–2027 Salary Budget Survey. Participants receive a free copy of the full results, which offers various types of salary increase data broken out by company size, industry, and location. Your responses are confidential.
