Annual Raises Are Dying: The Rise of Ad Hoc Pay

The conversation lasted 11 minutes. On a Tuesday in early December, a senior analyst at a logistics company in Columbus, Ohio, joined her annual review expecting what she had known for a decade: a rating, a calibration meeting held somewhere above her, and a raise effective in February, as it had been every year since she joined the company in 2019. Instead, her manager read a short script. The company was shifting to what it called a continuous pay model, he said; raises would no longer be tied to the review calendar. If her pay fell behind the market, she should come talk to him. The analyst, who asked not to be identified because she still works there, ended the call with her salary unchanged and a standing invitation to negotiate her own timing.

Two weeks earlier, a colleague two desks away had received an 11 percent market adjustment — no review, no waiting period — after he mentioned a competing offer. That asymmetry is the new shape of American pay.

The annual raise, a fixture of corporate life since the 1950s, is being replaced by spot adjustments, market corrections, and promotion-driven pay. Compensation surveys show merit budgets stuck near 4 percent while market rates and inflation move faster, and payroll data show a growing share of raises now arrive outside the annual cycle. The change cuts both ways. Pay can move the moment the market moves — but mostly for people who ask. Workers who wait for the calendar, the way the system taught them, are the ones losing ground. This article explains how companies now budget and award pay, how often pay actually changes, and when to make your case.

The ritual that defined a century of pay

For most of the postwar era, the annual raise was the contract between a company and its calendar. Pay reviews spread through American offices in the 1950s and 1960s, and the machinery became elaborate: managers rated employees on five-point scales, compensation teams fed the ratings into merit matrices, and a fixed pool — typically 3 to 4 percent of payroll — was divided among the deserving. Raises landed like clockwork, usually in the first quarter, and the ritual gave both sides something valuable. Employees knew a raise was coming. Employers got a quiet, orderly way to distribute a predictable cost.

The system assumed a stable world. Workers stayed at one company for decades, markets moved slowly, and inflation was low enough that a 3 percent raise in most years felt like progress. The merit increase was less a wage decision than a ceremony, and for a long time the ceremony worked.

That world is gone. Median tenure has fallen, hiring is continuous, and pay now responds to signals that arrive weekly: a competitor's job posting, a resignation, a new hire's offer letter. The annual review, meanwhile, has been stripped of its power. Companies still hold the meetings — they have become shorter and more numerous — but the meetings no longer decide pay.

What the budget surveys show

The budget numbers tell the story most clearly. Merit increase budgets — the pool a company sets aside for annual raises — have hovered near 4 percent since 2023, according to salary budget surveys by Willis Towers Watson (WTW) and Mercer, the two big compensation consultancies. WTW put the average merit budget at about 4 percent for 2023 and 2024 and roughly 3.7 percent for 2025; Mercer's 2025 projection came in around 3.6 percent. Inflation, by contrast, ran at 8 percent in 2022 and 4.1 percent in 2023, according to the Bureau of Labor Statistics. A 4 percent raise in 2022 was a pay cut in real terms: the raise bought less than the year before. The Bureau's Employment Cost Index, which measures what employers actually pay, rose about 4.3 percent in 2023 and just over 4 percent in 2024 — consistently ahead of the merit budgets that were supposed to set the pace.

The gap is the point. Merit budgets are set by internal logic — what the company can afford, what the board expects, what peers in the same industry plan to pay. Market rates are set by external events: a wave of hiring in a trade, a new regulation, a rival's expansion. When the two numbers diverge, someone has to reconcile them, and in the past few years the reconciliation has happened outside the annual cycle.

WTW and Mercer surveys show the result. Companies have set aside separate money for market adjustments, on top of merit, in most years since 2022, and roughly a third of employers made mid-year market adjustments in 2023 and 2024. A market adjustment is a raise with no review attached. It is triggered by data — the role's market rate moved, or the company's own hires created an internal imbalance — and it is awarded the moment the data say so.

Merit budgets versus inflation, 2021–2026. Sources: WTW and Mercer salary budget surveys; Bureau of Labor Statistics CPI-U.

Year	Merit budget	Inflation	Real change
2021	about 2.7%	4.7%	–2.0 points
2022	about 3.4%	8.0%	–4.6 points
2023	about 4.0%	4.1%	–0.1 points
2024	about 3.9%	2.9%	+1.0 points
2025	about 3.7%	2.5%	+1.2 points
2026	about 3.6%, projected	—	—

The quiet rise of off-cycle pay

The shift is visible in payroll data. Compensation platforms — the software that tracks pay across large workforces — report that a growing share of raises now land outside the annual cycle. PayScale surveys of compensation professionals have found that roughly half of employers make at least some pay changes off-cycle, and compensation consultants describe the annual review as one pay event among several, not the main one.

The off-cycle raise comes in a few recognizable forms. A market adjustment arrives when a role's going rate jumps and the company moves pay to match it. A retention adjustment follows an employee who produces a competing offer. A promotion increase lands when the job changes, whatever the month. Rarest is the spot increase, for someone whose value became obvious outside any calendar.

The market correction deserves special attention, because it is the purest example of the new logic. It usually starts with a resignation. When a valued employee gives notice, a manager suddenly discovers the market rate for the role, and the counteroffer that follows can run 10 to 15 percent above the person's salary — sometimes more. Compensation consultants say the money was available all year; it just was not triggered. What changed was information: the employee's departure made the market price visible.

The pattern shows up company by company. In one large retail chain that moved to continuous pay in 2024, more than half of all raises that year were awarded outside the review cycle, according to a compensation consultant who worked on the project; a decade earlier, the share would have been close to zero. The chain's payroll department now runs market reviews quarterly, and its managers are told to treat a raise request as a normal part of the job, like a vacation request.

The analyst in Columbus never produced that information. Neither do most workers. The system now rewards people who bring their market rate into the room, and it punishes, gently and permanently, those who wait for the meeting.

Why companies abandoned the calendar

Companies did not abandon the annual raise out of generosity. They abandoned it because the calendar no longer matched the business. The annual cycle made pay a fixed cost with a fixed date; it forced managers to justify raises with ratings everyone knew were partly fiction; and it created an expectation — the word companies now use with a slight wince — that pay rises automatically.

There is a deeper reason. The annual raise is a promise, and promises are expensive. A market adjustment is a decision. The distinction matters to finance teams: a merit pool is budgeted a year in advance and hard to unwind, while a market adjustment responds to a specific event and can be justified case by case. When compensation leaders describe the shift, they talk about pay following the business rather than the fiscal year.

Some of the change is borrowed from software companies, which began dismantling annual reviews a decade ago. Adobe eliminated its annual performance review in 2015, and a wave of employers followed with continuous check-ins. The stated goal was better feedback. The quieter effect was that pay conversations moved out of the review and into the ordinary flow of work — where they could be ignored more easily.

Payroll systems make the new model cheap to run. Modern compensation software can reprice a role against market data in days, and companies now republish salary ranges more often than once a year, partly because pay transparency laws in more than a dozen states require posted ranges to stay current. The machinery of annual pay — the calibration meetings, the forced distributions — is still there. It just settles less.

Who the new system rewards

The beneficiaries are easy to describe: people who know their market value, and people who can credibly leave. A recruiter in Austin who has negotiated more than 200 offers says the pattern is consistent. Candidates who ask about pay early, bring data, and treat compensation as a routine topic get adjusted more often, and faster, than those who wait for a review. He has watched new hires receive market corrections within months of starting, when the role's rate moved, while tenured colleagues who never ask sit on salaries set in 2022.

The story repeats in the data. Surveys by PayScale and Glassdoor have found that employees who negotiate receive larger increases than those who accept the first number, and the difference compounds over a career. A 10 percent market adjustment in 2024 is worth more in 2034 than a 10 percent merit raise would have been, because it lifts the base on which every later increase is calculated.

The new system also rewards visibility. A retention adjustment almost always follows evidence: a completed project, a signed client, a public offer. Workers who document their value in numbers, the way a company documents market rates, are the ones whose pay moves. The quiet employee who does excellent work and assumes the review will notice is, in the new model, invisible to the pay system.

"The review is no longer the pay event," said a compensation consultant who advises mid-size manufacturers and asked not to be identified. "Pay moves when the market moves, or when someone demonstrates that they can leave. The calendar is the last thing anyone looks at."

Who loses

The losers are harder to see, because they rarely complain. They are the reliable mid-career employees who never receive an offer, never ask, and quietly watch their salaries drift behind. Compensation consultants say the same pattern appears in every company: a handful of employees collect the adjustments, the promotions, and the retention raises, while the majority receive annual increases at or below the merit budget — in years when they receive one at all.

The arithmetic is unforgiving. A worker who gets a 3 percent raise every year while the market rises 5 percent falls behind by roughly 2 points annually; over five years, that is a meaningful gap in purchasing power. The salary inflation calculator shows how the math works: a nominal raise can be a real cut, depending on the year.

There is a psychological cost too. The annual review, whatever its flaws, told every employee on the same schedule that they were being seen. The new model individualizes pay: each raise is a private negotiation between one worker and one manager, with no shared calendar, no shared standard, and no way to know whether the person next to you was adjusted last month. Worker surveys reflect the unease. In a 2025 survey by the jobs site Indeed, roughly a third of employees said they did not know how raises were decided at their company, and those employees were measurably more likely to be looking for another job.

Consider a benefits administrator in Phoenix. She received 3 percent raises in 2023 and 2024 while the market rate for her role rose about 6 percent in each of those years, according to pay data for her title. By the end of 2024 she was roughly 6 percent behind the going rate — a gap no single review would have closed, because her company's reviews no longer compared salaries to the market. She found out from a friend who changed jobs.

The suspicion is not always wrong. Off-cycle pay is easier to withhold than an annual raise. A company that never promises a raise cannot be accused of breaking the promise.

When to ask now

The practical question — when to ask — has a new answer: when you have evidence, not when the calendar turns. The old advice to time your request to the review cycle is obsolete, because the review no longer controls the money. The new timing rules follow the money instead.

Ask after a measurable win. A completed project, a closed deal, a new certification, a stretch assignment covered for months — these are the events that trigger spot adjustments, and the moment they happen is the moment your manager can justify one.

Timing also follows the market. If job postings for your role show higher ranges — and pay transparency laws in more than a dozen states now make ranges public — you have a data point the company can check. Compensation teams reprice roles continuously; they are waiting for a reason.

And the most reliable trigger of all is a competing offer. Recruiters say the offer does not have to be accepted to move your pay. It has to be real.

A script for the off-cycle ask

The conversation is shorter than people expect. One compensation consultant suggests a version of this: "I've been here two years, and my salary hasn't moved with the market. I'd like my pay reviewed against current rates for this role. Can we set a time next week to talk about it?" No threat, no grievance, no complaint about the review. Just an information request, which is what a market adjustment is.

Bring numbers. The salary calculators can show what your pay is worth per hour, per month, and after inflation; a printout of posted ranges for your title does the rest. Managers approve adjustments when they can paste the evidence into a request to finance. Give them something to paste.

What to watch

The direction of travel is not in doubt. Compensation platforms keep getting better at continuous pricing; pay transparency laws keep spreading, which forces ranges to stay current; and a generation of managers has now worked its entire career without an annual raise of the old kind. Some employers are testing a hybrid: an annual conversation about performance, and continuous adjustment of pay.

What workers should do with this information is straightforward. Set a twice-yearly reminder to check your market value, the way you check your retirement account. Ask after wins, not after anniversaries. Keep the receipts — the completed projects, the posted ranges, the offer letters — because pay now moves on evidence, and the evidence is yours to supply. If you have not checked your market rate in the past year, the future salary tool can project where your current raises are taking you.

The deeper lesson is about attention. The annual raise was a system that paid people for showing up. The new system pays people for staying visible: knowing their number, asking at the right moment, treating salary as a living figure rather than a once-a-year event. The calendar still exists. It just no longer decides your pay.