Small employers facing pressure to retain staff increasingly favour spreading limited pay budgets evenly rather than differentiating increases by performance, while supplementing pay with bonuses, promotions and non‑cash rewards to keep top talent engaged.

The "peanut butter" approach

According to Payscale’s 2026 Pay Trend report, many firms are adopting what is popularly called the “peanut butter” approach to pay rises, where a set percentage uplift is applied across the workforce; industry reporting shows roughly 44% of companies plan to use this method in 2026. At the same time, a similar share continue to apply merit‑based increases, reflecting an uneasy balance between administrative simplicity and performance differentiation.

Modest pay growth continues

Average salary increases are expected to remain modest, with total pay rises hovering around 3.5% and merit increases near 3.2%, levels broadly unchanged from 2025 as employers respond to economic uncertainty and a cooling labour market. Smaller firms, however, have tended to grant larger percentage increases to compete for and retain staff.

Expanding rewards beyond base pay

That modest baseline helps explain why employers are expanding the mix of rewards beyond base pay. Companies report using incentive bonuses for goal achievement, spot and year‑end payments, sign‑on and retention bonuses, and tangible non‑cash rewards such as paid time off or event tickets to recognise contributions without permanently increasing headcount costs.

Hybrid models for high performers

Many organisations combine peanut butter increases with targeted payments to high performers: while an across‑the‑board uplift is administratively straightforward, managers often use bonuses, promotions or placement on a higher pay scale to ensure standout employees receive meaningful differentiation. Industry coverage notes that some firms are explicitly moving to that hybrid model to avoid alienating top talent.

Long-term incentive plans

Beyond cash, long‑term incentives and ownership models are increasingly part of the conversation for businesses able to offer them. Where feasible, employers can use stock options, immediate equity awards or Employee Stock Ownership Plans to align employee and company interests and provide reward that grows with the business. Such arrangements are particularly relevant for incorporated firms seeking retention tools that do not immediately burden payroll.

Risks of uniform pay rises

Critics warn that the peanut butter method risks demotivating high performers who expect pay to reflect individual contribution; opinion pieces argue that uniformly applied rises can undermine morale and hinder productivity if top talent feels insufficiently rewarded. Employers adopting blanket increases therefore often pair them with discretionary bonuses or clearer promotion pathways to preserve performance incentives.

The role of recognition

Simple recognition remains a low‑cost but powerful complement to monetary reward. As Mary Kay Ash, founder of Mary Kay Cosmetics, said: "There are two things people want more than love and money , recognition and praise." Managers who combine fair pay practices with timely praise, career development and selective financial incentives are better positioned to retain staff while controlling costs.

For more on managing your strategic pay analysis, click here to take a look at the sessions in this years Reward and Payroll Summit.