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What to Pay When Your Budget Says 3.4 Percent

23Oct
Scott DriggsInsights

By Scott Driggs, CEO, Driggs Search International

Every fall I watch the same thing happen. A company finishes its compensation plan for next year, and the merit budget lands around 3.5 percent. Two months later, the same company prices an offer to an outside executive with the same thinking and loses the finalist.

The budget was not wrong. It was built for a different job.

Earlier this month I wrote about searches that fail inside the company, and compensation that argues with the market was one of the causes. This is the practical side of that problem.

The numbers everyone is planning around

The 2027 salary surveys are in, and they agree. WTW projects U.S. salary increase budgets of 3.4 percent for 2027, after 3.5 percent actual in 2026. Mercer puts merit increases at 3.2 percent and total increases at 3.5 percent. WorldatWork projects 3.6 percent, with the same figure for officers and executives. Payscale lands at 3.5 percent.

Flat, steady, and predictable. That is the right way to manage the people you already employ. It is the wrong way to price the person you are trying to hire.

The number your finalist is looking at

ADP tracks pay for millions of U.S. workers. In its September 2026 report, people who stayed in their jobs saw gross pay rise 4.4 percent over the prior year. People who changed jobs saw 7.3 percent.

That gap covers the whole workforce. In my experience, the gap at the executive level is wider. The leader you want is performing well, is paid well, and has no reason to leave.

Your merit budget assumes the person stays. A search assumes the person leaves. Those are two different markets.

The median is the wrong target

At the Association of Executive Search and Leadership Consultants (AESC) conference in Dallas this month, I sat in on a session with a senior compensation consultant from Pearl Meyer, one of the leading executive compensation consulting firms. He described a pattern I see in almost every search.

A company asks its compensation consultant for market data on a new CFO. The consultant delivers a range. HR focuses on the 50th percentile, because that is the benchmark the company uses internally. Then the recruiter reports that candidates expect more, and the two numbers look like they disagree.

His point was that they rarely do. Internal benchmarks are built for promotions. For an external hire, the market sits between the 50th and 75th percentile, and a highly qualified candidate often requires the 75th.

He added a second point every owner should hear. Most compensation surveys are at least six months old by the time anyone reads them. Your recruiter is talking to candidates this week.

Price what the candidate walks away from

Base salary is the easy part of the conversation. The hard part is what the candidate leaves on the table.

October makes this sharper. An executive who resigns this quarter often forfeits most or all of this year’s bonus. If the current employer offers equity or a long-term incentive plan, unvested awards disappear too.

Picture a candidate with a 40 percent target bonus and two years of unvested equity. That person is not comparing your base salary to theirs. They are comparing your entire offer to everything they give up on the day they resign.

Large public companies have formalized this. Glass Lewis reports that 53 percent of S&P 500 sign-on awards in 2025 cited make-whole reasons, up from 39 percent the year before. The average sign-on award reached $3.5 million. Your numbers will be smaller. The math is the same.

Private and PE-backed companies have more tools than they think

Private company owners often tell me they cannot compete because they have no stock to offer. That is less true than it used to be.

He described private companies building cash-based long-term incentive plans that work like a multi-year bonus. The award builds over three or more years and ties to company performance. It gives a candidate a reason to join and a reason to stay, without changing ownership.

Private equity-backed companies face a different problem. Hold periods have stretched, and equity that looked compelling at the start of a hold looks less certain years later. In one example he shared, a portfolio company had no equity left to offer an incoming CFO. The solution was a transaction bonus large enough to attract the hire and keep that person through the next sale.

Whatever you offer, explain it clearly. Candidates discount what they do not understand. Show the plan, the timeline, a conservative value range, and the history. If your bonus plan has paid at or above target in most years, say so. That track record is worth money to a candidate, and most companies never mention it.

What to do before your next offer goes out

  1. Keep two budgets. Use the merit budget for your current team. Build a separate hiring budget for outside leaders.
  2. Price the role against the 50th to 75th percentile, not the median.
  3. Ask for the full walk-away number in the first conversation: base, target and expected bonus, the bonus payment date, unvested equity, and vesting dates.
  4. Plan for the bonus calendar. For a hire between now and the end of the first quarter, set aside sign-on cash or a guaranteed first-year bonus.
  5. Close gaps with one-time or long-term pay before you raise base salary. A sign-on bonus or a multi-year incentive fixes the offer without resetting pay for the whole team.
  6. Check the team the new leader will join. WTW found 36 percent of U.S. companies are hiring at higher salary ranges. A new hire paid well above peers creates problems later, so decide now how you will handle them.
  7. Set your ceiling before you make the offer, and move fast once you do. The finalist with other options keeps taking calls while you deliberate.

The real cost

The cost of losing a finalist over a 5 percent gap is rarely 5 percent. It is a restarted search, three or four more months with the seat empty, and a team that keeps waiting.

At DSI, we gather each finalist’s exact compensation before we present them: base, bonus, equity, and what they need to move. Clients see the real number early, while there is still time to plan for it.

If you are planning a leadership hire for 2027 and want a read on what the market will require, I am glad to talk it through.

Scott Driggs, CEO, Driggs Search International

Office (801) 253-1818  |  scott@driggssearch.com  |  www.driggssearch.com

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