Your 2027 Plan Budgets for Nobody Good Leaving

Most 2027 compensation plans being approved this quarter contain a line item of roughly half a percent that has to cover every promotion, every market correction, and every retention save for the entire year. That is the plan.

‍

The real problem

The headline number looks stable. The Conference Board's September survey puts 2027 base-pay increase budgets at a 3.5% median, unchanged from 2026, with most employers landing in a 3% to 4% band. Finance sees continuity. Nobody argues.

The number underneath it is the one that decides outcomes. The median "other" increase budget, the flexibility pool covering promotions, pay equity, market adjustments, retention, and critical skills, sits at 0.5%. Every competitive situation you will face next year gets paid out of that.

Run it against a 200-person company with a $30 million payroll. The flexibility pool is $150,000. Two retention saves on senior people and a single out-of-band hire will consume it before the end of Q2.

‍

Why this line gets set low

It is not carelessness. The 0.5% pool is the only compensation money in the plan that is not already committed to someone specific.

Merit is defensible because it is spread across everyone and tied to a review cycle. The flexibility pool is discretionary by design, which makes it the easiest thing in the model to trim when the CFO needs another twenty basis points. It has no constituency in the room. Nobody's team gets smaller when it shrinks.

So it gets set at whatever is left over rather than at what the year will actually require. Then in March, when a divisional CFO gets a call and comes back with a number, the conversation is not about whether she is worth it. It is about where the money comes from.

‍

What it costs when the pool runs dry

The failure is not that you lose the person. It is what you do instead.

You go to the board for an exception, which takes six weeks and signals that the plan was wrong. Or you let the person leave and open a search, which means a replacement at current market rather than at her current salary, plus the gap, plus the ramp. Or you hold the line, keep her, and quietly reset everyone else's expectations about what happens when someone gets an offer.

The third one is the most expensive and the least visible. Two of your other senior people watched that negotiation happen.

Meanwhile the market is moving in the opposite direction from your budget. WTW's survey of 1,650 U.S. organizations found 36% hiring at higher salary ranges, 34% increasing retention bonuses and spot awards, and 32% raising starting salary ranges. Only 22% are adding headcount.

Read that together. Companies are paying more for fewer people. A flat merit budget and a thin flexibility pool is a bet against a market that is already repricing.

‍

Four moves before the plan locks

1. Name the seats, not the number. List the five to eight people whose departure would visibly slow the business next year. Not the whole leadership team, the ones where the replacement search runs three months and the interim is somebody's second job. That list, not a percentage, is what the pool needs to cover.

2. Price the replacement, not the raise. For each name, get a real market number for what it would cost to hire that role today. In most cases it is meaningfully above what the person currently earns, because internal increases have lagged external offers for three straight years. The gap between those two numbers is your actual retention exposure.

3. Split retention money from merit money. If the flexibility pool sits inside the merit line, it gets spent on merit. Give it a separate name, a separate owner, and a separate approval path. A pool that can be raided is not a pool.

4. Pre-authorize the exception. You will not predict which offer arrives. You can decide now who can approve an out-of-band adjustment, up to what limit, without a board cycle. The six weeks it takes to get an answer is usually what loses the person, not the money.

‍

The close

Nobody plans to lose their best operator. Plenty of companies budget as though it cannot happen.

A 3.5% merit budget says you expect an ordinary year. A 0.5% flexibility pool says you expect an ordinary year with no surprises in it. Those are different claims, and only one of them has ever been true.

Look at that line before it gets approved. It is the cheapest thing in the plan to fix in October and the most expensive thing to fix in March.

‍

Worth a read if you are locking 2027 comp, or trying to work out why last year's retention budget ran out in the spring. Contact us if you want to pressure test what your key seats would actually cost to replace.

‍