Annual salary increases often attract attention because they sit at the intersection of business performance and workforce expectations. While these compensation decisions receive significant scrutiny from both employers and employees, Greg Roche, founder of Retention and Rewards Partners, believes leaders may be focusing on the wrong question.
Retention and Rewards Partners helps organizations develop compensation strategies, salary structures, rewards programs, and retention frameworks that support long-term workforce stability. According to Roche, the more important issue is not the specific percentage increase an organization provides in a given year, but whether compensation decisions are being evaluated through a long-term strategic lens.
"The difference between a 2% and a 3% increase may seem small to an employee, but across an entire workforce it represents significant payroll costs," Roche says. "The challenge is that many organizations focus on the immediate savings without fully considering the long-term consequences."
That concern arrives at a time when employers continue to navigate changing workforce expectations. According to a report, average salary increase budgets in the United States are projected at approximately 3.5% in 2026, reflecting a moderation from recent years while remaining above many pre-pandemic norms. Organizations, therefore, face increasing pressure to balance financial discipline with workforce competitiveness.
Roche explains that compensation markets tend to move in cycles. During periods when employers have greater leverage, organizations may feel less pressure to make aggressive salary investments. Yet he argues that those decisions should not be viewed in isolation.
"Companies often make compensation decisions based on today's budget pressures without considering the long-term cost of falling behind the market," Roche explains.
From his perspective, the issue is not whether leaders choose a lower increase in a particular year. The more important consideration is whether they understand the risks associated with repeatedly making the same decision. Over time, he notes that small gaps can accumulate and create larger market positioning challenges that become more expensive to address.
"The money companies save today often becomes a much larger compensation expense in the future when they need to catch up," Roche says.
Compensation, however, represents only one part of a broader retention strategy. Roche notes that organizations do not necessarily need to offer the highest salaries in their industry to maintain strong employee retention. What matters is whether leaders take an intentional and holistic approach to rewards.
Research found that compensation plays an important role in employee commitment and performance, with employees who feel appropriately rewarded more likely to contribute positively to organizational outcomes. For Roche, that reinforces the idea that compensation should be evaluated as part of a broader retention strategy that considers both financial rewards and the overall employee experience.
According to Roche, bonuses, incentive plans, retirement programs, healthcare benefits, paid time off, workplace flexibility, and remote work policies all contribute to what employees perceive as value. "Salary is only one piece of the employee value proposition," Roche says. "The strongest retention strategies take a holistic view of rewards."
He points to organizations that consciously invest in lifestyle benefits as part of their overall rewards philosophy. "Some may choose additional flexibility, expanded leave policies, or unique scheduling arrangements that employees value highly," he notes. "When those decisions are intentional and clearly communicated, employees are often evaluating a much broader experience than pay alone."
Yet Roche believes another factor receives even less attention than compensation. "People may leave because of pay, but they often stay because of trust, relationships, and connection," he says.
Workplace culture, relationships, and a sense of belonging can significantly influence retention outcomes. According to Roche, organizations frequently underestimate the value of helping employees build meaningful connections with colleagues and leaders.
As remote and hybrid work models continue to evolve, he suggests leaders should think carefully about how employees develop professional relationships and opportunities for growth. While many employees value flexibility and comfort, Roche believes organizations should also consider how workplace experiences contribute to learning, development, and engagement over time.
Ultimately, he encourages leaders to view compensation decisions as part of a broader business strategy rather than a standalone financial calculation.
"The real question is not whether a company can afford a particular raise percentage," Roche says. "The question is whether leadership fully understands the long-term risks and trade-offs associated with that decision."
For organizations evaluating compensation budgets in the years ahead, that perspective may prove increasingly important. Salary decisions can affect far more than payroll costs. According to Roche, they can influence trust, retention, competitiveness, and the long-term ability to attract and keep talented people in an evolving labor market.
