Market Adjustment Raise

Market Adjustment Raise Explained: What HR Won’t Tell You [2025 Guide]

Is your salary keeping pace with the job market? A market adjustment raise might be the answer you’re seeking. According to recent data, a third of employers planned to incorporate market adjustments in their next compensation review, with an additional 28.2% considering it for their teams.

While the average general pay increase hovers around 3%, the reality is more complex. In 2024, US employers in consumer goods industries planned salary increases of approximately 3.8%, but actual increases were slightly lower at 3.6%. Understanding what a market adjustment raise means and how it differs from performance-based increases is crucial for anyone looking to ensure fair compensation.

In this comprehensive guide, we’ll explore everything about market adjustment raises—from their definition to how much you can expect. We’ll also reveal the behind-the-scenes factors HR professionals consider when determining these adjustments that they rarely share with employees. Whether you’re wondering how to ask for a market adjustment raise or simply want to understand if you’re due for one, this article has you covered.

What is a Market Adjustment Raise?

Unlike ordinary salary increases, a market adjustment raise addresses a specific workplace compensation challenge. Many employees wonder what exactly sets this type of pay increase apart from the standard annual bump.

Definition and core concept

A market adjustment raise is a salary increase specifically designed to align an employee’s compensation with current industry standards and market rates. The primary purpose isn’t to reward performance but rather to ensure your salary remains competitive with what other companies are paying for similar roles.

Think of it as a correction mechanism. When the market value of your position changes (often increasing) due to industry trends, talent shortages, or economic shifts, a market adjustment helps close the gap between what you’re currently earning and what the position is now worth.

The core concept centers around external factors rather than internal metrics. These adjustments serve three essential functions:

• Aligning salaries with current market rates for comparable positions
• Enhancing the organization’s competitiveness in talent acquisition
• Supporting employee retention by minimizing the risk of departures for better-paying opportunities elsewhere

For instance, a UX designer might receive a market adjustment raise after industry data reveals a high demand and talent shortage of UX professionals. This adjustment doesn’t necessarily reflect the designer’s performance but responds to external market conditions that have increased the position’s value.

Furthermore, these adjustments lack a standard timing pattern. Unlike annual performance reviews that follow a predictable schedule, market adjustments typically depend on industry trends, market changes, and competitor strategies. Nevertheless, some organizations incorporate them during annual compensation reviews to maintain competitive pay structures.

Why it’s different from regular raises

The distinction between market adjustment raises and performance-based increases is fundamental to understanding compensation strategies. These differences span multiple dimensions:

Aspect	Market Adjustment Raise	Performance/Merit Raise
Purpose	Align employee compensation with current market rates for similar roles.	Reward individual performance, achievements, and contributions.
Timing	Irregular; initiated when market data shows salary discrepancies.	Regular (often annual), aligned with performance review cycles.
Focus	External — based on market benchmarks, industry standards, and competitor pay.	Internal — based on employee KPIs, goals, and manager evaluations.
Budgeting	May require off-cycle budget allocations due to market volatility.	Usually pre-planned and allocated within the HR compensation budget.
Impact	Helps retain talent by ensuring competitiveness in the job market.	Boosts motivation and reinforces a high-performance culture.

Additionally, market adjustments respond to the current economic climate rather than individual contributions. As one source notes, “As opposed to performance-based raises, a market adjustment is specifically focused on the value of the employee’s labor in the current economic climate”.

The average general pay increase typically hovers around 3%. However, this percentage varies significantly across industries and positions. For 2024, U.S. companies planned annual salary increases of approximately 4%, with variations depending on sector, location, cost of living, and talent shortages.

Notably, relying solely on market averages can create compensation problems. One potential issue is salary compression – where newer employees and long-term workers end up earning similar rates. To avoid this pitfall, companies sometimes need to exceed base market rates for certain employees to maintain appropriate pay scales and aid retention.

Market adjustment raises don’t follow a one-size-fits-all approach. Their implementation varies widely based on:

• Industry-specific demands and shortages
• Geographic location and cost of living differences
• Organizational compensation strategies
• Competitive pressures within specific talent markets

Consequently, these adjustments serve as strategic tools for maintaining compensation equity within the broader labor market rather than simply rewarding individual accomplishments. Understanding this distinction helps employees recognize when they might be due for a market adjustment rather than waiting for performance recognition alone.

Why Companies Offer Market Adjustment Raises

“Pay raises often reward employee performance and contributions while helping a business compete for talent in the broader market.” — Paychex, Leading provider of integrated human capital management solutions

Companies don’t just offer market adjustment raises out of generosity. These strategic compensation decisions serve multiple business objectives beyond simply paying employees more. Let’s examine the core motivations behind why organizations implement market adjustments to their salary structures.

To stay competitive in the job market

Market adjustment raises primarily serve to align employee compensation with industry standards. In essence, these adjustments ensure that salaries remain competitive compared to what other organizations in the same industry offer for similar roles.

This competitive positioning is crucial for several reasons:

• It helps organizations attract skilled talent in tight labor markets
• It positions the company as a market-rate employer
• It demonstrates awareness of industry compensation trends

Moreover, market adjustment raises respond directly to external market factors rather than internal performance metrics. For 2024, U.S. companies planned annual salary increases of approximately 4%, with variations depending on industry and position. In the fast-paced consumer goods industry specifically, employers planned average salary increases of 3.8%, although actual increases were slightly lower at 3.6%.

Without these adjustments, companies risk falling behind market rates, making it increasingly difficult to attract qualified candidates when positions open. As the job market evolves and certain skills become more valuable, organizations must adapt their compensation strategies accordingly.

To address pay equity and fairness

Beyond external competitive pay, market adjustment raises play a vital role in promoting internal fairness and worker satisfaction. Through regular salary adjustments based on market data, organizations demonstrate their commitment to equity and transparency.

Fair compensation practices benefit companies in multiple ways:

• They boost employee morale and engagement
• They strengthen loyalty to the organization
• They establish a reputation for fairness in the workplace

Above all, market adjustment raises allow HR teams to address compensation gaps proactively before they lead to turnover, dissatisfaction, or potential compliance issues. This preemptive approach helps maintain positive workplace dynamics and prevents the development of systemic pay inequities.

Internal pay equity reviews often reveal the need for market adjustments, particularly when new hires command higher salaries than existing employees with similar qualifications. Although addressing these disparities requires financial investment, the alternative—employee dissatisfaction and turnover—typically costs substantially more.

To retain top talent

Perhaps the most compelling reason companies implement market adjustment raises is talent retention. These adjustments minimize the risk of valuable employees leaving for better-paying opportunities elsewhere.

In fact, employees who feel they’re being paid fairly according to market value are significantly less likely to seek external opportunities. This directly impacts an organization’s ability to maintain institutional knowledge and avoid costly replacement hiring.

Market adjustments subsequently demonstrate a company’s commitment to recognizing employee worth, fostering loyalty that translates into tangible business benefits. Motivated workers typically contribute at higher levels, driving stronger alignment with company goals and business outcomes.

The connection between market-competitive pay and retention is particularly evident in specialized fields or during talent shortages. For instance, technical positions in high demand often receive more frequent market adjustments to counter aggressive recruitment from competitors.

Market adjustment raises function as a preventive measure against unwanted turnover. By proactively ensuring compensation remains competitive, organizations reduce the likelihood that employees will be lured away by marginally higher offers. This preventive approach is typically more cost-effective than reactively matching counter-offers after an employee has already decided to leave.

In summary, market adjustment raises serve as strategic tools that help companies maintain competitive positioning, ensure internal fairness, and retain valuable talent. While they represent a financial investment, the alternative—losing key employees and struggling to attract new ones—typically costs substantially more in both direct expenses and lost productivity.

Market Adjustment Raise vs Merit Raise

When comparing compensation strategies, understanding the distinction between market adjustment raises and merit raises is essential for both employers and employees. These two raise types serve different purposes and follow distinct implementation patterns.

Basis of evaluation

The fundamental difference between these raise types lies in what they evaluate. Market adjustment raises focus on external factors rather than individual contributions. They primarily aim to close the gap between an employee’s current salary and the market value of their position.

In contrast, merit raises (also called performance raises) center entirely on individual performance metrics. As one HR professional puts it, “Merit increases reward individual achievements. Employees earn them by excelling in their roles and driving results”.

The evaluation criteria highlight this distinction:

• Market adjustments evaluate: Industry salary benchmarks, competitor pay scales, and labor market conditions
• Merit raises evaluate: Individual goals achievement, performance review scores, and personal contributions to company success

Indeed, while a market adjustment might apply to an entire job category regardless of individual performance, merit increases specifically target those who “consistently outperform targets”.

Timing and frequency

The timing patterns for these two raise types also differ substantially. Merit raises typically follow a predictable schedule, aligning with “a company’s performance review schedule or reaching specific goals/milestones”. Most organizations award merit increases annually or semi-annually in conjunction with formal performance evaluations.

Meanwhile, market adjustment raises follow a more variable timeline. Their implementation depends on:

• Unexpected market shifts in compensation trends
• Industry-specific talent shortages
• Changes in economic conditions affecting labor costs

Essentially, market adjustments respond reactively to external changes rather than following a predetermined calendar. For smaller organizations without resources to regularly benchmark salaries, implementing market adjustments might be less systematic than for larger companies with dedicated compensation teams.

Regarding budgeting, merit increases are typically “budgeted in advance”, making them more predictable for financial planning. Conversely, market adjustments might encounter budgetary constraints due to “unexpected market/industry shifts”, creating challenges for organizations with limited compensation flexibility.

Impact on employee motivation

The motivational effects of these raise types differ significantly. Merit raises directly connect performance to compensation, creating a clear incentive system. “Employees work harder when they know their performance directly impacts their earnings”. This direct correlation “can foster motivation by rewarding those who contribute the most to the company’s success”.

On the other hand, market adjustment raises primarily impact talent attraction and employee retention rather than day-to-day motivation. They help prevent employee turnover by ensuring compensation remains competitive with external opportunities.

From an employee perspective, receiving a market adjustment might feel less personally rewarding than earning a merit increase based on individual contributions. Nevertheless, market adjustments play a crucial role in maintaining overall compensation fairness, which indirectly supports workplace satisfaction.

For employers, relying exclusively on either raise type creates potential problems. Using only merit increases risks falling behind market rates for critical roles, while depending solely on market adjustments might leave top performers feeling undervalued.

In practice, many organizations implement a hybrid approach. A strategic combination of both raise types allows companies to remain competitive in the talent marketplace while still recognizing and rewarding exceptional individual contributions. As one compensation expert notes, “A simple and effective hedge would be to use two or all three of these methodologies in your annual salary review process”.

How Companies Decide When to Give a Market Adjustment Raise

“Industries such as manufacturing, logistics, and shipping are actively seeking to address their skills gaps. This could mean that the standard market pay rates for some positions in these fields could be likely to climb higher than average.” — Terryberry, Employee recognition and rewards company

Behind every market adjustment raise lies a complex decision-making process that organizations carefully navigate. The timing and amount of these adjustments aren’t arbitrary—they follow systematic approaches based on multiple factors.

Using salary benchmarking data

Good data drives market adjustment raises. Without solid information on the key influencers of pay rates, businesses cannot make impactful and sustainable salary changes. Successful organizations typically:

• Leverage market compensation data from reliable sources to ensure new hires receive market-competitive salaries while balancing internal equity
• Utilize salary surveys, industry reports, and benchmarking studies to gather accurate market data
• Consult with compensation experts for valuable insights into current pay trends

Simply reviewing the latest Bureau of Labor Statistics data for a role generally isn’t sufficient. Instead, companies often employ business intelligence services to conduct comprehensive salary surveys across their industry and the broader market.

The quality and timeliness of benchmarking data directly impact adjustment decisions. Organizations face challenges when aligning external salary data with internal needs—especially since job responsibilities can vary significantly between companies. For example, external salary data for a software engineer might exceed the specific responsibilities of engineers in your company.

Responding to market trends

Market adjustment raises don’t follow a fixed schedule. They typically occur in response to specific triggers:

• Market shifts: Changes in industry salary benchmarks
• Competitor moves: Adjustments based on pay rates at other organizations
• Economic fluctuations: Changes in cost of living and industry demand

Many organizations review market adjustment needs at least annually or when significant market changes occur. Regular reviews ensure that salaries remain competitive and aligned with industry standards.

For 2024, U.S. companies planned annual salary increases of 4%, yet market rate adjustments could exceed this percentage depending on position and industry—particularly in tech or finance. These variations highlight the importance of industry-specific monitoring.

Failing to adjust pay rates according to market trends may result in talent shortages, limiting growth and hindering an organization’s competitive position. Hence, proactive market monitoring has become increasingly crucial for maintaining workforce stability.

Internal pay equity reviews

Beyond external benchmarking, companies conduct internal equity reviews to ensure fair compensation across similar roles. Organizations need a structured compensation framework that allows them to easily assess whether employees in comparable positions receive equitable pay.

During these reviews, companies analyze:

• Job levels across the organization
• Compa-ratios (comparison of actual salary to midpoint)
• Potential salary compression issues

One critical consideration is salary compression—where newer employees and long-term workers earn similar rates despite experience differences. By benchmarking salaries against the market during compensation reviews, organizations can identify employees whose salaries have fallen below desired positioning and make appropriate adjustments.

Most compensation experts recommend implementing market adjustments before awarding other increases such as performance-based raises or inflation adjustments. This sequence ensures everyone reaches the company’s desired market positioning before additional differentiation occurs.

Budget constraints present significant challenges for market adjustment implementation. Rapid or unexpected market changes can make it difficult to effectively budget for these raises. Organizations must balance their compensation philosophy with financial realities—market leaders can be more competitive but face higher costs, while those who cannot afford higher wages might emphasize alternative compensation forms like benefits programs.

Throughout this process, transparency remains vital. During meetings about market adjustments, effective managers clearly outline what information factored into their decision-making and provide employees with relevant market data. This transparency helps employees understand the rationale behind adjustment decisions, even when constraints limit the possible adjustment amount.

Challenges in Implementing Market Adjustment Raises

Implementing market adjustment raises presents companies with several thorny challenges that can derail even the best-intentioned compensation strategies.

Salary compression issues

One of the most problematic outcomes when implementing market adjustment raises is wage compression. This occurs when newly-hired, less-experienced employees earn salaries close to what current, more tenured employees make. In tight labor markets, companies must offer higher starting salaries to attract talent, which can inadvertently shrink the pay gap between new and experienced workers.

In extreme cases, this leads to wage inversion—where newer employees actually earn more than veterans. Beyond the obvious fairness concerns, wage compression creates serious organizational problems:

• Decreased morale among experienced employees
• Increased turnover of valuable long-term staff
• Potential grounds for discrimination lawsuits

Budget limitations

Financial constraints often force difficult choices when implementing market adjustments. Companies frequently lack sufficient funds to bring all positions up to market rates simultaneously. In some documented cases, organizations had enough budget to close only a fraction of the market gap—21% in one fiscal year and just 10% in another.

Rapid or unexpected market changes make it particularly difficult to effectively budget for these raises. When specific roles suddenly become more valuable due to industry shifts, companies may be caught unprepared financially.

Data accuracy and sourcing

Perhaps the most fundamental challenge lies in obtaining and applying reliable market data. According to compensation experts, aligning external salary information with internal organizational needs presents significant difficulties. Job titles and responsibilities vary considerably across companies, making direct comparisons problematic.

Poor data quality costs businesses an average of INR 1088.51 million annually, affecting not just financial outcomes but decision-making processes, customer relationships, and operational efficiency. Common data challenges include:

• Inconsistent data formats leading to skewed reporting
• Duplicate entries artificially inflating metrics
• Manual processes prone to human error

Finding the right balance between data accuracy and richness requires aligning with project objectives. While accuracy is critical for high-stakes decisions like forecasting, richness provides valuable context for understanding broader trends.

How HR Communicates Market Adjustment Raises

The way HR communicates a market adjustment raise can dramatically impact employee perception and satisfaction. Even when delivering good news about increased compensation, how the message is delivered matters as much as the raise itself.

Best practices for transparency

Effective communication about market adjustment raises begins with transparency. HR departments should initially explain the rationale behind adjustments, sharing market data, industry trends, and other supporting factors that influenced the decision. In place of generic explanations, HR should:

• Explain specific reasons for the adjustment
• Discuss the raise in dollar amounts rather than percentages
• Provide supporting market data when possible
• Deliver the news in person and privately

Whenever feasible, HR should personally inform employees of any market rate adjustments affecting their salary. This face-to-face approach shows respect and allows for immediate clarification of questions.

Avoiding employee confusion

To prevent misunderstandings about market adjustment raises, HR must plan communication thoroughly beforehand. This advance planning gives employees time to process and ask questions. Primarily, companies should avoid communicating market adjustments via email unless there’s a general raise across the board.

During meetings, HR should clearly outline what information factored into decision-making and provide employees with gathered market data. Throughout this process, it’s crucial to give employees opportunities to respond with questions and address these frankly.

Thereafter, companies can benefit from establishing anonymous conversation feedback channels where workers can share thoughts and concerns about the market pay adjustment approach.

Setting expectations for future reviews

Finally, HR should use the market adjustment conversation to set expectations for future compensation reviews. This includes discussing how salary might change through further development and progression opportunities.

While explaining the current adjustment, HR should outline the company’s commitment to monitoring market rates and indicate when employees might expect future similar raises. As well as thanking employees for their contributions, HR professionals should follow up with relevant departments to confirm the raise application.

By implementing these communication strategies, companies can maximize the positive impact of market adjustment raises while minimizing confusion and disappointment.

Conclusion

Understanding the Full Picture of Market Adjustment Raises

Market adjustment raises represent a critical component of modern compensation strategies. Throughout this guide, we’ve explored how these adjustments differ fundamentally from performance-based increases. While merit raises reward individual contributions, market adjustments ensure your salary remains competitive with industry standards regardless of personal achievements.

Companies implement these adjustments for three essential reasons. First, they maintain competitive positioning in talent markets. Second, they address internal pay equity concerns that might otherwise lead to dissatisfaction. Third, they serve as powerful retention tools, preventing valuable employees from seeking better-paying opportunities elsewhere.

Behind every market adjustment decision lies a complex evaluation process. HR departments analyze salary benchmarking data, respond to evolving market trends, and conduct internal equity reviews before determining appropriate adjustment levels. This systematic approach helps organizations balance competitiveness with financial sustainability.

Nevertheless, significant challenges exist when implementing market adjustments. Salary compression issues can create frustration among tenured employees when new hires receive competitive starting salaries. Budget limitations often prevent companies from closing market gaps completely. Additionally, data accuracy problems sometimes undermine the effectiveness of these adjustments.

Effective communication remains perhaps the most crucial aspect of market adjustment raises. Companies that clearly explain the rationale behind adjustments, provide supporting market data, and set appropriate expectations generally see higher employee satisfaction – even when budget constraints limit the possible adjustment amount.

Understanding these factors empowers you to navigate compensation discussions more effectively. Rather than waiting passively for raises, you can proactively research market rates for your position and initiate informed conversations with management. This knowledge also helps distinguish between adjustments meant to maintain market competitiveness versus those recognizing your individual contributions.

Above all, remember that market adjustment raises reflect economic realities rather than personal value assessments. Companies implement them strategically to maintain workforce stability and competitiveness. Armed with this understanding, you can approach compensation discussions with greater confidence and clarity about what factors truly influence your earning potential.

FAQs

Q1. What is the average market adjustment raise for 2025?

While specific figures for 2025 are not available, recent data shows that U.S. companies planned annual salary increases of approximately 4% for 2024. However, actual market adjustment raises can vary significantly depending on industry, position, and market conditions.

Q2. How does a market adjustment raise differ from a merit raise?

A market adjustment raise aims to align an employee’s salary with current industry standards, regardless of individual performance. In contrast, a merit raise rewards employees for their personal achievements and contributions to the company.

Q3. Why do companies offer market adjustment raises?

Companies offer market adjustment raises to stay competitive in the job market, address pay equity issues, and retain valuable employees. These raises help ensure that salaries remain in line with industry standards and prevent talented staff from seeking better-paying opportunities elsewhere.

Q4. How do companies determine when to give a market adjustment raise?

Companies use salary benchmarking data, respond to market trends, and conduct internal pay equity reviews to decide when to implement market adjustment raises. They also consider factors such as industry-specific demands, talent shortages, and changes in economic conditions affecting labor costs.

Q5. What challenges do companies face when implementing market adjustment raises?

Key challenges include dealing with salary compression issues, working within budget limitations, and ensuring the accuracy of salary data used for benchmarking. Companies must balance the need to remain competitive with financial constraints and potential internal equity concerns.