October and November are when compensation and benefits (C&B) teams across Europe lock in next year’s merit budget. When it comes to salary increase budgets 2027, the headline is simple: budgets are flat, between 2% and 3% in most of Western Europe, and they are being spent very differently. The across-the-board raise is disappearing, and the money is moving towards high performers, critical roles and pay equity corrections.

This guide is written for HR directors, Total Rewards leads and compensation analysts preparing their 2027 salary review. We bring together the latest published projections country by country and use TalentUp salary data to turn those percentages into euros per employee, which is the number you need when defending a budget to your CFO. We then set out how to build the budget, how to allocate it with a merit matrix, how benefits can stretch a tight envelope, and how the EU Pay Transparency Directive changes the rules of the game.

The big picture: stability, not acceleration

Every major source published this summer points in the same direction. WorldatWork’s 2026–2027 Salary Budget Survey, based on 1,799 organisations, found that in 13 of the 24 countries it covers, 2027 projections are slightly below 2026 actuals, while only 4 countries project an increase (WorldatWork, 2026). The European Central Bank’s wage tracker, which follows collective agreements already signed in the euro area, shows negotiated wage growth of 2.7% for the first quarter of 2027 (European Central Bank [ECB], 2026).

For HR, this is a very different environment from the 2022–2024 cycles, when inflation forced large general increases and budget conversations were driven by the cost of living. In 2027 the pressure comes from the other side: finance teams want cost control, employees still remember the loss of purchasing power, and new transparency rules make every pay decision easier to scrutinise. Budgets are not growing, so the quality of allocation becomes the main lever C&B teams control.

Salary increase budgets 2027 by country

The figures below come from different types of sources: company budget surveys, collective agreements, automatic indexation and macroeconomic forecasts. They are not strictly comparable, but together they give a reliable picture of where the market is heading.

Three patterns behind the numbers

What a 1% budget point really costs: TalentUp data

A percentage is easy to agree on and hard to plan with. The same 3% means very different amounts in Munich and in Lisbon. The table below uses TalentUp’s median base salaries (EUR, all seniority levels) for three roles that almost every company employs, and shows what each point of merit budget costs per employee.

Three practical conclusions follow for multi-country employers:

How to build your 2027 salary increase budget

A robust budget is not one number. It is a set of separate pools, each with its own purpose and owner. Separating them makes it easier to defend the total to finance and to explain decisions to managers.

1. Mandatory increases

Start with what you have to pay regardless of performance: Belgian automatic indexation, increases under collective agreements such as Spanish sector convenios, Dutch CAOs or German Tarifverträge, and statutory minimum wage changes. In Belgium, a 3.76% indexation on 1 January 2027 means the merit budget comes on top of an increase that is already larger than the full budget in most neighbouring countries (AltusConnect, 2026). Budget these costs explicitly so they do not quietly consume the merit pot.

2. Merit pool

The merit increase budget is the discretionary pool that rewards individual performance and progression within the salary band. Set it in line with the market data for each country, then translate it into a monetary amount per location using the salaries of your actual workforce rather than a single group percentage.

3. Market adjustment and pay equity pool

Keep a separate reserve for employees who are clearly below market for their role and for correcting unjustified gender pay gaps. Mixing these corrections into the merit pool forces managers to choose between rewarding performance and fixing structural problems, and usually neither is done well. With pay transparency reporting approaching, this pool is no longer optional for most employers.

4. Promotion pool

Promotions are a change of role, not a merit increase. Funding them separately protects the merit budget and makes the true cost of career progression visible. It also stops a few large promotional increases from distorting the merit statistics you will later report on.

Our guide to budget planning with real-time salary data explains how to feed market data into each of these pools.

Allocating a flat budget: the merit matrix

When the total is limited, a merit matrix is the most effective tool for making allocation fair, consistent and defensible. It combines two variables: the employee’s performance rating and their position in the salary band, usually measured as the compa-ratio (salary divided by the midpoint of the band). Employees who perform well and sit low in their band receive the largest increases; those who are already above the midpoint receive less, even if they perform well, because they are already paid above market.

The example below shows how a 3% average budget can be distributed. The percentages are illustrative and should be calibrated to your own budget, performance distribution and band structure.

Three rules make the matrix work in practice. First, simulate it against your real population before communicating it, so the weighted average stays within budget. Second, give managers a range for each cell rather than a fixed number, which allows judgement while keeping outcomes consistent. Third, review outcomes by gender, role and location before sign-off, because any unexplained pattern will appear in your pay gap reporting. For more on structuring bands, see our guide on how to create a good salary band.

Where to concentrate the budget: critical roles and hiring demand

If the budget is flat, where you spend it matters more than how big it is. Hiring demand is a useful signal for identifying the roles where being below market carries the greatest retention risk. At the time of writing, TalentUp is tracking over 5,400 open software developer positions in London and nearly 3,700 in Madrid. Paris and Madrid each have more than 4,000 data analyst openings. Accountant roles are especially in demand in Madrid (over 6,300 openings) and Milan (over 5,900).

Where your people are in high demand from competitors, these roles should get the first call on the market adjustment pool. A practical approach is to classify each job family by business criticality and market demand, and to set a target market position for each: for example, the market median for most roles and the 75th percentile for a small number of critical, scarce profiles. This is how a compensation philosophy becomes an operational budget rule.

Beyond base pay: using benefits and variable pay to stretch the budget

A flat salary budget does not mean a flat reward offer. Total Rewards teams have several tools that improve the employee value proposition without adding permanently to fixed payroll costs:

The key is to communicate the full package. Many employees underestimate the value of their benefits, so a clear total reward statement can change how a modest increase is perceived. Our article on benefits as a crucial part of compensation goes deeper into this topic.

Pay transparency: why the 2027 cycle is different

The EU Pay Transparency Directive had to be transposed into national law by 7 June 2026. Employers with 250 or more employees must report on their gender pay gap every year, with the first reports due by 7 June 2027 covering 2026. Employers with 150 to 249 employees report every three years from the same date, and those with 100 to 149 employees from 2031. Where the gap in any category of workers is 5% or more and cannot be justified by objective, gender-neutral criteria, employers must carry out a joint pay assessment with employee representatives (European Parliament & Council of the European Union, 2023).

For the 2027 salary review, this has three direct implications:

Before approving final increases, run a pay equity check on the proposed outcomes. For guidance on explaining ranges to applicants, see how to meet candidate salary expectations under the directive.

A 2027 salary review checklist for C&B teams

For a step-by-step calendar for the review itself, see how to run a salary review cycle this quarter.

The bottom line

For salary increase budgets 2027, a range of between 2% and 3% is the norm in most of Western Europe, with Belgian indexation and Central and Eastern Europe above it. The companies that get the most from it will not be the ones with the biggest pot. They will be the ones that know, role by role and city by city, what the market pays, that separate mandatory costs from merit, and that allocate their money with clear, documented criteria that stand up to pay transparency scrutiny.

Want to see how your roles compare? TalentUp Salary Benchmarking Platform gives you real-time salary benchmarks by role, seniority, company size and city across Europe, so you can build your 2027 budget on today’s market rather than last year’s survey.

Frequently asked questions

What are the average salary increase budgets 2027 in Europe?

In most of Western Europe, 2027 projections fall between 2% and 3%. Germany is at 2.6%–2.7%, France at 2.0%–2.5% and Spain’s collective agreements at around 2.8%. The United Kingdom (3.7%) and the Netherlands (3.1%) are slightly higher, while Poland and other Central and Eastern European countries remain above the Western European average.

Is a salary increase budget the same as the raise each employee receives?

No. The budget is the average increase across the whole workforce. Individual raises vary according to performance, position in the salary band and market demand for the role. Some employees may receive twice the budget and others none at all, as long as the weighted average stays within the agreed total.

Should mandatory increases such as indexation be included in the merit budget?

It is best to budget them separately. Automatic indexation in Belgium or increases under collective agreements must be paid regardless of performance. Including them in the merit pool reduces the money available to reward performance and makes the budget harder to explain to managers and employees.

How can HR reward top performers with a limited budget?

Use a merit matrix that concentrates increases on high performers who are low in their salary band, and combine base pay increases with one-off bonuses, benefits and development opportunities. Reducing or removing increases for employees who are above the band midpoint or below expectations frees up budget for those who matter most.

How does the EU Pay Transparency Directive affect the 2027 salary review?

Increases must be based on objective, gender-neutral criteria that can be explained and documented. Employers with 250 or more employees must publish their first gender pay gap report by June 2027, and a gap of 5% or more that cannot be justified triggers a joint pay assessment. The salary review is the ideal moment to identify and correct unjustified differences.

Which data should HR use to set the 2027 budget?

Combine three sources: published budget projections for each country, up-to-date salary benchmarks for your specific roles and locations, and internal data on performance, compa-ratios and turnover. Market salary data is essential, because it shows where your employees stand today rather than what the average company plans to spend.

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