What is a market adjustment in salary?

A market adjustment in salary refers to a salary increase or adjustment designed to bring a worker’s pay in line with current market rates for their role, industry, or geographic location. Organizations use market adjustments to help attract and retain top talent, promote pay equity, and maintain internal consistency in compensation.

Unlike performance-based raises, which are tied to individual achievements, a market adjustment raise is based on external factors such as salary surveys, industry standards, and cost-of-living data. Its primary goal is to ensure workers’ salaries remain competitive and aligned with the broader labor market.

How does a market adjustment differ from a merit increase?

A market adjustment and a merit increase serve different purposes:

A market adjustment aligns workers’ salaries with external market rates for similar roles. It helps companies remain competitive in attracting and retaining talent and promotes fair, market-aligned compensation across roles. Market adjustments are not tied to individual performance. Instead, but are driven by salary data, industry standards, and the cost of living.

A merit increase, on the other hand, is a performance-based salary increase tied to workers’ achievements and contributions. It is typically linked to internal evaluations, such as annual performance reviews. It is not dependent on external benchmarks or changes in the labor market.

The key distinction between a market adjustment and a merit increase lies in the basis for the salary increase: external benchmarks drive market adjustments, while worker performance influences merit increases.

Example: Consider a worker whose salary has fallen below the market rate. They may receive a market adjustment to stay competitive with similar roles in their industry. Alternatively, suppose the worker exceeds their performance expectations. In that case, they may receive a merit increase to reward their efforts, even if their current salary already aligns with market levels.

Why is a market adjustment necessary in HR management?

Market adjustments are essential in HR management to ensure that compensation practices remain competitive, fair, and compliant. They also help to:

• Attract and retain top talent: Organizations stay competitive in recruiting skilled talent by offering salaries that align with market rates, reducing the risk of losing valuable staff to competitors
• Promote fairness and worker satisfaction: Organizations demonstrate their commitment to equity and transparency by regularly adjusting salaries based on market data, which can boost morale, engagement, and loyalty
• Address pay disparities proactively: HR teams can address compensation gaps before they lead to turnover, dissatisfaction, or possible compliance issues through timely market adjustment raises
• Adapt to changing economic conditions: Market adjustments help organizations respond to external factors like inflation, cost of living shifts, and evolving industry standards, ensuring that salaries remain relevant and competitive

In 2024, US employers in the fast-paced consumer goods industry planned average salary increases of 3.8%, with merit increases averaging 3.5%. Actual increases were slightly lower, averaging 3.6% for total salary increases and 3.3% for merit increases. Projections for 2025, while not yet known, are expected to follow a similar trend, seeing a divergence between total salary increases and merit increases.

These figures illustrate the importance of market adjustments in salary planning. While standard annual increases help maintain internal equity, market adjustments address external competitiveness, especially in industries or roles where the demand for talent drives salaries above average (merit) increases. Market adjustments ensure that compensation remains competitive, helping to attract and retain top talent in fast-moving or high-growth industries.

How does a market adjustment for salaries work?

A market adjustment for salaries typically involves permanently increasing a worker’s base pay to align with current market rates for similar roles.

HR teams use salary surveys, market data, and benchmarking tools to evaluate whether a worker’s pay is competitive compared to external benchmarks. Adjustments are made for worker salaries that are below market rates to correct gaps and support equity and retention goals.

Market adjustments are typically not one-time payments or bonuses, as they address a structural pay issue rather than reward short-term performance. They are often applied outside of regular merit cycles and may be selective, e.g., in high-turnover roles, hard-to-fill positions, or where internal pay disparities have emerged.

How do companies determine if a market adjustment is needed?

Companies identify the need for a market adjustment by benchmarking salaries to compare current talent compensation with market rates for similar roles. This process draws on salary surveys, compensation databases, and third-party market data providers. HR teams assess pay positioning against industry standards by considering job roles, experience levels, and geographic location.

Companies also review internal pay equity to ensure consistency across similar roles. Factors such as the rising cost of living, increased demand for specific skills, or challenges in retaining talent may also signal the need to adjust salaries.

Suppose pay discrepancies are identified, especially where salaries fall below market averages. In that case, organizations may apply market adjustments to correct imbalances and remain competitive.

How often should a company offer market adjustments?

How often organizations offer market adjustments depends on factors such as industry trends, labor market conditions, and business goals. HR teams typically conduct a comprehensive salary review at least annually to help identify any misalignments between current pay and market rates and enable timely corrections.

In fast-moving industries or regions with significant cost-of-living changes, more frequent reviews (e.g., semi-annually) may be necessary to stay competitive. Regular reviews help reduce the need for reactive measures and support long-term efforts to retain top talent, maintain pay equity, and ensure that salary levels remain aligned with evolving market data.

Are market adjustments required for all roles within a company?

Market adjustments are not uniformly required across all roles within a company. Instead, they are typically prioritized for roles with:

• High market demand: Positions requiring specialized skills or those in rapidly evolving sectors to attract and retain top talent
• Significant pay disparities: Roles where current compensation significantly lags market rates to correct imbalances and uphold internal equity
• Retention challenges: Jobs experiencing high turnover rates to enhance worker satisfaction and reduce attrition

HR should assess each role individually, considering factors such as market trends, organizational priorities, and budgetary constraints when determining the need and extent of market adjustments.

Insights from Deel’s latest Global Hiring Report highlight examples of roles where market adjustments may be relevant:

• Accountants: There’s been a surge in demand for accounting professionals over recent years, indicating that competitive compensation is essential to attract and retain talent in this field
• Software engineers: As the top job title on Deel’s platform in 2024, software engineers represent roles in high demand, requiring market-aligned salaries to secure skilled professionals
• Remote workers: The report notes a significant increase in cross-border hiring in certain regions, suggesting that competitive pay is crucial for attracting remote talent in these geographies

What are the key factors to consider when implementing a market adjustment policy?

HR teams should consider the following factors to support a fair and competitive market adjustment policy:

• Accurate market data: Ensure alignment with industry standards through current and reliable salary benchmarking data
• Internal pay equity: Maintain consistent and fair salary adjustments by avoiding pay disparities among workers in similar roles
• Budgetary constraints: Determine how much the organization can afford for adjustments without compromising the overall pay rate structure
• Worker impact: Consider the impact of adjustments on worker morale, retention, and perceptions of fairness and transparency
• Timing of adjustments: Decide the optimal timing for implementing changes, e.g., annually, at set intervals, or as needed based on market trends and business needs
• Compliance: Ensure adjustments align with relevant labor laws, regulations, and equal pay standards
• Communication strategy: Develop a clear approach to informing workers about the rationale and process behind salary adjustments, promoting trust and clarity

How does geographic location impact market adjustments?

Geographic location influences salary structures due to variations in the cost of living and local labor market conditions. For example, urban centers with higher living expenses warrant higher compensation than rural areas.

Organizations must assess regional economic factors and adjust salaries accordingly to remain competitive and equitable. This is particularly relevant for remote or distributed teams, where regional pay differentials are crucial in attracting and retaining talent.

Consider a job posting for a software engineer in San Francisco, CA. This may list a salary range of $120,000 to $150,000 annually, reflecting the area’s high cost of living. The same role in Austin, TX, may offer between $100,000 and $130,000, aligning with comparatively lower living expenses. Such adjustments ensure that compensation remains fair and competitive across different locations.

Read more: Best Practices for Creating a Location-Based Compensation Strategy

What are the benefits of offering market adjustments to workers?

Market adjustments offer benefits that strengthen workforce stability and performance:

1. Increasing worker retention: Market adjustments help retain talent by ensuring that compensation stays competitive. Employees who feel they are being paid fairly are less likely to look for external opportunities. Market adjustments also demonstrate a company’s commitment to equitable pay and recognition of its people, fostering loyalty, satisfaction, and long-term engagement.
2. Boosting motivation and productivity: Workers who know their compensation reflects market value feel a greater sense of worth and motivation, particularly when their organization proactively addresses compensation fairness. Motivated workers are more likely to be productive and contribute at a higher level, driving stronger alignment with company goals and business outcomes.
3. Enhancing employer reputation: Proactively adjusting salaries based on market data builds an organization’s reputation for fairness and transparency, strengthening its employer brand and making it easier to attract skilled candidates in competitive hiring markets.

What are the potential risks of not conducting regular market adjustments?

Not conducting regular market adjustments can lead to several risks, including:

• Worker turnover: Talented workers may leave for competitors if they consider their compensation below industry standards, leading to increased recruitment and training costs
• Lower morale: When staff feel undervalued due to stagnant or non-competitive salaries, their morale and job satisfaction may suffer, negatively impacting productivity and engagement
• Recruitment challenges: Below-market salaries may deter top talent from joining the organization, making it difficult to fill critical positions
• Pay inequities: Without regular adjustments, internal salary disparities may develop and lead to dissatisfaction among workers, increasing the risk of legal challenges
• Reputational damage: A reputation for underpaying staff can harm an organization’s employer brand, reducing its appeal to prospective candidates. This may be reflected in reviews on sites like Glassdoor, where reviews on BBI Solutions, for example, mention low worker morale and a lack of pay progression
• Retention issues: Dissatisfaction with compensation can be a clear driver of turnover. Based on reviews on Glassdoor, some workers at People Scout cite low pay and a lack of support as reasons for poor morale and attrition

How can HR ensure fairness and transparency in market adjustments?

To build worker trust and promote equitable compensation practices, HR should take a structured and transparent approach when implementing a market adjustment raise:

1. Use reliable market data: Set salary adjustments based on credible, up-to-date market research and benchmarking tools, ensuring that any adjustments based on external data are objective and defensible
2. Communicate openly: Clearly explain the difference between a market adjustment raise vs. performance raise, including what factors influence pau decisions and why specific roles or individuals are receiving adjustments, helping to manage worker expectations and reinforce trust
3. Prioritize equity: Ensure that market adjustments reflect external competitiveness while supporting internal fairness so that similar roles with comparable responsibilities receive equitable compensation
4. Standardize the adjustment process: Establish consistent guidelines for evaluating and implementing market adjustments across teams, reducing biases and promoting fair treatment for all workers
5. Maintain clear documentation: Keep detailed records of the market data used, the rationale for decisions, and the processes behind each adjustment, helping to ensure compliance, support accountability, and make it easier to communicate how adjustments were made

Manage compensation globally with Deel

Manage and scale your compensation strategy with Deel, no matter where your teams are based. Deel’s all-in-one global HR and payroll platform gives you the tools you need for informed, transparent, and market-aligned pay decisions:

• Benchmark salaries with Deel’s salary insights tool, helping you identify when market adjustment raises are needed
• Confidently manage market adjustments at scale with consistent processes across your global and distributed workforce
• Support internal equity and external competitiveness with centralized compensation data and customizable role-based access
• Automate payroll and tax while ensuring global compliance so you can focus on strategic compensation adjustments
• Monitor your market adjustments alongside performance outcomes using Deel Engage, our integrated compensation and performance solution

Book a demo to learn how Deel can help you build a global, competitive, and equitable compensation framework.