Your 2027 Compensation Budget: Stop Guessing and Start Planning

It’s October, which means somewhere a small business owner is staring at a spreadsheet trying to figure out how much more payroll is going to cost next year. Maybe you’re considering a 3% raise for everyone. Maybe your health insurance renewal just arrived and made you question a few life choices. Maybe you have an incredible employee who deserves more money, but you are not entirely sure what the business can afford.

Or maybe you are doing what plenty of small businesses do: taking last year’s payroll expense, adding a little something to it, and hoping for the best.

We get it. Compensation planning can feel like trying to solve a puzzle where half the pieces keep changing. But your compensation budget should not be a guessing game, and it definitely should not start and end with deciding what percentage raise everyone gets.

What should small businesses include in their 2027 compensation budget?

A complete compensation budget includes much more than salaries and hourly wages. Employers should account for base pay, anticipated raises, overtime, commissions, bonuses, employer payroll taxes, unemployment insurance, workers’ compensation, employee benefits, retirement contributions, paid leave, and any staffing changes planned for the coming year.

Colorado employers also need to build new wage requirements into the budget. The statewide minimum wage is increasing to $15.71 per hour on January 1, 2027, and some Colorado communities have higher local minimum wages. Even if none of your employees is currently earning minimum wage, those changes can affect the rest of your pay structure.

That is why the real question is not simply, “How much more should we budget for wages?” It is, “What is our workforce actually going to cost us next year?”

An employee costs more than their salary

Imagine hiring someone at $60,000 per year. It is easy to put $60,000 into the budget and move on, but that is not the employee’s full cost to the business.

In addition to salary, you may be paying employer payroll taxes, unemployment insurance, workers’ compensation, health insurance, retirement contributions, paid time off, training costs, professional development, equipment, and overtime. According to the Bureau of Labor Statistics data referenced in the original draft, wages and salaries represented roughly 70% of total employer compensation costs for private-industry workers in June 2026, with benefits and other employer costs making up the remainder.

That does not mean every small business should automatically add 30% to each salary. Actual costs vary significantly based on benefits, industry, payroll structure, and the employee’s role. What it does mean is that budgeting salary alone can leave a pretty large hole in your financial plan.

At Savvion, we encourage business owners to look at the fully loaded cost of employment. Once you understand what it truly costs the business to employ each person, compensation decisions become a lot more useful.

How much should you budget for employee raises?

One of the most common questions employers ask is, “What is a normal raise percentage?”

Our favorite HR answer applies here: it depends.

There is no universal percentage that makes sense for every business, every employee, or every position. A 3% increase might be perfectly appropriate for one organization and completely inadequate for another. For a company already struggling to meet payroll obligations, even a modest across-the-board increase may not be financially responsible.

Instead of beginning with a percentage, start with three questions. What can the business afford? How competitively are employees currently paid? What compensation decisions will help the business accomplish its goals?

Those questions may lead you to different answers for different employees. One employee may already be paid well above market. Another may be a top performer whose compensation has fallen significantly behind comparable positions. Giving them both the same percentage increase is simple, but simple is not always strategic.

Are you paying competitively?

Many small businesses set wages based on some combination of what they can afford, what the employee asked for, and what they paid the last person in the role. That is understandable, but it does not necessarily tell you whether compensation is competitive today.

A position that was competitively paid three years ago may no longer be competitive now. The employee may have taken on more responsibility, developed new skills, and become significantly more valuable to the organization while the local labor market has also changed.

The dangerous part is that the business owner may not realize there is a problem until the employee leaves.

Market data can help, but comparing compensation is not as simple as matching job titles. A bookkeeper at one organization may primarily enter transactions and reconcile bank accounts. A bookkeeper somewhere else may manage accounts payable, financial reporting, payroll coordination, and several other responsibilities. Same title, very different job.

A meaningful compensation analysis looks at the work itself, including actual responsibilities, experience, required qualifications, reporting relationships, and local market conditions. It should not be based solely on whatever job description happened to be created years ago.

Watch for wage compression

Wage compression happens when employees with significantly different levels of experience, tenure, responsibility, or skill end up earning very similar amounts.

Imagine an employee who has been with your business for four years. They are experienced, dependable, and regularly help train new employees. They earn $19 per hour. Then you discover that attracting a new employee into the same role now requires an offer of $18.50 per hour.

Your experienced employee technically earns more, but only by 50 cents. That is wage compression.

It does not automatically mean everyone needs a raise. It does mean the entire pay structure deserves a look. As minimum wages and market rates move upward, employers should consider how required or competitive increases at the bottom of the pay structure affect employees with more tenure, responsibility, or experience.

Salaried employees belong in the review too

Your compensation review should include salaried employees, especially those classified as exempt from overtime.

Colorado has specific salary requirements for certain exempt employees, and those requirements are adjusted over time. Employers must also remember that salary is only one piece of an exemption. Simply putting someone on salary does not automatically make that person exempt from overtime.

The original draft notes that Colorado proposed updated 2027 salary thresholds in its September 30 PAY CALC Order and that employers should wait for final requirements before making January classification decisions.

That matters for budgeting because raising a salary may not be the only option. Depending on the role and applicable law, an employer may need to consider whether the position should remain exempt or whether reclassification to nonexempt status makes more sense. If that employee regularly works overtime, those potential overtime costs need to be included in the budget as well.

Do not forget the costs outside base pay

Employer payroll taxes are another piece of the compensation budget. So are unemployment insurance, workers’ compensation premiums, health insurance renewals, retirement contributions, bonuses, and commissions.

Colorado employers also have FAMLI premiums to consider. The original draft notes that Colorado announced a 2027 FAMLI premium decrease from 0.88% to 0.86% of covered wages, with employer contribution requirements varying based on size.

These expenses can change even when an employee’s wages do not.

A strong compensation budget accounts for the expected, the variable, and a little room for the unexpected.

Budget for the people you have not hired yet

One of the easiest ways to underestimate next year’s payroll is to build the entire budget around the people employed today.

Then March arrives, the business is growing, work is piling up, and suddenly you need another employee. If that position was not included in the budget, now you have to figure out how to fund it.

Instead, look at your actual business goals for 2027. If you plan to expand, launch another service, increase production, open a location, or take on larger clients, ask what additional people those goals require.

Even if you do not know exactly when a position will be filled, you can make reasonable assumptions about timing, expected compensation, benefits, and payroll expenses.

The opposite may be true too. Perhaps someone plans to retire. Maybe a vacant position will not be replaced. Perhaps responsibilities can be redistributed.

Your compensation budget should reflect the business you are planning to operate next year, not simply the business you operated last year.

Compensation is where HR and finance need to talk to each other

Sometimes market data says an employee should be paid more while the financial statements say the business cannot support a significant increase right now.

That is not unusual.

The answer is not automatically choosing one side over the other. It is understanding the options.

Maybe the business can support a smaller increase today and another review in six months. Maybe a performance-based bonus makes more sense than permanently increasing fixed payroll expense. Maybe professional development, greater flexibility, or another benefit has meaningful value to the employee. Or maybe the compensation analysis shows that a critical position is significantly underpaid and the company needs to find room elsewhere in the budget.

Those are decisions worth making intentionally, rather than waiting until January and assuming everyone gets the same raise.

How can compensation analysis help?

A compensation analysis gives employers a structured way to evaluate whether pay is competitive, internally consistent, and financially sustainable.

Instead of looking at each employee in isolation, you can review compensation across the organization. That includes comparing jobs with relevant market data, reviewing the responsibilities attached to each position, identifying wage compression, evaluating internal pay relationships, and developing practical compensation ranges.

For a small business with 10, 20, or 40 employees, that can be incredibly valuable. You probably do not have a full-time compensation specialist sitting down the hall.

This is also an area where Savvion can help. We work with small businesses to evaluate compensation based on the actual work being performed, relevant market data, organizational structure, and internal pay relationships. We can identify positions that may be underpaid or overpaid compared with the market, flag compression concerns, and develop practical recommendations.

Then we can connect those recommendations to the financial side of the business.

Knowing what you should pay someone is only half the equation. Knowing how to afford it is the other half.

That is one of the advantages of having HR, payroll, accounting, and financial strategy working together. Compensation decisions should not live in separate silos. They are all connected.

How do you actually build the budget?

You do not need a sophisticated compensation system to get started. A spreadsheet and accurate payroll records can take you pretty far.

Begin with your current payroll and identify each employee’s compensation, hours, overtime history, commissions, and bonuses. Then calculate the full employer cost, including taxes, benefits, insurance, retirement contributions, and other employer-paid expenses.

Next, layer in known legal changes such as minimum wage increases and the final exempt salary requirements once they are released. Compare your current pay to relevant market information and review internal relationships for wage compression or inconsistent pay.

From there, add anticipated hires, promotions, departures, and organizational changes. Build a few different scenarios so you can see what various raise strategies, staffing plans, and benefit increases would do to your overall payroll expense.

Finally, compare those scenarios against your financial projections.

The point is not to create a perfect prediction. The point is to understand your options before the decisions have to be made. And do not treat the budget as something you build in December and forget. Businesses change, employees change, and the market changes. Your compensation strategy should be able to change too.

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Frequently Asked Questions

How much should a small business budget for employee raises in 2027?

There is no single percentage that works for every organization. Employers should consider financial performance, employee performance, market compensation, wage compression, retention concerns, and legal requirements before deciding how much to budget for raises.

What belongs in a compensation budget?

A complete compensation budget should generally include salaries, hourly wages, overtime, bonuses, commissions, employer payroll taxes, unemployment insurance, workers’ compensation, benefits, retirement contributions, paid leave, and anticipated staffing changes.

What is a compensation analysis?

A compensation analysis evaluates employee pay using relevant market data, job responsibilities, internal pay relationships, and organizational needs. It can help employers identify wage compression, potential pay gaps, and opportunities to create a more consistent compensation structure.

How often should businesses review compensation?

An annual review is a useful baseline, especially before the next year’s budget is finalized. Additional reviews may make sense when responsibilities change significantly, wage requirements increase, or the business grows rapidly.

Should everyone receive the same percentage raise?

Not necessarily. Across-the-board raises are simple, but they may not address differences in performance, market competitiveness, responsibilities, or internal pay relationships.

How do you know whether employees are underpaid?

Start with the work actually being performed. Compare responsibilities, qualifications, and experience against relevant local and industry market data, then review how pay compares across similar positions inside your business.

Your compensation budget is more than a spreadsheet

It is October. You are planning another year. You have goals, expenses, expectations, and probably a few unknowns.

Somewhere in the middle of all of that are the people who make the business work.

Compensation planning is about much more than deciding who gets a raise. It is about understanding what employees cost, what their work is worth in the market, what the business can afford, and how those decisions support where the company is headed.

Sometimes that means increasing wages. Sometimes it means adjusting benefits. Sometimes it means rethinking a position entirely. And sometimes the analysis confirms that your compensation structure is already in pretty good shape.

That is valuable information too.

The goal is not simply to pay everyone more. The goal is to pay thoughtfully, competitively, consistently, and sustainably.

A good compensation budget should not just help you survive next year’s payroll.

It should help you build the business you want to have next year.

And that is a much better use of a spreadsheet.

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