How the AI Era Is Reshaping Merit Cycles: 3 Key Takeaways

Merit budgets aren't expanding, but the way companies are using them is changing. 

For AI and technical roles, annual raises and equity are replacing promotion events as the primary retention levers. Pave’s 2026 Merit Cycle State of the Union tells a clear story about how that shift is playing out and what it means for how compensation leaders structure total rewards. 

Here's what we learned, based on Pave data from 200+ companies and more than 100,000 employees.

1. R&D Promotion Raises Are Shrinking, But That's Not the Whole Story

Promoted R&D employees received the smallest median raise of any department in H1 2026 at 7.7%—down sharply from 9.9% in 2025. G&A and GTM median raise amounts also declined, but not as steeply.

So why is the function building AI-era products seeing the biggest compression in promotion raises?

The answer is in where the investment is going instead. 

R&D non-promoted raises have held flat or slightly increased year over year at 3.7%. The investment isn't being reduced; it's being redistributed. For technical talent, companies are increasingly rewarding employees through annual raises rather than promotion events.

2. Inside R&D: The AI & ML Premium

When looking at R&D job families, that trend becomes more evident.

• AI & ML Engineering leads all R&D job families on non-promoted raises at 4.4%, but ranks near the bottom of promoted raises at 6.5%
• Data science employees have a non-promoted raise rate of 3.9%, but the lowest promoted raise in all of R&D at just 5%
  

The pattern is consistent: for the most sought-after technical roles, the competition is happening in the annual raise, not the promotion event. Companies are using ongoing raises and equity—rather than large promotion increases—to retain critical AI and technical talent.

The backdrop helps explain why. As Pave founder Matt Schulman noted in the 2026 Merit Cycle State of the Union webinar, AI native companies are hiring technical talent aggressively, creating retention pressure that's reshaping how everyone else structures rewards.

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3. Equity Is Where R&D Pulls Further Ahead

Among promoted employees, equity participation is effectively universal across R&D, G&A, and GTM—function doesn't matter when you're being promoted. 

But for those with Meets Expectations performance ratings, things change.

At the median, 30% of R&D employees who meet expectations receive ongoing equity, compared to 22% for G&A and just 13% for GTM. 

The drop from Above to Meets Expectations in GTM equity participation is steeper than any other function. In GTM, ongoing equity is reserved for high performers, reflecting the reality that sales talent has traditionally been more cash and incentive-driven than equity-driven.

Equity is also a strategic lever for R&D. The 30% equity participation rate at Meets Expectations is a deliberate function-level retention strategy for a talent pool that is increasingly difficult to replace. 

The question for compensation leaders is whether your equity distribution is as intentional as the market data suggests it should be.

Retain Technical Talent With a Strategic Compensation Strategy

For AI and technical talent, how you structure rewards matters as much as how much you spend. Annual raises and equity participation—not promotion events—are where retention is won or lost for these roles.

For even more merit cycle data, download the 2026 Merit Cycle State of the Union. In it, you’ll find three years of insight into who gets raises, when equity is awarded, and which functions are gaining the most compensation leverage.