Developing your 2026 compensation planning strategy 

Over the past three years, the U.S. labor market has undergone a significant reset. 2025 marks the first time the number of unemployed workers exceeds the number of available job openings since 2021, marking a clear shift from the talent-scarce environment that drove aggressive hiring and rapid wage escalation. The era of competing for talent at any cost is receding.

All the while, compensation budgets have stabilized. Following pandemic-era spikes, most organizations are now planning annual salary increases in the mid-3% range, a more measured approach reflecting the continued shift in supply and demand of workforce talent and continued economic and geopolitical uncertainty.

However, this stability masks a widening divide. Pay trends are diverging sharply depending on role type and labor supply. Skilled trades and other frontline, on-site roles continue to command premium wage growth due to persistent staffing challenges. Meanwhile, compensation growth in technology and professional services has cooled as hiring normalizes and remote work arrangements mature.

Remote workers — once positioned to benefit most from flexible labor markets — are now feeling the trade-offs: smaller merit increases, lower engagement scores, and slower promotion advancement relative to on-site employees. This shift underscores the rising importance of intentional pay differentiation based on role criticality, skill scarcity, and contribution to outcomes.

This report examines how leading organizations are moving away from uniform, across-the-board increases and toward targeted, data-driven merit strategies. The goal: sustain engagement and reward impact while ensuring compensation investments are aligned with business priorities

After several years of volatility, compensation planning is returning to a more stable footing.

The post-pandemic surge of double-digit salary increases and rapid market adjustments has largely subsided. While the broader economic environment remains uncertain, compensation budgets are settling closer to historical norms. For 2026, employers project an average merit increase budget of 3.2% and a total salary increase budget of 3.5%. This marks the third consecutive year of relative stability following the sharper upward adjustments seen in 2021–2023.

For total rewards leaders, the “spend-at-all-costs” tactics used previously are no longer viable. The current environment shows organizations adopting a more precise and disciplined approach.

Organizations are focusing on targeted compensation investments that align with business priorities, reinforce critical skills, and proactively manage risk. Broad, uniform pay practices, on the other hand, can widen inequities and stall progress toward closing meaningful pay gaps

Although the national average projected merit increase for 2026 is 3.2%, many industries report lower averages. Healthcare and Retail, traditionally conservative in their compensation strategies, are reporting projected increases of 2.9%

The highest total increase budgets are seen in Banking/Financial Services, Energy, and High Tech, all projected at 3.7%. In the case of Banking/Financial Services, the merit increase budget is below national average at 3.0%, which shows a large emphasis in other compensation adjustments such as promotional increases, cost-of-living increases, and more.