A recent survey has found that budgets for employee compensation in 2026 are projected to be about on par with where they were this year—and ongoing economic uncertainty could be keeping compensation investments flat. 

Mercer’s U.S. Compensation Planning survey found that employers plan to boost their compensation budgets by 3.1% for merit increases and 3.5% for total salary increases for non-unionized employees. That’s consistent with 2025, as employers have delivered actual merit and total salary increases of 3.2% and 3.5%, respectively.

Interestingly, Mercer’s report found that 20% of U.S. companies expect ongoing economic uncertainty to have a significant impact on compensation decisions in 2026. Also, the report found that 88% of respondents noted that the budgets are still in the preliminary phase, and that there is further potential for salary increases to soften as budgets are solidified closer to the end of the year.

Compensation in 2026: a ‘cautious’ approach

The flat projections for compensation budgets in 2026 come after a multi-year period of budget increases—particularly during the pandemic-driven Great Resignation.

“The compensation fever has cooled,” says Lauren Mason, Mercer’s U.S. workforce solutions leader. “After years of rapid growth, companies are now approaching 2026 with a more cautious mindset.”

That hesitancy to hike compensation in 2026 may also be impacting internal promotions, the report found.

Mercer found employers plan to promote approximately 8.1% of their workforce in 2026, down from 9.9% in 2025. For companies with a separate promotional increase budget, the average promotional increase budget for 2026 is 1.1%, slightly up from 1% in 2025.

Mason notes the majority of employers have moved away from limiting promotions to once a year. The most common approach, utilized by nearly half (43%) of employers surveyed, is to promote “as needed,” while 26% say they have two promotion cycles per year.

The broader economic landscape—marked by uncertainty and inflation—has organizations re-evaluating their spending, making every compensation dollar count.

“However,” Mason notes, “employers are still prioritizing strategic talent investments, focusing on rewarding key skills, retention and future-ready capabilities.” This shift reflects a move from reactive compensation adjustments to more deliberate, targeted strategies that align with long-term business objectives.

Strategies to maximize value for employee compensation

Jack Jones, principal, senior compensation consultant at Mercer, offers several ways employers can meet expected challenges for compensation budgets in 2026.

The role of automation

For example, he suggests, employers automate pay decisions to maximize impact, noting that in today’s tight budget environment, every dollar invested in compensation must deliver maximum value.

“Replacing manual, time-consuming merit cycles with automated, data-driven pay decisions empowers organizations to strategically allocate limited resources,” he explains. By leveraging smart analytics, companies can identify and reward top performers, close critical pay equity gaps and prioritize compensation for roles that drive the greatest impact.

“This shift not only enhances fairness and transparency but also ensures that compensation decisions truly support business goals and workforce excellence,” he says. “Automate your pay decisions to transform routine processes into meaningful, strategic actions.”

See also: As 2026 salary budgets remain flat, how employers are rethinking value propositions

Understanding a changing market

Employers also must understand the shift in “hot” jobs, as the labor market transforms in “fascinating ways.” For example, costs for software development, IT and data analytics roles are declining, while frontline and skilled trades roles are seeing rising labor costs, Jones explains.

“This increase is fueled by a shrinking supply of workers willing to take on on-site, in-person jobs and growing demand for these essential roles,” Jones says. Understanding these dynamics is crucial for HR leaders aiming to allocate compensation effectively and stay competitive in attracting talent across diverse job categories.

A personalized approach

Finally, Jones says, employers need to personalize their rewards strategy to workforce segments.

“The era of one-size-fits-all compensation is over,” Jones says. “To truly win the war for talent, organizations must segment their workforce and tailor rewards to meet the unique needs of each group.”

For instance, frontline employees and white-collar professionals are motivated by different factors, so designing distinct reward strategies for each segment is essential.

“By understanding what drives each group, companies can better align budgets and programs, maximizing compensation impact while boosting satisfaction and retention,” he says. “Segment and conquer to create a workforce strategy that resonates across your organization.”