2026 Compensation Outlook: Pay Increases and Merit Budget Planning

Blue Whale Compensation’s Annual Pay and Merit Budget Advisory—now in its fourth year—provides an exhaustive review of current and forecasted market and economic conditions. Grounded in data, trend analysis, and practical context, this report gives your company clear guidance to make well-informed decisions on pay and merit budgets for 2026.

From 2024 Optimism to 2025 Reality: A Cautious Path for 2026

A review of pay increase data, including projected to actual increases in 2025 indicate that with the exception of few sectors, U.S. employers tightened their budgets in 2025. The rare lower-than-plan figures are indicative that in 2024, employers were optimistic about their labor costs as they planned their 2025 budgets. That optimism, however, did not continue into 2025: Actual increases, as compiled from Payscale, SHRM, WorldatWork, and WTW, show that whereas employers planned increases around 3.9% for 2025, the actual increases dropped to an average of 3.5%. Generally, actual increases tend to exceed projected increases by three to four-tenths of a point.

For 2026, with uncertain economic growth, data suggests that companies are adopting a conservative stance on salary increases. While pay freezes have become more common—especially in industries like tech where major players such as Salesforce and Microsoft previously announced no raises—other sectors may follow depending on economic conditions. Following this cautious approach, U.S. companies plan to increase salaries by 3.5% in 2026. This equals the 3.5% median increase observed this year, as reported by WTW and Payscale.

Increases Based on Economic Uncertainty, Not Inflation Factors

Whereas in the last few years inflation was the key driver in how companies set pay increases, for 2026 the number one factor, as reported by WTW, is economic conditions. Almost 40% of employers cited anticipated recession, weaker financial results, or supply costs as the primary reason for setting their pay adjustment budgets. Employers will be tasked with effective communication and employee-focused tactics to minimize the impact of restrained salaries. Considering that employee optimism is at record lows, and that many employees prefer to stay put, the challenge will be keeping and motivating staff. In all, this year’s increases mirror a restrained labor market and companies’ cautious approach in response to evolving economic conditions.

Variance by Industry Sector

Although most reports show restrained increases for 2026, comparable to actuals in 2025, there is evidence that certain industries will be setting budgets that are noticeably more aggressive than others. Finance and Insurance are projecting increases around 3.8%, and nonprofits around 3.7%. However, of the 22 industry sectors reported by Payscale, Business Services was the only sector projecting a 4.0% increase—no other industry sector crossed that threshold. Conversely, industries posting the lowest projected increases for 2026 include Arts, Entertainment & Recreation at 3.2%, Education at 3.1%, and Food, Beverage & Hospitality at 3.0%.

Manufacturing and Service Jobs vs. Professional and Managerial Jobs

It is noteworthy that most surveys show no material differences in projected increases between employee groups—specifically hourly, exempt, and management. The differences between these groups are negligible. This marks a shift from earlier years when exempt and management employees typically received greater increases than hourly or blue-collar workers. Over the last five years, these differences have nearly disappeared, likely reflecting employers’ adoption of more holistic pay policies aligned with pay equity and transparency requirements.

Additionally, as states increase their minimum wage requirements, certain sectors—such as fast food and healthcare—will see even higher mandated wage floors. These increases, alongside potential hikes from local ordinances and new legislation, underscore the pressure on employers to offer competitive wages to attract and retain skilled labor in these industries.

Overall Projection: Wage and Salary Movement

Based on wage growth trends and economic conditions, Blue Whale Compensation expects wage and salary movement for 2026 to drop by 0.5% from 2025 levels. Projections include:

• 3.7% for production and blue-collar classifications
• 3.6% for hourly administrative positions
• 3.7% for professional administrative positions
• 3.8% for managers and executives

Projected Merit Increases, Budgets: 2026

Survey findings confirm this restrained stance. Payscale reports that across U.S. organizations, the median merit increase budget is expected to be 3.0% in 2026, down slightly from the 3.2% actual median in 2025. This pattern is consistent with recent years, where merit budgets have hovered near 3% since 2022, briefly edging higher in 2023 before flattening again.

In past articles, (2024, 2023), Blue Whale Compensation have highlighted—and again emphasize—the difference between overall wage movements and planned increases. While overall wage movements include promotions, cost-of-living adjustments, and compliance with new minimum wage guidelines, planned increases specifically refer to the budgeted payroll percent increases employers allocate for merit-driven or across-the-board pay adjustments. Typically, these figures trail overall wage and salary movements by 0.5% to 0.75%. For 2026, projections suggest that merit increase budgets will range between 3.0% and 3.2%.

By industry, there are some important variations. Construction (3.4%) and Finance & Insurance (3.4%) stand above average in 2026 merit budgets, while Education (2.9%) and Manufacturing (3.1%) lag behind. Nonprofits, often under pressure to balance donor expectations with retention needs, are planning around 2.9% to 3.0% for merit increases—still shy of their 3.7% overall salary increase projection.

These numbers underscore the reality that while organizations continue to use merit as a lever to reward and retain, the room for differentiation is shrinking. With most industries clustering tightly around 3.0%, employers must lean on tools like the merit matrix to ensure those limited dollars are allocated in ways that reinforce performance, equity, and competitiveness.

Strategic Pay Adjustments When Budgets Are Tight

Among the most effective methods employers can use to maximize a small budget is the merit matrix model. By linking increases to both employee performance and current pay position relative to the market, this approach directs the largest adjustments to high performers who are still paid below market. In an environment where overall increases are expected to barely outpace inflation, the merit matrix helps organizations maximize impact—rewarding performance, addressing pay equity concerns, and ensuring that scarce budget dollars move pay levels closer to competitive benchmarks.

Best Practices for Salary Increase Budgeting

1. Take a holistic view of pay growth: Budget not only for annual merit increases but also for promotions, market adjustments, and off-cycle actions to sustain competitiveness and fairness.
2. Demonstrate commitment to your pay equity strategy: Reserve funds to correct pay equity gaps when audits reveal disparities. This protects reputation, mitigates compliance risk, and strengthens trust.
3. Protect long-term employees from compression: Ensure tenured staff are not disadvantaged when new hires enter at equal or higher pay. Addressing compression safeguards retention and engagement.
4. Align budgets with industry and peer market realities: Different industries face distinct talent pressures and pay dynamics. Tailoring salary increase budgets to industry benchmarks ensures investments are competitive where it matters most.
5. Keep compensation market-driven, not inflation-driven: Anchor salary growth in competitive labor market data rather than inflation indices. This ensures pay remains aligned with talent demand.
6. Budget with full compensation visibility: Boards should expect management to analyze total compensation—salary, incentives, and benefits—relative to market benchmarks by role and level.
7. Secure Finance partnership: Well-supported budgets align with financial strategies, withstand scrutiny, and give the board confidence in their sustainability.

Conclusion: A Strategic Approach to Compensation

As employers plan for 2026, it is essential to take a strategic approach to compensation, ensuring that budgeting is based on a comprehensive view of market conditions. Blue Whale Compensation’s tools, such as BlueComp, can assist companies in staying competitive by offering insights into wage movements and helping adjust pay scales accordingly.

For more information on how to leverage these insights and tools for your organization, please contact a BlueComp representative.