2026 Compensation Outlook:
Pay Increases & Merit Budget Planning

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

A review of pay increase data — including projected vs. actual increases in 2025 — indicates that with the exception of a few sectors, U.S. employers tightened their budgets in 2025. The 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 carry into 2025. Actual increases compiled from Payscale, SHRM, WorldatWork, and WTW show that whereas employers planned increases around 3.9% for 2025, actuals dropped to an average of 3.5%. Generally, actual increases tend to exceed projected increases by three to four-tenths of a point — making this reversal notable.

For 2026, with uncertain economic growth, data suggests companies are adopting a conservative stance. While pay freezes have become more common — especially in tech, where players like Salesforce and Microsoft previously announced no raises — U.S. companies plan to increase salaries by 3.5% in 2026, matching the median increase observed this year.

Increases Based on Economic Uncertainty, Not Inflation

Whereas in recent years inflation was the key driver behind pay increases, for 2026 the number one factor — as reported by WTW — is economic conditions. Nearly 40% of employers cited anticipated recession, weaker financial results, or supply costs as the primary reason for setting 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. 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, certain industries will set budgets noticeably more aggressive than others. Of the 22 industry sectors reported by Payscale, Business Services was the only sector projecting a 4.0% increase — no other industry crossed that threshold.

Manufacturing & Service Jobs vs. Professional & Managerial Jobs

Most surveys show no material differences in projected increases between employee groups — specifically hourly, exempt, and management. This marks a shift from earlier years when exempt and management employees typically received greater increases than hourly 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.

Overall Projection: Wage & 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.

Projected Merit Increases & Budgets: 2026

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. Merit budgets have hovered near 3% since 2022, briefly edging higher in 2023 before flattening again.

As highlighted in Blue Whale’s 2024 and 2023 reports, it’s important to distinguish overall wage movements — which include promotions, cost-of-living adjustments, and minimum wage compliance — from planned increases, which represent the budgeted percent allocated for merit or across-the-board adjustments. Typically, planned figures trail overall wage movements by 0.5–0.75%. For 2026, merit increase budgets are projected to range between 3.0% and 3.2%.

By industry, Construction (3.4%) and Finance & Insurance (3.4%) stand above average, while Education (2.9%) and Manufacturing (3.1%) lag behind. Nonprofits are planning around 2.9–3.0% for merit — still below 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 limited dollars are allocated in ways that reinforce performance, equity, and competitiveness.