A breakdown of key compensation trends and 4 ways to take clear action in 2026

Compensation planning never happens in a vacuum. It’s shaped by the economy, industry dynamics, talent availability, and shifting employee expectations. As 2025 winds down, HR and Total Rewards teams are already looking ahead, asking how to prepare compensation strategies for a softening labor market in 2026.

Mercer’s latest research, including the Mercer Compensation Planning Survey and Mercer Benchmark Database, sheds light on the realities of today’s workplace and what lies ahead. Let’s break down the key compensation trends and explore how employers can position themselves for success.

A softening labor market

The backdrop for 2026 planning is a cooling but still resilient labor market. According to the US Bureau of Labor Statistics, unemployment peaked at 4.2% in July 2025, up slightly from June but still consistent with the prior year. Job openings declined to 7.2 million, a 2% dip from June, signaling reduced labor demand, while quits retreated to levels last seen in 2015–2016.

Employees’ confidence in finding new jobs has weakened, and layoffs, while still low, are slowly increasing. These signals point toward a softening labor market that reduces the leverage employees once had during the post-pandemic hiring frenzy.

For employers, this economic climate matters because:

• 82% of organizations report that the US economy significantly or moderately impacts compensation decisions.
• Top priorities are shifting with market competitiveness and skill development climbing, while hiring and promotions are being deprioritized.

The big takeaway? Organizations are recalibrating, aiming to maintain competitiveness while preparing for tighter budgets and a more measured pace of pay growth.

Budgets and industry differences

Compensation increase budgets have settled into a new normal after the post-pandemic spike. According to Mercer’s Compensation Planning Survey, annual merit and total salary increase budgets have held steady, at around 3.1% and 3.5%, respectively, since 2023.

But averages only tell part of the story. Budgets vary meaningfully by industry:

• Banking/Finance and Life Sciences lead with a projected 3.7% total budget increase.
• Health Care Services, High Tech, and Retail sit at the lower end, with merit increases of around 3%.

For Total Rewards teams, these differences underscore the importance of understanding sector-specific pressures. Labor shortages in healthcare, for example, don’t necessarily translate into higher merit budgets. Instead, employers are turning to other retention tactics such as off-cycle adjustments and career development opportunities.

Understanding the differences between industries is important. A 3.1% average increase may sound sufficient, but being behind the trends could jeopardize retention if you’re competing in a hot labor market like Logistics or Life Sciences.

A shift to internal focus

One of the clearest compensation trends for 2026 is a shift inward. With external hiring slowing, organizations are doubling down on retention and talent development.

Off-cycle salary adjustments are becoming a bigger part of the toolkit, as employers look for flexible ways to retain high performers and address pay equity gaps. Total Rewards leaders are asking: Where can we invest in ways that keep employees engaged without overspending on blanket increases?

Priorities are also changing. Surveys show that retaining employees and building skills rank far above new hiring or promotions. This internal focus reflects economic caution and the recognition that long-term success comes from developing, not just acquiring, talent.

In-person compensation premium

Another striking trend is the in-person premium. Remote and hybrid work options were once a differentiator, but now they affect compensation outcomes.

Mercer’s Inside Employees’ Minds report reveals that fully remote workers report poorer experiences compared to their in-office peers, and this gap is reflected in compensation. From 2024 to 2025, in-person roles saw higher year-over-year compensation increases than remote roles.

Why? Organizations are emphasizing the value of face-to-face collaboration and rewarding employees who show up physically. While flexibility remains important, Total Rewards teams should prepare for a future where physical presence carries a pay premium.

This doesn’t mean employers should abandon remote work. Instead, they should be transparent about how work arrangements affect pay progression and career opportunities.

Changes in high-demand jobs

Perhaps the most dynamic aspect of the current compensation landscape is the difference between hot jobs and cooling jobs.

Data from Indeed Hiring Labs (August 2025) shows demand surging for hands-on, frontline work:

• Construction jobs: Up 23%
• Logistics support: Up 19%
• Installation and Maintenance: Up 17%
• Production and Manufacturing: Up 11%

Meanwhile, white-collar and tech roles are cooling:

• IT: Down 30%
• Software Development: Down 34%
• Data and Analytics: Down 39%

This demand shift is driving pay changes. From 2024 to 2025, the most significant base salary increases were in Production and Skilled Trades, Hospitality, and Transportation Services, while Sales and Marketing, IT, and Customer Service saw the smallest gains.

For HR and compensation leaders, this realignment highlights the need to:

• Reassess job architectures and pay ranges for frontline roles.
• Consider targeted top-ups in high-demand sectors where turnover is costly.
• Recognize that traditional “hot jobs” in tech may no longer command the same premium.

Mercer’s research points to four clear actions, each of which deserves careful consideration.

1. Pinpoint ROI: Invest in rewards that actually work

Every organization is facing increased scrutiny around budgets. Leaders want to know that compensation dollars are used strategically, not just spread evenly across the workforce. To achieve this, HR teams must treat rewards like any other business investment and measure the return.

Data and employee feedback are used to identify which rewards influence retention and engagement. For some organizations, this might mean funneling more of the budget into tuition reimbursement or reskilling programs because employees value career development. In other organizations, retention depends more on predictable scheduling, wellness benefits, or housing stipends for frontline workers.

HR can maximize retention without inflating the overall budget by reallocating dollars away from low-impact perks and toward the rewards that employees say make a difference. This approach also provides leaders with a clear story about the ROI of rewards, which helps defend compensation budgets during reviews.

2. Turn transparency into a competitive advantage

Pay transparency isn’t just about compliance with emerging laws. It’s about trust. Mercer’s survey data shows that about half of organizations (52%) still take a compliance-only stance, sharing only what’s legally required. The other half are leaning in to a strategy-driven approach and proactively sharing pay ranges internally and externally.

Organizations in this second group are reaping the benefits. Transparency helps demystify the pay process, reducing employee skepticism and perceptions of unfairness. It also strengthens the employer brand by showing prospective hires that compensation practices are equitable and consistent.

Total Rewards teams should aim to answer the following questions:

• Why are we paying the way we do?
• How does performance connect to pay?
• How are we addressing equity across the organization?

These conversations build credibility and often do more to retain employees than simply increasing pay.

3. Segment and conquer: Tailor rewards to workforce segments

What motivates a skilled tradesperson on the factory floor differs significantly from that of a software engineer or a sales executive. Yet many organizations still rely on one-size-fits-all reward structures.

Going into 2026, leading employees are differentiating. For frontline employees, retention might hinge on predictable shifts, reliable overtime pay, or performance-based bonuses. For knowledge workers, the emphasis may be on career growth, mentorship, and flexibility. And for leadership roles, long-term incentives and equity stakes remain powerful motivators.

Employee surveys, interviews, and workforce analytics can reveal what matters most to each group. Once identified, budgets and rewards can be tailored accordingly, allowing companies to conquer retention challenges across multiple workforce segments instead of overinvesting in one.

4. Automate to maximize impact

Compensation planning has historically been one of the HR calendar's most manual, time-consuming cycles. However, in an era of budget constraints and high expectations, organizations can no longer afford inefficiencies. Automation and analytics tools can transform compensation cycles from administrative exercises into strategic investments.

Automation allows for precise allocation of merit increases, prioritizing top performers and critical roles. It also supports real-time pay equity analysis, helping organizations address potential gaps before they become legal or reputational risks. For managers, automated tools reduce the burden of merit cycles by surfacing data-driven recommendations instead of forcing them to make difficult decisions in a vacuum.

Over time, this shift from manual to meaningful compensation planning creates more consistency, fairness, and better alignment with business goals. And because automation provides detailed reporting, HR leaders are prepared to show executives exactly how compensation investments are driving retention and performance outcomes.

Ready to navigate your 2026 compensation planning?

Compensation trends for 2026 reflect a marketplace in transition. The labor market is softening, but competition remains fierce in specific sectors. For HR, Total Rewards, and compensation leaders, now is the time to sharpen your strategy to stay ahead of the curve.

If you need help with your 2026 compensation planning, contact us via email or call 855-286-5302.