Planning for compensation in 2026 is no small task. Canadian employers are preparing for a year shaped by economic uncertainty, shifting workforce expectations, and a wave of new technologies changing how organizations think about rewards.

While the US market often dominates headlines, Canada has its own story to tell. Understanding trends is crucial for business leaders, HR professionals, and employees alike to navigate the year ahead.

Let’s explore what’s happening in the Canadian economy, how budgets are being set, and which industries are leading the way in 2026.

The Canadian economy

The Canadian economy enters 2026 on shaky ground. While stock markets have been strong, the real economy tells a different story:

• Gross domestic product (GDP) slipped in the second quarter of 2025, weighed down by weaker exports and sluggish business investment. For employers, that signals a more cautious approach to planning.
• Unemployment has been climbing, with the rise in youth unemployment being especially troubling.
• Total wage growth has been almost flat, with total wages paid to employees up only 0.2% in the second quarter, the smallest gain since 2016, excluding the sharp pandemic dip in 2020.
• Inflation has moderated from its peak, but the cost of living remains a top concern for Canadians. Shelter and food costs continue to rise sharply year-over-year, putting pressure on household budgets. These factors are setting the stage for difficult compensation conversations.

The US labour market has also shown signs of slowing down. The latest US jobs reports had an unemployment rate of 4.3% as of August 2025, which is its highest level since 2021.

Yet, Canada’s economy has been relatively resilient, with strength in natural resources, infrastructure investment, and support for domestic businesses. Together, these factors could support a more stable outlook by late 2026. For now, however, employers are planning carefully.

Budget discrepancies across industries

One of the clearest signals for compensation trends in 2026 is salary increase budgets. The Mercer Canada Compensation Planning Survey shows:

• The average total projected salary increase will hover around 3%. That’s modest, but it reflects ongoing caution in an uncertain economy.
• High Tech and Insurance/Reinsurance are leading the way, with the highest total budget increase projected to be 3.5%. These industries face fierce talent competition, particularly in specialized and technical roles. Crown Corporations, Banking/Financial Services, and Consumer Goods aren’t far behind.
• Fewer organizations are planning budget increases above 4% compared to 2025. Instead, most budgets are consolidating around the 3% mark, signaling a shift toward cost containment and predictability.
• Salary structure adjustments are also trending around 2.7%, with just over half of organizations (51%) planning to adjust in 2026.

Interestingly, many companies report that their budgets are moving from preliminary estimates into approved figures earlier than in past years. That suggests a more substantial commitment to formalizing compensation strategies, even in a volatile environment. Employers are prioritizing stability and signaling to employees that modest increases are reliable.

Internal focus: pay transparency and talent development

Compensation isn’t just about how much is paid. It’s also about how fairly and clearly pay practices are communicated. Here’s what employers reported:

• Two-thirds of organizations say their transparency strategies are compliance-driven, sharing information only when legally required to comply with provincial pay transparency laws. They have no plans to broaden transparency beyond the required amount. This is consistent with 2025 data.
• The other third of organizations, however, is leaning into proactive transparency, sharing pay ranges internally and externally in a standardized way, or is exploring implementing a standardized approach beyond what’s legally required.
• This shift is partly driven by Ontario’s Pay Transparency legislation, which is expected to push more firms across Canada to adopt consistent practices.
• A small subset of employers (4%) doesn’t know their approach to pay transparency. These organizations operate in provinces without any current pay transparency legislation, so they haven’t decided whether they will be driven by compliance or strategy.

At the same time, compensation priorities are shifting inside organizations. With the economy slowing, hiring has dropped on the priority list. Instead, companies emphasize skill and talent development, market competitiveness, and making thoughtful compensation changes for their existing workforce. Promotions are less of a focus, but performance management and employee support programs remain steady priorities.

In short, employers recognize that pay transparency and career development are key factors for retention. Organizations can keep employees engaged by investing in skills and creating clear, equitable structures, even if salary increases aren’t soaring.

Technology, AI, and the rewards revolution

One of the most talked-about compensation trends for 2026 is the impact of technology and artificial intelligence (AI) on rewards. Key findings include:

• While 96% of NYSE-listed CEOs view AI as a chance to unlock productivity, only 7% of rewards leaders say AI has significantly shifted their processes. Most organizations are still in the early stages of redesigning work to increase productivity, but struggle to show measurable results.
• That said, HR technology investment is booming. More than 96% of organizations have recently upgraded their HR tech systems, and over 40% plan further investments in 2025 and 2026. The goal is to make compensation and rewards processes more efficient, data-driven, and responsive.
• Practical applications of AI are emerging. Companies are experimenting with automated job description writing, AI-powered job matching, and job grading tools that use proprietary methodologies to suggest grade levels. Much of the time spent by compensation/rewards professionals is on job evaluation and the annual compensation process including benchmarking and survey participation. You can expect to see increased efficiency and time saving among these activities with the use of AI. Predictive analytics for performance, compensation optimization, and workforce planning are on the horizon.

This rewards revolution isn’t just about efficiency, it’s about turning your rewards function into a driver of strategic value, promising fairer rewards that promote future growth and required skills, and providing better support for managers making compensation decisions. But employers must overcome roadblocks around data quality, bias, and legal considerations before AI can reach its full potential.

Moving forward

What do these compensation trends mean for Canadian employers in 2026? The path forward involves four key priorities.

1. Balance competitiveness with cost control

Employers face a tricky balancing act. Rising living costs make competitive pay essential, but economic headwinds demand careful budgeting. Companies that can strike the right balance will be better positioned to retain talent without overstretching financially.

2. Embrace transparency and equity

Pay transparency is no longer optional. Legislation in Ontario and changing employee expectations dictates that organizations will need clear, equitable practices. Those who take a proactive approach will strengthen employee trust, improve retention, and attract talent in a competitive labour market.

3. Implement technology and AI thoughtfully

The promise of AI is real, but so are the risks. Employers should start small with pilot projects, ensure their data is accurate, and build the skills needed to use new tools effectively. Doing so will help HR teams unlock efficiencies without creating new risks around bias or compliance.

4. Invest in people through skills and careers

Salary increases may be modest, but investments in skills, learning, and career pathways go a long way toward retention. Employers who create growth opportunities will find it easier to keep top talent engaged and prepared for future challenges.

Ready to navigate your 2026 compensation planning?

A slowing economy, stubborn inflation, and rising unemployment are pushing employers to tighten budgets. Yet, new technologies, pay transparency, and a focus on skills development create fresh ways to engage and reward talent.

For Canadian organizations, the challenge is to stay agile: balancing modest increases with long-term investments in people, thoughtfully adopting AI, and identifying the hot jobs that will drive growth. Canadian employers who take a proactive, data-driven approach to compensation will be best positioned to attract, retain, and motivate their workforce in 2026 and beyond.

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