In Brief
Most mid-market employers will hold 2026 salary increase budgets near 3.5% while health benefit costs are projected to rise about 6.5%. Stay competitive by reallocating toward market and equity fixes, rewarding performance and critical skills, keeping a mid-year reserve, refreshing ranges, and clearly communicating total rewards.
Budget season is here, and 2026 brings familiar pressures. Salary increases will consume a larger portion of your budget, while benefit costs are rising sharply. For many leaders, the challenge will be to figure out ways of stretching limited resources to deliver success in the year ahead.
However, there are also opportunities here. Done right, your salary strategy can become a tool for engaging and retaining your best people. The key is knowing where to allocate your dollars and how to make every investment count.
In this article, we'll outline practical ways to stay competitive in 2026. But first, let's look at what the data tells us about the year ahead.
What's changing in 2026?
The salary increase landscape for 2026 looks remarkably similar to 2025. Most organizations are holding steady, with budgets clustering around the same levels we saw this year.
On average, we expect to see salary increases of around 3.4% to 3.6%. Some notable projections include:
- WorldatWork projects a 3.6% average (3.5% median) for U.S. total salary increase budgets
- SHRM forecasts 3.5% average increases, reflecting flat expectations from 2025
- Payscale reports 3.5% planned salary budget increases for U.S. organizations
- Aon projects a 4.0% salary increase for American employers
On top of that, we expect to see other trends that will impact salary planning, such as:
- Increased benefit costs: Employers are bracing for health benefit cost increases of 6.5% in 2026 after cost-management actions, with the underlying trend running closer to 9% before plan changes. This represents the highest increase in 15 years.
- Changes to bonus structure: Organizations are scaling back one-time discretionary bonuses while leaning more heavily into performance and incentive pay. Merit pool allocations are moderating from 3.5% in 2024 to 3.0% in 2025.
- Greater expenditure on professional development: Companies are increasing investments in upskilling, particularly around AI and critical technical skills. This reflects a broader shift toward building internal capabilities rather than competing solely on base pay.
- Focus on internal equity: With 59% of employers now using "other" base pay adjustments—up from 56% in 2025—organizations are prioritizing market corrections, equity fixes, and retention adjustments over across-the-board increases.
- Responses to unpredictable externalities: Leaders face another year of uncertainty ahead, especially if the current government shutdown continues into the new year.
All employers are facing these challenges, and in some cases this might lead to pressure on organizational culture and employee relations. There is an opportunity here to engage and retain staff, provided you have the right strategy.
5 ways to stay competitive in 2026
The salary increase number is only part of the story. What matters more is how you deploy that budget to attract, engage, and retain the people who drive your business forward.
1. Hold the headline budget, but reallocate internally
Most organizations will keep their overall salary increase budgets around 3.5%, matching 2025 levels. That doesn't mean your compensation strategy should stay the same.
Create a dedicated pool for market adjustments, equity corrections, and retention bonuses. Research shows 59% of organizations are increasing their use of "other" base pay adjustments specifically to address hot jobs and critical skills. This approach lets you respond to market pressures without inflating your merit budget across the board.
Next steps: Review your current allocation between merit increases and market adjustments. Consider reserving 0.25 to 0.50 percentage points of your total budget for mid-year corrections in high-demand roles or critical positions where you're seeing retention issues.
2. Differentiate with performance and skills, not across-the-board increases
Broad-based merit increases feel fair, but they rarely drive the results you want. The most effective compensation strategies reward performance and critical skills, not tenure or presence.
Organizations are increasingly tying compensation to performance and incentive pay while moderating broad merit increases. This allows you to recognize top contributors more meaningfully without raising costs for everyone. WTW reports that 37% of organizations are using targeted base increases for specific groups, and 43% are deploying enhanced retention or spot awards.
Next steps: Map your workforce to identify which roles are most critical to business outcomes. Build a differentiated pay strategy that recognizes high performers and hard-to-replace skills, even if that means smaller increases for solid but less critical contributors.
3. Build a mid-year market adjustment reserve
Salary planning shouldn't be a once-a-year exercise. Markets move, competitors make offers, and your best people get approached. Having a reserve fund for mid-year adjustments gives you the flexibility to respond when it matters.
Keep your baseline merit pool at around 3.1% and your total budget at 3.5%, but carve out a small portion for market recalibration. This approach, recommended by Mercer in their 2026 guidance, allows you to stay agile in hot markets or address equity issues that emerge throughout the year.
Next steps: Set aside 0.25 to 0.50 percentage points of your compensation budget for mid-year adjustments. Establish clear criteria for when these funds can be deployed, and ensure managers understand the process for requesting market adjustments.
4. Refresh salary structures and starting ranges where needed
If you're consistently hiring at or above the midpoint of your salary ranges, your structures are out of date. This creates compression issues and makes it harder to reward internal talent fairly.
Use current market data to adjust salary ranges in areas where you're seeing persistent hiring challenges. Organizations are raising starting ranges and hiring higher in range to compete for talent, particularly in technical roles and specialized functions. When you refresh your structures, you're not just solving a hiring problem—you're preventing future retention issues.
Next steps: Conduct a range penetration analysis to identify roles where most employees cluster near or above midpoint. Update salary ranges based on current market data, and communicate changes clearly to prevent confusion about internal equity.
5. Balance cash compensation against rising benefit costs
Salary isn't the only number that matters to your people. With health benefit costs rising, take-home pay becomes a more complicated equation.
Model total rewards trade-offs before locking in your compensation strategy. With medical plan costs increasing 6.5% after cost-management actions—and running closer to 9% without intervention—protecting take-home pay requires a balanced approach. Consider increasing variable pay opportunities for broader populations while targeting base pay increases to critical roles. Deploy strategic plan design changes, like pharmacy benefit management reviews and utilization controls, to relieve benefit cost pressure without shifting the entire burden to employees.
Next steps: Calculate the full cost of total rewards, including projected benefit increases, before finalizing salary budgets. Work with your benefits team to identify high-impact cost management strategies that won't significantly affect employee experience. Make sure employees understand the full value of their total compensation package, not just their base salary.
Need help with budget planning?
Budget planning for 2026 requires balancing competing pressures: staying competitive in the talent market, managing rising costs, and investing in the people who matter most to your business. The organizations that get this right are the ones that approach compensation strategically, using data to drive decisions and allocating resources where they'll have the greatest impact.
If you're looking for support with your 2026 compensation strategy, Helios HR can help:
- Strategic HR to align people initiatives with business goals
- HR consulting for expert guidance on compensation planning and implementation
- HR Compliance to ensure your compensation practices meet regulatory requirements
- Employee engagement strategies that help you retain your best people
Ready to build a compensation strategy that works for your business? Contact Helios HR to discuss how we can support your 2026 planning.
Resources
- WorldatWork (Workspan Daily) “WorldatWork projects a 3.6% average” https://worldatwork.org/publications/workspan-daily/salary-increase-budgets-forecast-to-hold-steady-in-2026
- SHRM “SHRM forecasts 3.5% average increases” https://www.shrm.org/topics-tools/news/benefits-compensation/salary-increases-2026
- Payscale “Payscale reports 3.5%” https://www.payscale.com/featured-content/salary-budget-survey
- Aon “Aon projects a 4.0% salary” https://www.aon.com/en/insights/articles/2026-salary-increase-budgets-us
- WTW “WTW reports that 37% of organizations are using targeted base increases…” https://www.wtwco.com/en-us/news/2025/07/most-us-companies-plan-to-raise-salaries-at-a-slower-pace-in-2026