2026 Salary Increase Projections: Navigating Flat Budgets and High-Performers
Salary planning season is here, and HR Directors face a familiar paradox: how do you retain top talent when merit budgets refuse to grow? According to Mercer’s October 2025 US Pay Planning Survey, firms are planning merit-based salary increases at 3.2% for 2026. This is essentially flat compared to 2025 actuals. Total salary budgets (including raises and market adjustments) average 3.5%. However, this stability masks a deeper challenge. While budgets have leveled after post-pandemic highs, employee hopes remain elevated. The fight for high-performers gets fiercer. Consequently, the clash of steady budgets and rising retention risks demands smarter merit pay strategies. This guide provides clear tactics to stand out with pay, protect your best people, and satisfy both CFO cost discipline and CEO talent priorities.
The 2026 Salary Landscape: What the Data Reveals
First, Mercer’s October 2025 US Pay Planning Survey confirms that merit-based salary increases are set at 3.2% for 2026. This matches 2025 levels exactly. Additionally, total salary increase budgets sit at 3.5%. These include merit, raises (averaging 8.7% per Mercer), and market tweaks. Furthermore, research from Payscale, WorldatWork, and Willis Towers Watson backs up this range. Employers have steadied pay spending after the 4%+ highs of 2021–2023. For HR leaders, this stability creates a key problem. Steady budgets cannot deliver distinct rewards unless you carefully redesign your merit pay strategies.
The tension grows when you segment your workforce. Specifically, high-performers—those driving major value—expect rewards that match their work. Meanwhile, solid performers receive modest increases that barely keep pace with inflation. Notably, raises from moving up now average 8.7%. Yet fewer employees (around 9% of the workforce) receive these moves compared to prior years. Without careful action, your merit cycle risks becoming a routine task. It neither inspires excellence nor retains critical talent. Moreover, failing to stand out with 2026 salary increases can trigger voluntary exits among your most valuable employees. This ultimately forces you to backfill roles at premium market rates.
Why Steady Budgets Complicate High-Performer Compensation
Stable budget settings force trade-offs that many HR teams struggle to handle. For instance, when your overall merit pool holds at 3.2%, awarding a high-performer 8% or 9% means other employees receive far less. Some get nothing at all. As a result, this zero-sum dynamic creates internal friction. This is especially true in cultures unused to clear performance talks. Additionally, managers often resist making hard calls. They default to even spreads that leave everyone equally underwhelmed.
Furthermore, steady budgets collide with outside market realities. In fact, rivals are not limited by your budget cap. They can recruit your top performers with offers that leap past small raises. Thus, a 3% increase feels like a token gesture. This applies to someone who knows they could earn 15% more by switching employers. Therefore, HR Directors must build a pay framework that boosts perceived and actual value within money limits. Leverage non-cash rewards, paths to move up (where raises average 8.7%), and targeted equity tweaks.
Strategic Framework: Differentiation Within Constraints
Decision Framework for Merit Allocation:
- Classify performers using clear, written criteria (top 10%, solid 70%, needs work 20%)
- Set contrast ratios (e.g., top performers receive 2–3× the average increase)
- Validate budget math to ensure total spend stays within the approved cap
- Talk openly so employees grasp the link between performance and pay
Putting this framework to work requires discipline. To start, audit your current spread. If 80% of employees receive between 2.8% and 3.5%, you lack meaningful contrast. Instead, aim for a spread where high-performers receive 5–7%. Solid workers get 2–3%. Poor performers receive zero or minimal increases. Ultimately, this approach sends a clear signal. Merit pay strategies reward results, not tenure. Indeed, this aligns with a broader compensation planning clarity framework. It helps HR teams prioritize pay decisions in tight budget seasons.
Next, equip managers with training and tools. In reality, many leaders hesitate to stand out. They lack confidence in performance checks or fear conflict. Therefore, provide alignment sessions, standard rating definitions, and scripted talking points. Similarly, tech platforms like SimplyMerit make this process smoother. They handle math automatically, enforce budget guardrails, and create manager-ready talk templates. By removing manual spreadsheet guesswork, you free HR to focus on strategy rather than error fixing.
Tactical Levers Beyond Base Pay Increases
When 2026 salary increases hit budget ceilings, explore other levers. These boost total rewards without raising recurring costs. For example, one-time bonuses, spot awards, and project-based perks allow you to reward high-performers. They preserve long-term budget flexibility. In particular, a $3,000 bonus paired with a 4% merit increase often delivers stronger retention impact than a 5.5% raise alone. The lump sum feels more real and immediate.
Likewise, equity or profit-sharing programs offer another path. Notably, high-performers value ownership and upside share. This is particularly true in growth-stage or private companies. Even symbolic equity grants signal confidence and alignment. They boost commitment to firm success. Also, consider non-monetary rewards: expanded duties, leadership growth chances, and flexible work settings. These resonate deeply with employees seeking career progress and work-life balance.
Moving-up cycles also deserve scrutiny. Specifically, if your merit budget cannot stretch to market-level increases, speed up moves for top talent. In this case, a title change coupled with an 8–10% tweak resets their pay range. This aligns with Mercer’s 8.7% average and validates their work. Conversely, delaying moves to “wait for the next cycle” risks losing high-performers. Rivals move faster. Thus, HR Directors should advocate for nimble, performance-triggered moves rather than rigid annual schedules.
✅ Quick Implementation Checklist for 2026 Merit Cycles
Use this practical checklist to put your contrast strategy to work:
☐ Lock performance ratings and align across departments by February 15
☐ Model merit scenarios using actual budget limits and contrast ratios
☐ Train managers on delivering tough talks and justifying pay decisions
☐ Automate math with pay software to remove manual errors
☐ Share outcomes one-on-one and explain the performance-pay link
☐ Monitor retention for 90 days after cycle and adjust tactics for at-risk high-performers
Regulatory and Market Considerations
The current regulatory setting increasingly demands pay openness and equity. At present, several states now require salary ranges in job postings. Employees compare notes on platforms like Glassdoor and Blind. Consequently, this openness boosts the importance of defensible, data-driven merit pay strategies. Therefore, document your reasons for contrast. Ensure decisions align with performance data. Audit for unintended demographic gaps that could trigger legal risks.
Market dynamics also vary by industry and region. For instance, while national averages sit at 3.2% merit and 3.5% total salary budgets, high-tech and money sectors often project closer to 3.7% total increases. Retail and healthcare lag at 2.9–3.4%. Accordingly, tailor your contrast approach. Assign scarce merit dollars to roles with the highest flight risk or key importance. Consider below-market increases for positions with plenty of candidate supply. Ultimately, this targeted approach boosts ROI on your limited budget.
🧠 MorganHR Point of View: Capitalist Differentiation Drives Performance
We believe merit cycles should function as capitalist tools for performance elevation. Specifically, making pay differences obvious—not obscure—heightens high-performer output. It rewards clear work and creates healthy internal rivalry. When top performers see clear financial rewards, they double down on excellence. Conversely, when poor performers receive minimal or zero increases based on written performance, it creates reasons to improve. It signals a potential mismatch and ultimately boosts team quality.
This thinking requires courage and clarity. In practice, HR Directors must partner with finance to secure budget flexibility for the top 10%. This may mean explaining to the CEO why some employees receive nothing. Indeed, the alternative—equal spreads that please no one—erodes meritocracy and talent retention. By fine-tuning steady budgets for CFO efficiency and CEO competitive edge, you transform pay from an admin task into a strategic lever for firm performance. Equal spreads do not build great companies. Capitalist contrast does.
Segmentation by Company Size
Small companies (<250 employees): Rely on fewer formal systems. Put contrast to work through open, frequent one-on-ones and nimble bonus pools. In this setting, personal ties can substitute for complex software.
Mid-size companies (250–2,500 employees): Invest in pay software like SimplyMerit to standardize processes. This enforces budget discipline and scales manager support. At this stage, alignment sessions become critical to ensure uniformity.
Large enterprises (2,500+ employees): Deploy centralized pay teams, rigorous analytics, and multi-tiered approval workflows. In these organizations, contrast must survive layers of review while keeping speed and fairness.
Key Takeaways
- Merit-based salary increases are set at 3.2% for 2026, with total salary budgets averaging 3.5%. This requires careful contrast to retain high-performers within steady budgets.
- Merit pay strategies must use ratios (e.g., 2–3× average for top performers) to signal a performance-driven culture.
- Combine base increases with one-time bonuses, equity, and moves up (averaging 8.7%) to boost perceived and actual reward value.
- Automate and document decisions to reduce errors, ensure legal compliance, and equip managers for tough talks.
- Contrast is a capitalist tool: making merit values obvious elevates output and protects CFO and CEO priorities.
FAQs
Q: How do I justify an 8% increase for one employee when the budget average is 3.2%?
A: Document the employee’s clear impact (revenue, efficiency gains, leadership) and compare to peers. Explain that steady budgets require trade-offs. Zero or minimal increases for poor performers fund higher rewards for top talent.
Q: What if managers resist standing out with pay?
A: Provide alignment training, standard performance definitions, and software guardrails. Show data on retention risk and rival offers. This reinforces the business case for tough decisions.
Q: Can I legally give some employees zero merit increase?
A: Yes, provided decisions are based on written performance, not protected traits. Audit outcomes for uneven impact. Consult counsel on state-specific openness or notice rules.
Q: How do small companies compete with larger firms’ merit budgets?
A: Emphasize total rewards—equity, flexibility, career growth, and culture. Use targeted bonuses and sped-up moves to deliver competitive value. This avoids raising fixed costs.
Q: When should I refresh this pay strategy?
A: Review quarterly retention data and market benchmarks. Conduct a full refresh annually or whenever budget assumptions change notably.
Q: How does pay software reduce spreadsheet errors?
A: Automation removes manual formula mistakes and enforces budget caps. It flags outliers and creates audit trails. Tools like SimplyMerit provide these abilities while giving managers clear talk templates.
Ready to see how strategic merit planning transforms retention and performance? Schedule a SimplyMerit walkthrough with MorganHR’s pay experts. Discover how automation, contrast, and data-driven insights turn steady budgets into competitive advantage.