First Midwest BankFirst Midwest Bank logoArrow DownIcon of an arrow pointing downwardsArrow LeftIcon of an arrow pointing to the leftArrow RightIcon of an arrow pointing to the rightArrow UpIcon of an arrow pointing upwardsBank IconIcon of a bank buildingCheck IconIcon of a bank checkCheckmark IconIcon of a checkmarkCredit-Card IconIcon of a credit-cardFunds IconIcon of hands holding a bag of moneyAlert IconIcon of an exclaimation markIdea IconIcon of a bright light bulbKey IconIcon of a keyLock IconIcon of a padlockMail IconIcon of an envelopeMobile Banking IconIcon of a mobile phone with a dollar sign in a speech bubbleMoney in Home IconIcon of a dollar sign inside of a housePhone IconIcon of a phone handsetPlanning IconIcon of a compassReload IconIcon of two arrows pointing head to tail in a circleSearch IconIcon of a magnifying glassFacebook IconIcon of the Facebook logoLinkedIn IconIcon of the LinkedIn LogoXX Symbol, typically used to close a menu
FDIC-Insured - Backed by the full faith and credit of the U.S. Government

Suggested Search Terms

    Suggested Search Terms

      Zz0yNGQ4ZWJkZTAzY2UxMWYxYmU3Y2RlMjE4YmRkMmZkYg==.webp
      Get Insights

      Get monthly ideas delivered right to your inbox.

      Subscribe for Insights

      For Your Business David McCann February 23, 2026

      Employers Peg Pay Hike Budgets at 3.5% for 2026

      With the number of unemployed workers now exceeding the number of available jobs for the first time since 2021, U.S. employers have left behind the historically high compensation budget increases that prevailed a few years ago.

      Employers are projecting an average salary budget increase of 3.5% for 2026, according to new research from Mercer. As recently as 2023, the corresponding figure was 4.1%.

      Budgets for merit increases are forecasted to average 3.2% next year, down from a high of 3.8% in 2023.

      Mercer, which polled more than 1,000 U.S. organizations, reported a sharp decline in the number of specializations with year-over-year pay hikes of 5% or more, from 650 roles in 2023, to 168 in 2024, to just 87 this year.

      “This downward trend reinforces that the post-pandemic period of accelerated wage growth and labor market pressure has cooled considerably,” Mercer wrote in its study report. “Employers appear to be shifting toward more moderate pay increases as market conditions stabilize and inflation trends ease.”

      Almost two-thirds (63%) of the survey participants cited salary benchmarking as a top compensation-related priority for 2026.

      Among sectors, the highest average budget increase, 3.7%, is projected for financial services, energy and technology. Retail/wholesale and manufacturing have the lowest outlook, at 3.3%.

      Off-cycle salary adjustments have emerged as a commonly employed tool, used by 66% of employers in 2025, up from 52% in 2023. That trend, driven mostly by promotions, evolving job scope and proactive retention of key talent, signals “a shift toward more fluid, business-responsive pay practices,” the report said.

      Still, Mercer counseled that employers should be smarter with their workforce spending. An overwhelming proportion (83%) of the surveyed companies said they allocate budget increases uniformly without consideration of individual employees’ performance​​​​​​, often called the “peanut butter” approach. Only 15% strategically differentiate the budget dollars.

      According to the report, AI tools can identify pay-equity risks in real time, highlight performers who may be underpaid relative to the market, and consider differentiated increases based on performance, market dynamics and internal equity, according to the report.

      The survey also found, however, that AI and automation are having a limited impact on hiring and compensation decisions. Only 2% of survey participants cited AI and automation as a reason for reduced hiring, and just 9% said they plan to make headcount changes related to AI.

      AI hasn’t yet shaped such decisions because “organizations are still evolving their operating models to apply AI responsibly and with the right governance and oversight,” said Stephanie Penner, Mercer’s career practice leader for the U.S. and Canada.

       

      This article was written by David McCann from CFO.com and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.

      Subscribe for Insights

      Subscribe