Salary budgets are trending stable, but AI may be the dark horse to watch

Compensation leaders had to navigate 2025, a year that was defined by several years of volatility: inflation spikes, talent scarcity, remote work and sudden shifts in talent demands. As we look to the 2026 planning cycle, a clear pattern has emerged: Salary increases are stabilizing.

However.

The real story is not about restraint; it’s about precision and — increasingly — about the role AI will play in deciding how to spend compensation dollars.

Stability is the headline, strategy is the subtext

Across markets, the average merit increase is consolidating in the 2% to 3% range, according to WTW’s 2025 Salary Budget Planning Report — Global (December edition). This reflects a return to more normalized budget environments after years of reactive adjustments.

In contrast to 2025, post-pandemic increases in the United States started off above 4.0% in 2022 and gradually came back down (including merit increases, promotional increases, collective bargaining increases and so on):

• 4.2% in 2022
• 4.4% in 2023
• 4.0% in 2024
• 3.7% in 2025

Large, broad-based increases with little to no performance-based variances are no longer the dominant lever. Instead, organizations should be far more deliberate. The question is no longer, “How much can we afford to spend?” Rather, it’s “Where will each dollar have the greatest impact?”

This shift signals a maturing compensation strategy: Fewer across-the-board increases and more targeted investments tied to skills, roles, performance and business priorities.

Shifting from blanket increases to strategic pay

Compensation planning needs to move away from uniformity. Organizations are increasingly differentiating pay based on:

• Critical roles tied to growth or transformation
• Scarce or fast-evolving skill sets 
• Performance outcomes that directly support strategy
• Internal equity corrections where risk is highest

This approach allows organizations to remain fiscally disciplined while still competing for key talent. In practice, it means some employees will see higher-than-average increases, while others may see a little less — or none — by design.

Regional signals worth watching

While the global trend is toward stability, several market-specific dynamics stand out:

• Brazil: The return-to-office trend is accelerating, influencing both workforce strategy and compensation design. As location and presence regain importance, companies are reassessing pay structures, allowances and market positioning.
• United Kingdom: Promotional increases are trending down, with planned increases averaging 4.9%. Organizations appear to be tightening promotion-linked spend and applying greater scrutiny to role changes and progression frameworks.
• United States: Workforce planning signals are mixed but telling. Approximately 20% of companies indicate plans to add roles, while 9% plan to decrease headcount. This divergence reinforces the move toward selective hiring and targeted pay rather than broad expansion.

These regional nuances underscore the need for flexible and accurate data-driven planning rather than one-size-fits-all global assumptions. Results from the salary budget planning report also show additional, noteworthy highlights.

AI is entering the compensation planning room

Perhaps the most important shift is not in the size of budgets, but in how decisions are made — and the use of AI in total rewards processes is one trend that is touching every corner of the world. There is growing evidence of organizations using AI and advanced analytics in compensation planning, including:

• Scenario modeling to test budget trade-offs
• Identification of pay equity risks before decisions are finalized
• Smarter market pricing using broader and more dynamic data sets
• Targeting increases to roles with the highest retention or performance impact

Importantly: AI is not replacing human judgment, it’s reshaping it. Compensation teams are gaining the ability to move faster, test assumptions and explain decisions with greater confidence and transparency (Figure 1).

2026 takeaways for compensation and HR leaders

The era of large, uniform salary increases is behind us — for now. It’s being replaced by something more complex and more powerful: stable budgets deployed with intent. The organizations that will win in this environment will:

• Treat the 2% to 3% merit pool as a strategic asset, not a constraint
• Embrace differentiation, even when it requires harder conversations
• Use AI as a tool that partners with data and the human in the loop to inform — not justify after the fact — pay decisions
• Adapt global frameworks to local realities without losing coherence

Salary budgets are stabilizing. Expectations are not. And with AI potentially influencing how pay decisions are modeled and executed, compensation planning is becoming less about averages and more about accuracy.