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.
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):
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.
Compensation planning needs to move away from uniformity. Organizations are increasingly differentiating pay based on:
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.
While the global trend is toward stability, several market-specific dynamics stand out:
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.
Across many regions, employers are maintaining regular salary cycles rather than resorting to freezes or ad hoc corrections. This signals a shift away from reactive pay responses toward structured, repeatable pay governance — even in locations like Brazil, where inflation or growth pressures persist.
India’s 8%-plus planned increases co-exist with improving overall employment indicators (unemployment near 5%, down from 6% in 2017 and 2018). This highlights a critical nuance: Pay pressure is role-specific, not economy-wide.
Employers are competing globally for scarce digital, tech and specialized skills while exercising restraint elsewhere. Average increases mask sharp internal differentiation driven by skills scarcity rather than broad labor market tightness.
The introduction of the new labor codes — particularly the uniform and expanded definition of “wages” — will require companies to fundamentally reassess the design of their compensation structures. Because “wages” now include most salary components except for a narrow set of specified exclusions, many existing structures with large special or supplementary allowances will need to be reviewed and redesigned.
Organizations are maintaining or selectively increasing headcount despite modest salary budgets. This is a departure from the more reactive approach of 2021 to 2023 and signals a renewed focus toward workforce shape vs. across-the-board salary growth.
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:
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).
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:
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.
