Budget planning for 2026 is going to be tricky due to concerns over the economy, inflation, and stymied growth.
Fortunately, Payscale’s Salary Budget Survey (SBS) is now open for participation so you can inform your peers what you are planning for pay increases in 2026 and get the aggregated results to inform your budget.
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According to Payscale’s 2025 Compensation Best Practices Report, 47 percent of organizations are experiencing increased tension between ensuring fair pay for employees and optimizing spend on compensation in current market conditions. The average base pay increase given in 2024 was a whopping 3.8 percent, and the average planned for 2025 was 3.5percent, which is down a whole percentage point from the previous. This reflects a reduced cost of labor, reduced inflation, and reduced turnover, which are all connected economically.
While pay increases have been dropping, they continue to be higher than prior to the pandemic and the outlook for 2026 is uncertain.
Employers may be hoping that salary budgets will increase following a year of reduced activity in the labor market, but it’s difficult to say if this will be the case. Certainly, employees are hungry for increased opportunity and higher pay for a variety of reasons:
First, inflation drove up prices. While inflation has dropped, prices remain high, which impacts the standard of living. When pay doesn’t keep pace with inflation, it can be viewed by employees as a pay cut. While market pricing is based on cost of labor, not cost of living, merit increases are somewhat influenced by inflation.
Second, the red-hot labor market of 2020-2022 rewarded job hoppers with considerably higher salaries than employees who stayed loyal, which shows thanks to pay transparency. While some working professionals who negotiated high salaries during the Great Resignation may have been laid off when the market contracted, their wages have still grown faster than people who remained with their organization. Long-tenured employees are looking at pay ranges published to job postings today and are feeling frustrated.
Third, many employees want higher pay because they are currently understaffed and overworked. Some employees have been struggling since the layoffs during the COVID-19 pandemic while others are survivors of more recent layoffs. Regardless, these employees are frustrated by overburdened schedules and “quiet promotions” without increased pay.
Unfortunately, the macroeconomic climate does not side with employees at present.
In the latter half of 2023, labor market dynamics shifted in the favor of employers, especially when it comes to high paying white-collar positions, so much so that some are calling the present economy a “white-collar recession”. This dynamic has continued into 2024, and may be exacerbated by artificial intelligence. Given the climate of apprehension and relative scarcity of jobs, organizations are enjoying lower attrition rates despite dissatisfaction from employees.
But will it last?
So far in 2025 the Federal Reserve has elected to hold interest rates steady, so nothing is likely to change in the near-term. But opinions are divided about whether the economy will decline or improve in the latter half of 2025. The threat of tariffs has both organizations and consumers on edge as tariffs could drive up prices and contract budgets.
So far, the labor market has remained resilient in spite of these concerns—at least on the surface, as jobs have met or exceeded expectations in recent reports. April’s job report showed U.S. employers adding 177,000 jobs and the unemployment rate was unchanged at 4.2 percent. These job gains are not tremendous but were above projections. However, job losses were high in the federal government over the first quarter, and those losses could have ripple effects on jobs in the private sector that are dependent on federal funding.
At the same time, the labor market has become strained, with hiring processes that job seekers report to be punishing. While some economists are predicting a recession in mid-2025, others are saying that a recession may be avoided. The odds of a recession reported by JP Morgan Chase has dropped from 60 percent earlier this year to 40 percent in recent weeks. However, this reduction is the result of the U.S. administration backing off on a trade war with China, which could resume in July. In addition, instability and other factors causing headwinds are likely to keep growth weak.
Payscale offers free insights on budget planning pay increases via our salary budget survey. In this survey, we ask compensation professionals what they gave for base pay increases on average in 2025 as well as what they are planning for 2026. This question is asked for merit increases, COLA increases, and total increases overall and by employee type for state, province, and country. We also ask about promotional increases and budgets for salary structure adjustments.
The report is segmented by industry, location, and company size to provide a valuable point of reference to compensation and HR professionals about what the averages for base pay increases are when aggregating the data of all participants.
Participants will receive a free copy of the report. The survey is open for participation now through the end of June, with the report scheduled to launch in time for salary budget planning season.
