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.
