Written by Megan Nail, Vice President, Total Rewards, NFP
As we look toward 2026, compensation planning is one of the most strategic, if not most scrutinized areas of HR. Economic uncertainty, evolving regulations and shifting employee expectations are complicating the pay landscape, challenging organizations to approach compensation with both precision and purpose. Staying competitive now means balancing fiscal responsibility with fairness, transparency and flexibility. And those that embrace this will transform compensation from a budgeting exercise into a true competitive advantage.
The Total Rewards Halo: Connecting Pay to Purpose
Compensation doesn’t exist in a vacuum. It’s a key piece of the broader “Total Rewards Halo™,” a model that integrates pay, benefits, wellbeing, learning, inclusion and work environment. Together, these elements not only define the employee experience but also help attract talent, shape retention, engagement and culture.
Of course, in times like these when market forces like inflation, regulation and labor shortages are the reality, it’s easy – even expected – to focus solely on the numbers. However, history shows that the organizations willing to stay intentional and keep compensation connected to purpose and culture are the ones that build reward programs reflecting both business goals and the values people want to work for.
Market Trends to Watch in 2026
As employers plan for 2026, three themes stand out: a tighter talent market, growing pressure for transparency and a more measured approach to pay budgets.
- A tighter, skills-driven labor market. Job openings continue to outpace available talent, particularly in high-demand fields like IT, finance and cybersecurity.
- A new era of pay transparency. With a majority of candidates researching salary before applying, transparency is now a competitive necessity. Nearly half of U.S. workers will be covered under pay transparency laws by 2026, and the reputational risk of inaction is growing (Trusaic).
- More conservative pay budgets. Several outlets – including Aon, WorldatWork and Payscale, among others – are reporting that salary increase budgets are stabilizing in the low-to-mid 3% range. Separate equity and promotion pools remain critical to recognize high performers and address pay gaps.
How to Respond
Understanding the trends is only the first step. The real opportunity lies in how to respond. By designing pay strategies that are flexible, transparent and continually calibrated to the market, organizations that are agile and move early are the ones best positioned to take control. Here’s where to start.
Use Variable Pay to Balance Flexibility and Performance
Variable pay – both short- and long-term incentives – continues to gain traction as a way to reward performance while managing fixed costs. Employers are using incentive plans to drive alignment, flexibility and retention. Typical short-term incentive targets hover around 7% of base pay for non-exempt employees, 15% for exempt and 30% or more for executives. The most effective plans balance company and individual metrics, with payouts generally landing between 90 – 110% of target.
Build Transparency Before Regulation Requires It
Pay transparency is no longer just a compliance issue, it’s a trust issue. Employees expect clear communication about pay structures and growth opportunities. Organizations that proactively define and share their compensation philosophy are better positioned to build credibility, retain talent and avoid misinterpretation.
A strong pay communication strategy should answer three questions for employees: How is my pay determined? How can I grow? And how does my contribution connect to the organization’s goals?
Keep Compensation Structures Current and Competitive
For 2026, compensation structures should be aged by roughly 2.2% to remain competitive. Conducting a comprehensive market benchmark every three years ensures your ranges reflect current conditions. High performers typically receive 1.5 – 2 times the average increase, but without regular structure updates, even the best performers can fall behind market value.
Compensation planning will always involve numbers, but the real story lies in how those numbers connect to people. Commandeering compensation means taking ownership of that connection and ensuring pay decisions reflect not just market data, but also the culture and values an organization stands for. As 2026 unfolds, the organizations that lead with transparency and empathy will be the ones employees choose to stay with and grow alongside.
For a deeper dive into these insights, watch my recent webinar with my colleague Paul Ashley, Plan Ahead Compensation Strategies for 2026. We discuss the trends shaping 2026, strategies for pay transparency, and practical ways to align compensation with organizational goals.
