After several years of economic turbulence, shifting workforce expectations and rapid advances in AI, 2025 marked a clear turning point. Organizations were pushed to rethink not only how they pay people, but how they attract, develop and retain talent in a fundamentally different labor landscape. Looking back, the themes of the year are unmistakable: stabilization, recalibration and a renewed commitment to sustainable, data-driven people strategies. Understanding these shifts isn’t just a retrospective exercise — it’s essential groundwork for navigating the opportunities and challenges that 2026 is already beginning to surface.
Q1 2026: Trends & Predictions
Compensation Budgets Tighten and Strategy Shifts to Sustainability
Salary budgets leveled off in 2025 after several years of aggressive post-pandemic increases, ending the year in the 3.2–3.5% range.3 As we enter Q1 2026, many employers are planning for static or slightly reduced budgets amid continued economic uncertainty and slower growth. Expect smaller merit increases, more targeted adjustments for critical roles and a growing emphasis on internal mobility and skills-based pay. Variable pay programs tied to measurable outcomes will continue to expand as organizations balance cost discipline with retention needs.3
Compensation Transparency and Benchmarking Intensity
Pay transparency has moved firmly into the mainstream, driven by state level legislation and shifting employee expectations.4 Candidates increasingly view transparent pay practices as a differentiator when evaluating employers, and employees continue these conversations once hired — making equity a central component of compensation strategy. Reliable benchmarking data is now essential as organizations adopt more transparent pay ranges, leverage real-time market data and formalize their pay communication practices.3 In the age of information accessibility, employees want to understand why information they have visibility to may differ from their company’s salary ranges and their pay. A strong compensation philosophy rooted in quality data and consistent competitive positioning will help to bring employees along when they have questions.
Work Environment
Return to Office (RTO) mandates and leadership expectations around in office culture continue to clash with employee preferences for remote, flexible or nonlinear work arrangements. 5,7 With leaner teams and heightened retention pressures, employers are navigating a complex environment amidst the rise in desire for purpose-driven work.9 In person roles saw higher year over year compensation increases than remote roles in 2025, even as largescale layoffs from notable employers fueled concerns about job stability.3 Terms like “quiet layoffs” and “forever layoffs” reflect growing employee anxiety.6 As technological transformation accelerates, employee experience and flexibility — not just compensation — will become a defining competitive advantage. 2,10
AI – Reshaping everything from Recruiting to Performance Management
AI’s influence now touches every corner of HR. Predictions for 2026 highlight major shifts: the decline of traditional annual performance reviews in favor of real-time feedback, the evolution of training into continuous upskilling and AI generated applications meeting AI driven screening tools.1 Yet despite the hype, AI has not proven to be a simple or cost effective replacement for like-for-like jobs. Leaders are increasingly aware of the operational, ethical and managerial complexities that come with integrating AI at scale.1
Turning Insight into Action
As organizations step into 2026, the path forward will require more than awareness of emerging trends — it will demand deliberate, strategic action. Compensation, talent and technology are evolving in tandem, and the employers who navigate this moment most effectively will be those who plan proactively rather than reactively. To position your organization for success in the year ahead, consider focusing on a few practical steps:
1. Reassess Your Compensation Frameworks Early
- Review salary structures and merit budgets with an eye toward sustainability
- Identify critical roles where targeted adjustments may be necessary
- Understand how work location and arrangements can influence employee expectations of pay
2. Strengthen Your Pay Transparency Salary
- Audit pay ranges and ensure they align with current market data.
- Formalize communication practices so managers can confidently discuss pay decisions.
- Conduct regular pay equity audits to address gaps before they become risks.
3. Reevaluate Your Work Environment and Retention Levers
- Clarify expectations around in-office, hybrid and flexible work arrangements
- Monitor turnover risk in roles affected by RTO mandates or shifting job security perceptions
- Invest in employee experience initiatives that reinforce stability, trust and belonging
4. Build Responsible, Practical AI Integration Plans for Compensation Practices
- Identify HR processes where AI can enhance human decision making and make it more efficient — not replace it
- Train managers and HR teams on how to use AI tools effectively and ethically
- Establish governance frameworks to ensure transparency, fairness and data integrity
Organizations that take these steps now will be better positioned to navigate the uncertainty of early 2026 and capitalize on the opportunities that follow. The landscape is shifting quickly, but with thoughtful planning and a commitment to transparency, agility and employee experience, HR and compensation leaders can turn this period of transition into a strategic advantage.
References:
- SHRM 2026 Predictions
- BPM HR Industry 2026 Outlook
- iMercer 2026 Compensation Trends
- MRA 2025 Compensation Trends Survey
- Glassdoor Work Life Trends Report 2026
- HR Executive “Quiet Firing” and layoffs
- Deloitte Insights 2 Action Nonlinear Workday
- Fortune RTO Mandates
- CSUG from Perks to Purpose
- Brown & Brown RTO Employee Well-Being
- Bamboo HR 2025 Whitepaper Compensation Benchmarking
