As hiring slows and labor markets ease, compensation has quietly slipped down many organizations’ priority lists. With fewer resignations, less competition for talent and more stable workforces, it can feel like the pressure is off. However, history shows this is exactly the moment when employers should lean in, not pull back. Compensation cycles are cyclical, and the decisions made during calmer periods often determine whether organizations respond strategically or reactively when the pendulum inevitably swings back toward an employee-driven market.
Q2 2026: Trends & Predictions
When markets are hot, compensation changes tend to be rushed. Employers scramble to address pay compression, off-cycle adjustments and inconsistent job pricing — often at a premium. In contrast, slower periods create space to be intentional. This is when organizations can step back, assess internal equity, clarify job architectures and build clear, sustainable compensation structures without the added stress of immediate attrition risk. The work may not feel urgent, but it is foundational.
Refreshing or building a compensation structure now allows employers to align pay philosophies, career progression and market positioning before external pressures dictate those decisions. It gives leaders time to make thoughtful choices about how they want to pay, rather than simply how they need to pay to keep up. Done well, this work reduces future cost volatility, improves transparency and strengthens trust with employees over the long term.
The employers who fare best in the next employee-driven market will not be the ones who paused compensation efforts during the slowdown. They’ll be the ones who used this time to prepare. A well-designed compensation framework is not just a response tool; it’s a readiness strategy. In a landscape where cycles turn quickly, proactive preparation is far less costly than reactive correction.
Turning Insight into Action
Whether your organization currently has a compensation framework or it needs to be developed from the ground up, consider the following actions:
1. Revisit your compensation philosophy:
Clarify how you want to pay and philosophically what aligns with your organization’s strategy, vision and values (market position, mix of base vs. variable, and progression over time) so future decisions follow intent, not urgency.
2. Review job architecture and role clarity:
Ensure roles are clearly defined, consistently titled and aligned to responsibilities before market pricing pressures re‑emerge. Well-defined career levels ensure leaders and employees understand expectations, which promotes clearer opportunities to support growth in-role and promotion.
3. Validate market pricing with current data:
Confirm that benchmark roles are anchored to the right market matches and that pricing assumptions still reflect your talent strategy.
4. Create or refresh pay ranges:
Well‑defined ranges paired with strong job architecture support career movement reducing future off‑cycle increases and give managers better tools to explain pay decisions. At a minimum, organizations should review their structure annually to avoid falling behind.
5. Assess internal equity across teams and levels:
Identify compression, misalignment or legacy pay issues while correction can be planned thoughtfully instead of reactively. Leveraging the job architecture helps to identify hidden risk that is broader than job title alone.
6. Prepare leaders for intentional pay conversations:
Managers need to understand pay. Providing training and clear frameworks now can lead to clearer, more credible employee messaging later.
Remember, the goal isn’t to overcorrect in a slower market — it’s to prepare thoughtfully so when heightened competition returns, your organization responds with confidence instead of cost.
Following Merit Trends
After peaking in 2022 – 2023, 2025 merit budgets came in lower than expected overall around 3.2 – 3.7% and fell slightly below 2024 levels (3.7 – 3.9%), according to Mercer’s latest QuickPulse U.S. Compensation Planning Survey. 2026 is projected to track at, or slightly below, what we experienced in 2025, reporting 3.2 – 3.6% budgets. With merit budgets settling back into a more “normal”, pre-pandemic range, many organizations seem less focused on the headline percentage and more on how they’re allocating dollars — especially around critical roles, performance differentiation and using job architecture as a guide.
