Effective Salary Budget Planning for 2026: Strategies for HR

As we head into Q3 2025, many HR and finance leaders are preparing salary budgets and setting strategic priorities for 2026.

With ongoing inflation and persistent trade uncertainty, leadership teams are weighing how raises and bonuses will affect both employee retention and cost management.

Cautious Planning for 2026 Salary Budgets

For most companies, the approach is cautious. About 68% expect their 2026 salary budgets to stay roughly the same as 2025, according to Payscale’s 2025-2026 Salary Budget Survey.

Ruth Thomas, chief compensation strategist at Payscale, noted that pay increases have tapered year over year as wage growth and inflation started leveling off. “But inflation is starting to creep back up with economic uncertainty mounting and labor markets shifting in favor of employers, which may mean that pay increase plans will need to be revisited,” she said in a press release. 

Thomas said HR leaders should prepare for more questions about salary budgets, especially since another recent Payscale report found one in three employees believes their pay doesn’t reflect their performance. 

Pay Increases Expected to Slightly Decline in 2026

Heading into 2026, U.S. companies are anticipating that base pay increases will be 3.5% next year, down 1% from this year’s average pay raises. Despite this slight decline, most organizations plan to award salary increases across employee groups, including:

• Exempt management employees (85%)
• Exempt non-management employees (84%)
• All employees (84%)
• Non-exempt employees (83%)
• Officers and execs (79%)

Variety of Pay Increases Still Common

Merit increases (87%) and promotional increases (73%) remain the most prevalent forms of adjustments. Additionally, employers are offering:

• Salary structure increases: 39%
• Cost of living adjustment (COLA) increases: 26%

Promotional Increases: Key for Engagement

Promotional increases continue to play a critical role in retaining top performers – because “Dry Promotions” (title advancement without a pay increase) can backfire. The tricky thing is, HR and finance need to make sure these increases reward performance while staying aligned with salary budget and business goals.

Approaches to budgeting for promotions vary:

• Budgeted separately from other salary increases: 33%
• Included as part of annual salary increase budgets: 32%
• Not budgeted: 35%

The “promotional increases (% of payroll)” KPI tracks how much of total payroll goes to promotions, giving HR and finance teams a sense of salary budget impact. In 2025, this stood at 2.3%, with expectations it will rise to 2.6% in 2026, reflecting increased commitment to career growth.

Salary Structure Increases

A majority of U.S. employers (64%) review and adjust salary structures and/or ranges annually. Others review them every two years (15%) or three years (7%). The remaining 14% of respondents selected “other” rather than a specific time frame.

Keeping salary structures current helps companies stay competitive, maintain internal equity and respond to market changes. Annual reviews give HR and finance leaders more flexibility to adjust for inflation, retain top talent and reduce issues like pay compression. Even a 1% structure adjustment on a $20M payroll adds $200K in recurring costs, so tying changes to compa-ratio or market midpoint ensures the spend actually supports retention and hiring.

COLA – a Timely Increase to Offset Lingering Inflation

A cost-of-living adjustment (COLA) is a pay increase designed to offset inflation and help employees maintain their standard of living. Typical COLAs range from 1–3%, depending on company policy and inflation trends. On a $20M payroll, a 1% COLA represents $200K in additional annual costs.

For reference, let’s look at the Social Security COLA. In 2025, that was a 2.5% increase. We won’t have the official number for 2026 until October. But the Senior Citizens’ League has projected that the 2026 COLA will be 2.7%.

Without COLAs, employees effectively take a pay cut when inflation exceeds their raises, which can impact retention and engagement. Providing COLAs signals responsiveness to market conditions and helps HR and finance leaders balance workforce competitiveness with budget discipline.

It’s a voluntary increase. No state or federal law requires employers to provide COLAs.

Next Steps for HR and Finance

• Align pay strategy with business goals. Use annual review cycles as a chance to ensure compensation stays competitive and equitable, and model how adjustments affect total payroll.
• Track key KPIs. Monitor salary budgets, promotional pay spend, and out-of-cycle adjustments, and evaluate their impact on turnover and retention costs.
• Balance flexibility with discipline. Plan for inflation and market shifts, but test scenarios to avoid overcommitting resources in volatile conditions.