January 23, 2026
Each new calendar year brings employee compensation and benefits concerns for employers, and 2026 is no exception. In fact, it might be the most dynamic year in recent memory and will require extra awareness and diligence to manage challenges such as competitive salaries, flexible work arrangements, and career development opportunities. Talent shortages and an aging workforce will add to the strain for employers, too, as will burnout, retention, and gaps in specialized skills. And finally, employees are sending strong signals that financial security and total rewards are their top priorities. What should employers watch for? Here are the top 10 employee compensation and benefits challenges they will face in 2026:
#1: Base Pay
Across the business landscape, salary budgets are down. After reaching 4.4% on average in 2023, salary increase budgets are projected to be 3.5% on average. Meanwhile, employees say a merit increase of at least 5% is fair as they try to keep pace with escalating costs for household necessities. Even in a cooling labor market, this can lead to low employee engagement and higher turnover – which can cost between 30% to 200% of pay.
#2: Job Listing Laws and Pay Transparency
The workforce continues to demand pay transparency; and entering 2026, 14 states will have laws regarding job listings and/or pay transparency (multi-state employers must ensure compliance in each state), and 60% of employers now publish pay ranges in job postings, up from 45% the previous year. Meanwhile, 52% of respondents to a USA Today Blueprint Survey say salary transparency is helpful in attracting and retaining talent. Nonetheless, according to Bamboo HR, 33% of employees feel negative about their current compensation.
#3: Elimination of DEI
What happens to pay equity with the elimination of DEI? Equal pay is still the law per the Equal Pay Act and the Lilly Ledbetter Paycheck Fairness Act. Thus, it is every leader’s responsibility to ensure fairness and pay equity for employees. To achieve this, Human Resources departments must review salaries for new hires against others in the same or similar job. It is important for companies to complete annual discrimination and pay equity reviews.
#4: Incentive Pay is Here to Stay
Since the 2008 recession, more companies have given lesser merit increases and put more opportunities for higher pay into incentive plans. Some organizations include all employees in incentive plans while others focus their plans on management. In 2026 and beyond, expect fewer sign-on bonuses and more focus on incentive pay to enhance employee growth, engagement, and retention. Not-for-profits are also embracing incentive pay more than in past years.
#5: Cost of Living vs. Cost of Labor
Cost of salaries decreased .6% from the previous 12-month reporting period but benefits only dropped .1%. Meanwhile, persistent inflation continues to impact labor costs. Employers must help employees understand how cost of living and cost of labor affect their compensation. It is easy to recognize when cost of living exceeds merit, but easy to overlook when merit exceeds cost of living. It will likely take employees several years to recover from the last few. Regardless, every organization should know the living wage in their counties of operation and strive to pay employees a living wage.
#6: Better Training on Compensation
Robust training is necessary for employees to understand an organization’s compensation philosophy, market data scopes of who they compare to, the merit process, how promotions work, etc. Not training employees on compensation will leave them to train themselves – incorrectly! By simplifying “comp speak,” employers can help workers understand essential and common compensation terminology.
#7: Embrace Hybrid Work When Possible
2024 saw significant increases in corporations dialing back on remote work flexibility. Nonetheless, flexible work arrangements can be important to effective compensation strategies. Organizations should define roles suitable for remote work and then train managers and teams on how to thrive in virtual environments. A distributed workforce can be a strength if leadership listens and practices ongoing intentional communication.
#8: Benefits
Organizations must strike the right balance between fiscal realities and options that boost retention. According to the 2026 Employer Health Care Strategy Survey, employers predict a 9% increase in medical and healthcare costs for the coming year. Top factors driving up costs are GLP-1 drugs (79% of employers have seen an uptick in use), cancer diagnoses, and the use of mental health services (73% increase in usage). Pharmacy spending in 2024 was 24% of healthcare while an increase of 11-12% in pharmacy costs is projected for 2026. Accordingly, many employers will increase focus on cancer prevention and screening and removing of age restrictions on preventive care coverage. Other benefits are also in the spotlight. Paid leave benefits are more important than ever, and many employers have added or enhanced these over the past year. Student loan benefits have also increased, with employers offering student loan repayment assistance programs. And employers are expanding access to teletherapy, mental health apps, and designating dedicated mental health days to help address burnout. Finally, mentorship programs are effective and deserve increased adoption since 90% of employees in such a program report being happy at work.
#9: Aggressive Retention Strategies
The talent pool is shrinking. Case in point: the number of high school graduates peaked in 2025 and will drop over 10% between 2026 and 2037, with the segment of Americans age 16+ growing 5 million less than it did between 2013 to 2023. An aging workforce, thanks to lower birth rates and retiring baby boomers, will naturally decrease labor force participation. For employers, it will be important to provide a clear path for internal mobility and regular feedback sessions to show employees their growth matters. Likewise, companies should educate employees on essential skills and knowledge the organization values and is willing to pay for and then help employees acquire those skills and knowledge.
#10: Embrace AI
Workforce audits can pinpoint inefficiencies, enabling Artificial Intelligence (AI) to streamline repetitive low tasks with effective industry-specific solutions. To enhance efficiencies and avoid potential liabilities it is critical for companies to stay up-to-date on emerging technologies, monitor inputs and outputs, and do their continuing due diligence. Ultimately, companies should use emerging technologies where it makes sense to safely and effectively streamline processes.
Bottom Line:
Employee compensation and benefit challenges abound, but in the ongoing battle for talent, a powerful employer brand is your secret weapon. Think about what employees value and showcase how you can meet their needs and expectations. Key drivers to a positive employee experience include:
- Teamwork – being part of a cohesive team
- Purpose – finding purpose in one’s work
- Fairness – receiving fair treatment, and
- Recognition – being recognized for contributions.
Chaos might not be easy to cope with but being proactive and productive makes you and your organization stronger! If you need help managing these challenges, contact us at 317.589.8529 or reach out via our contact page.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees, and retain top performers.