Compensation planning for 2026: 'If you are going to ‘trim the fat,’ you have to be very careful'

“If you are going to ‘trim the fat,’ you have to be very careful because you know that this is very temporary and any cuts you have may jeopardize your footing for after it ends.”

With these words, Sean O’Brady captures the cautious mindset guiding many Canadian employers as they plan compensation for 2026.

Rather than swinging between “radical” cost-cutting and bold investments, most organizations should aim for stability and moderation, says the assistant professor at the DeGroote School of Business at McMaster University.

“You don’t want to tip the scales in one direction or another,” O’Brady says. “You still have to maintain the strategy that you had before… all the pieces are put in place for a reason.”

Salary forecasts for 2026

An earlier survey by Mercer found the average total projected salary increase in Canada will hover around 3% in 2026. Fewer organizations are planning budget increases above 4% compared to 2025, with most budgets consolidating around the 3% mark.

Salary structure adjustments are also trending around 2.7%, said Mercer, with just over half of organizations (51%) planning to adjust in 2026.

Other outlooks have included:

A separate survey by Western Compensation & Benefits Consultants found that, in 2025, Canadian employers raised base salaries by an average of 3.5% for non-union employees and 3.0% for unionized groups, while salary ranges increased by about 2.6%.

The outlook for 2026 is “strikingly” similar, it says. Employers project 3.5% increases for non-union staff and 2.7% for unionized employees. Salary ranges are expected to rise by 2.5%, just below last year’s pace, found the survey of 917 organizations across Canada.

‘Making every dollar count’

Overall, more than two-thirds (69%) of Canadian organizations expect the external economic environment will have a moderate to significant impact on their overall compensation decisions, says Elizabeth English, senior principal at Mercer.
“Because there’s so much uncertainty coming from every direction,  organizations are reevaluating their spending with the focus to make every dollar count,” she says.

“Employers are still prioritizing strategic talent investments, retention,
getting ready for the future, but it feels more deliberate and the increases will be more targeted to strategies that support long-term business objectives.”

Amid economic uncertainty, there is the potential for structural adjustments by employers that might be effective, says O’Brady.

“On the other hand, making these structural adjustments poses a risk in the long term because this is an evolving situation.”

For example, the sectors most affected by U.S. tariffs are most likely to make those adjustments, he says.

“But they’ll have to be careful because there’s also movement in terms of importing to other countries, new markets. So, you still have to make yourself strong if you’re going to address these new markets.”

And in competitive markets, such as universities facing challenges because of reduced visas for international students, employers should be careful because they still need to attract talent, says O’Brady.

“The minute you budge too fast in competitive markets… you’re going to have a reputation in the market for being a cost-cutter and… you might not be as effective at attracting talent.”

Non-monetary rewards amid uncertainty

With limited budgets, organizations are likely rethinking how to motivate and retain their best people. Instead of cost-cutting measures such as reducing pay for performance, O’Brady suggests focusing on “relational returns” — opportunities for promotion, training and development, and recognition — when financial rewards are constrained.

English agrees, pointing to non-monetary rewards such as specialized training, mentorship, flexible work, public recognition or extra time off as effective ways to recognize top performers.

Organizations focused on employee engagement by investing in skills,
development opportunities and providing a fair, equitable salary structure are in a much better position, “even if those salary increases are quite modest,” she says.

But employers really need to listen to employees to understand what benefits they find valuable to motivate top staff, she says.

“It’s key that organizations tailor this non-monetary reward to the individual employee… If you have someone who is having trouble taking their vacation days already, giving them some extra time off may not be a good approach — but for other people, that would be fantastic.”

O’Brady adds that employers can also boost morale by highlighting existing benefits that employees may not fully appreciate.

“Sometimes, people don’t understand the whole scale of the benefits that are available to them: ‘Oh, I didn’t know that I have money for therapy.’ And that’s already earmarked by the employer for use by the employees, so go and use it.”

Difficult conversations around salary increases

Given the conservative increases, amid cost-of-living pressures and higher inflation, it’s expected management and HR could face some difficult conversations with employees unhappy about their pay.

And that could escalate given tech tools such as AI, says English.

“They can use different programs like ChatGPT to get a better understanding of market-competitive data for their own position,” she says. “They can also use tools to help practise having a conversation with their manager and what kind of wording they should use when asking for a raise or a promotion.”
As a result, it’s critical that the employer and HR teams as a whole
prepare people managers for these discussions, or take the burden off them, by providing information during employee communications, training or onboarding about the organization’s compensation philosophy, how salary ranges work, and the types of incentive programs available, says English.

“What organizations need to focus on is being transparent around their compensation philosophies, their expectations, to really drive employee commitment and engagement.”

Leadership: Communicating compensation

It’s also important to show that your organization is stable and won’t be a failure in the future, says O’Brady, highlighting the role of high-level leadership “to communicate exactly where they are financially, exactly where they're going to go, exactly what's going to happen to jobs, if there'll be job growth or decline… so that workers feel like they have a good sense of where the organization's going — and that will make them feel confident with their future there.”

That might be tough for employers and leadership, he admits, because a byproduct of that kind of transparency is power sharing.

“The more information you give to your employees, the more likely they are to react to that information. And the more that they react to that information means they might criticize it…: ‘Why is it that we can't hire more? Our team really needs it in the current budget… are you going to consult us?’”

Pay transparency effect

Pay transparency is of course a growing trend in Canada, driven by new legislation and evolving expectations. Ontario, for example, is bringing in new rules in January 2026 around pay ranges in job postings.

Mercer Canada’s research shows that two-thirds of organizations are sharing pay information only as required by law, while a third are proactively disclosing pay ranges or exploring broader transparency initiatives.

“Some employers might be scared to do it because they don't want to have to go through the motions because it takes a lot of work — it means putting yourself out there,” says O’Brady.

He describes transparency as a “double-edged sword,” capable of fostering fairness but also generating difficult conversations and, in some cases, employee discontent.

“One reason why some low-wage employers might not want pay transparency is because it tends to generate conversations and these conversations can lead to discussions of unfairness; discussions of unfairness could lead to employee discontent which, by connection, could lead to unionization.”

Transparency can also lead to jealousies, so employers should make sure any job design or job analysis done in the past was done well so it is justifiable, he says: “If you didn't do a good job of it, then it becomes more difficult and that's where you have problems.”

Pay transparency can be problematic if it reveals problems around favouritism and a history of unfairness, says O’Brady.

“On the other hand, if pay transparency was coupled with an effort to make the organization more fair, when the organization was previously seen as unfair, then that could be seen as turning the page.”

Compensation and AI: promise and pitfalls

With the huge rise in the use of AI and generative AI, compensation planning is yet another area where HR is seeing the advantages of the new tech.

Tools such as ChatGPT can be used to:

• suggest appropriate job grades and salary bands using proprietary methodologies and up-to-date market data
• forecast performance trends, optimize compensation strategies, and plan workforce needs by analyzing historical and real-time data
• automate the collection and analysis of compensation survey data
• scan compensation data to flag potential pay equity issues and ensure compliance with evolving regulations.

But O’Brady warns of the risks associated with AI-driven monitoring and performance evaluation, arguing that such practices can be dehumanizing and lead to unfair outcomes. He cites his research into the tracking of call centre workers as an example.

“The more you have AI tracking worker behaviour in a way that’s very detailed, that leads to compensation, I think that this can have a lot of negative consequences,” he says.

“They don’t look at the qualitative and the contextual. This can create a lot of problems.”

However, O’Brady admits there are also benefits to using the AI tools, such as trend analysis.

“You can use AI to do sweeps of market data on the internet… to do things a lot faster and more effectively than you could have in the past.”

English acknowledges the potential of AI to improve efficiency and insight, but urges HR teams to proceed carefully by starting with pilot projects and ensuring data accuracy to avoid bias and compliance issues.

“We do see a lot of hesitation because there's a real concern to make sure that the data that they're using is accurate and that the HR teams themselves have the skills and knowledge required to use these new AI tools,” she says.

“A lot of the work is making sure that the foundational pieces of your compensation program — your job architecture, your grading, your salary structure — are up to date and all of your data is accurate.”