Constrained Budgets, AI Among Top Influencers Shaping Comp

It’s the year of strategic alignment for compensation professionals and HR teams as organizations face an uncertain economy and a cooling labor market, according to Payscale’s 17th annual Compensation Best Practices Report (CBPR). Released on Tuesday, Feb. 24, the compensation software and data company’s report featured responses from more than 3,000 global leaders, including compensation and HR professionals.

Among the report’s key findings:

• 61% of surveyed organizations have updated existing roles to include artificial intelligence (AI) skills or competencies, but 55% are not adjusting compensation for those skills.
• 51% cited balancing pay expectations with financial limits as their top challenge.
• 40% said misinformation/disinformation from unverified salary sources was driving unfair pay perceptions.

Workspan Daily (WD) recently interviewed Payscale chief people officer Lexi Clarke to learn:

• What alignment means for compensation and HR teams this year;
• How AI is impacting pay; and,
• What compensation trends to keep an eye on as you start planning your budgets.

Lexi Clarke, chief people officer, Payscale 

WD: Your report calls 2026 “The Year of Strategic Alignment.” What does that mean for organizations as they plan their budgets for this year?

Clarke: Compensation in 2026 is undergoing a shift from a reactive activity to a deliberate strategy that drives business outcomes. As organizations plan their budgets in 2026, they are facing several challenges, from tighter budgets and a cooling labor market to the acceleration of AI adoption. On top of this, HR leaders are under growing executive pressure to treat compensation as a strategic lever, requiring stronger data, clearer return on investment (ROI) and more measurable outcomes rather than across-the-board increases.

To overcome these challenges and develop a plan that maximizes their budget impact, HR leaders need to purposefully decentralize compensation information. It can no longer be siloed within HR teams.

WD: What are some key takeaways you can share from this year’s CBPR report? Did anything surprise you compared to past years?

Clarke: The key takeaway from this year’s report is that organizations are defaulting to short-term tactics when compensation is getting more complex and strategic. Instead of setting up for success in the future, these [short-sighted] strategies will have long‑term consequences. It undermines market competitiveness, widens pay inequities, and drives a wedge between effort and reward, especially for top performers and high‑demand talent.

One surprising way this turned up in our report is the finding that more companies are turning to a “peanut butter” approach to pay raises, where they spread raises across a workforce, rather than differentiating based on performance. While this is the first year this data was looked at, a shocking 43% of organizations surveyed indicated they were considering, newly planning or already using across-the-board increases.

The oversimplification of pay is most telling when it comes to AI upskilling.

AI skills are widely desired and promoted as a guaranteed path to higher pay, but CBPR data shows that promise often falls short. AI proficiency is becoming an expectation without added compensation. It’s not that the skills aren’t valuable; it’s that HR teams are not using pay differentials to reward these specialized skills.

This all levels back to the fact that compensation is still seen by many companies as a back-office function that is disconnected to the business. This is leading organizations to shy away from the complexity of pay and opt for the path of least resistance.

---

“Compensation is still seen by many companies as a back-office function that is disconnected to the business. This is leading organizations to shy away from the complexity of pay and opt for the path of least resistance.”

WD: You mentioned a rise in “peanut butter” salary increases, which we covered in an earlier Workspan Daily article. What other trends do you see for merit increases in 2026?

Clarke: We tend to observe this trend of declining performance-based pay during times of economic uncertainty and low wage inflation. In uncertain economic conditions, flatter raises feel safer and easier to manage. However, it’s worth noting that 48% were still planning to continue pay increases based on performance. Merit increases aren’t going away, but they are facing increased scrutiny as they are prone to bias and place an extra administrative burden on HR teams that are already strapped for resources.

The “peanut butter” pay approach might be tempting, but it’s not a best practice. Instead, companies need to ask themselves why this approach seems attractive. Streamlining performance management workflows can help with administrative burden. Targeting adjustments to roles hit the hardest can help with inflation and smaller budgets. Reviewing performance practices can help eliminate bias.

WD: Based on the research, how is AI impacting current pay practices?

Clarke: We’re not seeing widespread evidence that AI is directly reducing individual pay. Instead, AI is operating within a broader environment of constrained raises, driven primarily by economic uncertainty, budget pressure and low turnover.

Our research shows 30% of organizations are already replacing roles with AI or seriously considering it, though 59% say they don’t plan to replace workers. For most employees, displacement isn’t the immediate story — job evolution is.

Workers are being asked to adopt AI tools, build new skills and take on expanded responsibilities to keep pace with rising productivity expectations. The disconnect is that compensation hasn’t yet caught up with that shift. HR teams often lack the tools and insights needed to align skills with compensation strategies effectively. To accurately value specific skill sets, skill-based compensation requires better data and more sophisticated tooling.

WD: What did the report discover about labor market trends?

Our research found that despite a softer labor market, organizations aren’t taking advantage of workers. Only 5% of companies lowered pay for current employees and only 11% reduced salary offers. The most common reaction to economic pressure was reducing pay increases.

What’s driving pay panic within the labor market today is misinformation, with 40% of organizations stating that misinformation and disinformation from unverified data sources are driving unfair pay perceptions. Workers are seeing inflated numbers on crowdsourced salary websites, comparing themselves to roles that don’t match their skill sets or assuming that inflation alone entitles them to large raises.

To fix this, organizations need to make sure they’re communicating the whys behind pay, backed with transparent data, so employees can have a full understanding of their compensation package.

WD: What about pay equity and pay transparency?

Clarke: When it comes to pay transparency, we’re seeing about three-quarters of organizations feeling unprepared for upcoming legislation and regulatory requirements. For example, with the EU Pay Transparency Directive taking effect later this year, only 23% are fully prepared for its rollout.

This year’s report also found 60% of organizations say that pay equity analysis is a current or planned initiative, a 3% increase year-over-year. This growth in dedication to equity is especially exciting as we see that almost half of organizations (49%) are targeting pay transparency either across the organization or publicly in 2026, which is a 16% jump from last year, when it was only a third of organizations.

---

“The organizations that are building themselves up for success are embracing dynamic communication cycles, transparent communication and sophisticated tools that elevate human judgment.” 

WD: Based on the findings of this report, what are some next steps for organizations to consider?

Clarke: It’s essential for organizations to select compensation strategies that align with their objectives and to consider labor market trends, while ensuring high performers feel appreciated and motivated to stay. For example, using a “peanut butter” approach distributes pay raises uniformly, but it can dilute individual accountability.

As a result, organizations should take into account other variable pay options and total rewards — whether it’s bonuses, promotions, upskilling or other long-term incentives to make sure they continue to reward performance.

The organizations that are building themselves up for success are embracing dynamic communication cycles, transparent communication and sophisticated tools that elevate human judgment. This helps connect pay to business outcomes instead of just a cost to be controlled.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Finance and Budgeting