Gallagher Predicts ‘Moderate’ Approach to 2026 Salary Increase Budgets

In response to fluctuating economic conditions, a cooling labor market, and growing expectations around pay equity and transparency, U.S. employers are taking a moderate approach toward their 2026 salary increase budgets, according to a new report from Gallagher.

The risk management and consulting firm’s “2025/2026 Salary Planning Report” revealed participating organizations are forecasting fiscal year 2026 average total pay increases of:

3.3% for non-exempt (hourly) workers
3.3% for managers
3.2% for executives
3.2% for “other exempt” workers

This is a step down from 2025 actual increases, as the report showed averages of:

4.0% for managers
3.9% for non-exempt workers
3.8% for executives
3.8% for “other exempt” workers

For its new report, Gallagher collected data from 1,165 organizations in an online survey conducted between March and April. Survey participants represented:

By organizational ownership structure: 43% for-profit entities, 57% non-profit entities
By workforce size (in full-time equivalents, or FTEs): 34% under 100 FTEs, 32% 100 to 499 FTEs, 10% 500 to 999, and 24% 1,000 or more
By primary U.S. geographic location: 50% North Central region, 15% South Central, 13% West, 12% Northeast, 11% Southeast

“While inflation still influences compensation strategy, salary growth is beginning to moderate,” the consultancy stated in the report’s opening section. “Employers are moving away from broad adjustments and toward more targeted increases — yet many continue to underestimate actual pay movement. Trends are emerging across general, merit and other increases, alongside growing adoption of structured pay practices. … While 75% of [respondents] implemented smaller salary structure increases in 2025 than in 2024, 94% still exceeded their own projections. Employers continue to recalibrate, as the need to remain competitive often outpaces conservative planning.”

Gallagher’s data points for 2026 projections and 2025 actuals resemble those found in other recently released salary budget survey reports for the U.S. market.

WorldatWork: 3.6% mean salary increase budgets for 2026; 3.7% actual mean increase budgets in 2025.
WTW: 3.5% average salary increase budgets for 2026; 3.5% actual budgets in 2025.

Research Summations

Within the report, Gallagher researchers provided insights and commentary on several general compensation fronts.

On overall pay practices: “As organizations refine their pay strategies, balancing competitiveness and sustainability remains key. The persistent gap between projected and actual increases highlights ongoing forecasting challenges. Yet the growing adoption of salary structures — particularly among larger and mission-driven employers — signals a long-term shift toward more disciplined, transparent pay programs. Those who prioritize equity and clarity in compensation will be best positioned to attract and retain talent in a dynamic labor market.”
On cost-of-living adjustments (COLA): “[These adjustments] and general base pay increases are losing momentum. From 2024 to 2025, every category of general/COLA increases declined across all four employee groups, with nearly 75% falling short of projections. Notably, not-for-profit organizations granted nearly 1% more in general increases than for-profit peers, suggesting a heavier reliance on general increases over merit-based ones.”
On merit increases: “[These increases] followed a similar trend, with 86% of categories showing declines. However, 67% slightly exceeded projections, indicating that employers anticipated a sharper drop than what occurred. For-profit organizations awarded about 0.5% more in merit increases than not-for-profits, maintaining their preference for performance-based pay.”

Case-Based Compensation Decisions

Examining specific compensation-based decisions, the report showed:

For instances of promotions, organizations are planning average increase budgets of 3.0%, compared to a 2025 average actual increase of 3.2%. Both for-profit and non-profit organizations predict 3.0% increases for next year. Looking at workforce size, employers with 100 to 499 employees are planning for the largest average increases (3.7%), while those with less than 100 employees are anticipating the smallest (2.4%).
For instances when considering lump sum awards and base pay increases, 64% of surveyed organizations do not plan to utilize lump sums. However, among those that do anticipate using the option of lump sums, 32% would consider them for employees at the “range maximum average” and 4% would for employees in all parts of the salary range. Organizations with 1,000 or more employees are most apt to consider such awards; just 39% said they do not plan to utilize this option (versus 56% for those with 500 to 999 employees, 64% for those with 100 to 499 and 83% for those with less than 100).

Job-Based Compensation Decisions

Examining pay-increase decisions by job classification, the report showed some nuanced differences.

Non-Exempt Workers

While 3.3% is the projected average total pay increase (3.2% for-profits, 3.3% non-profits) for hourly workers, the breakdowns include:

By geographic region: 3.5% West, 3.3% South Central, 3.3% Southeast, 3.2% North Central and 3.0% Northeast
By workforce size: 3.4% for employers with 500 to 999 employees, 3.3% for those 1,000 or more, 3.2% for those with 100 to 499 and 3.2% for those with less than 100

Looking at the factors contributing (with unequal weight) to the total pay increase figure (across all demographics), projections are 2.4% for merit pay, 1.6% for general/COLA and 0.6% for “other.”

Managers

While 3.3% is the projected average total pay increase (3.2% for-profits, 3.4% non-profits) for managers, the breakdowns include:

By geographic region: 3.8% West, 3.6% Southeast, 3.2% North Central, 3.2% South Central and 3.0% Northeast
By workforce size: 3.4% for employers with 500 to 999 employees, 3.3% for those 1,000 or more, 3.3% for those with 100 to 499 and 3.3% for those with less than 100

Among the factors contributing to the total increase figure, projections are 2.6% for merit pay, 1.6% for general/COLA and 0.5% for “other.”

Executives

While 3.2% is the projected average total pay increase (3.0% for-profits, 3.3% non-profits) for executives, the breakdowns include:

By geographic region: 3.6% West, 3.3% South Central, 3.3% Southeast, 3.1% North Central and 2.9% Northeast
By workforce size: 3.3% for employers with 500 to 999 employees, 3.2% for those 1,000 or more, 3.2% for those with 100 to 499 and 3.1% for those with less than 100

Among the factors contributing to the total increase figure, projections are 2.5% for merit pay, 1.5% for general/COLA and 0.5% for “other.”

Other Exempt

While 3.2% is the projected average total pay increase (3.1% for-profits, 3.2% non-profits) for “other exempt” employees, the breakdowns include:

By geographic region: 3.4% Southeast, 3.3% West, 3.2% North Central, 3.0% Northeast and 3.0% South Central
By workforce size: 3.3% for employers with 1,000 or more employees, 3.2% for those with 500 to 999 employees, 3.1% for those with 100 to 499 and 3.1% for those with less than 100

Among the factors contributing to the total increase figure, projections are 2.4% for merit pay, 1.6% for general/COLA and 0.5% for “other.”

Top-level results from WorldatWork’s 2025-2026 Salary Budget Survey report will soon be available to the general public. The full report — covering base salary increases and merit budgets for 22 countries and in-depth salary budget insights for the U.S., Canada, India and the United Kingdom — will be available for purchase through the WorldatWork website. Report purchase also provides access to the U.S./Canada Online Reporting Tool to build customized reports based on industry, organization size and/or geographic area.

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