Compensation planning for 2026: Five trends that matter

2026 employee benefit budgets

While salary budgets are moderating, employee benefit costs continue to rise — and their perceived value is rising in tandem. According to the BLS, employer costs for benefits accounted for nearly 30% of total compensation for private-industry workers as of the March 2025 survey. This marks a steady increase in benefit spending, even as wage growth slows.

Labor economists note that the labor force participation rate remains below pre-pandemic levels — hovering around 62.6% in mid-2025, down from 63.4% in early 2020. Many workers reentering the labor market are doing so with new expectations: flexibility, wellness and financial security are increasingly valued over pure salary maximization. Despite these sentiments, rising inflation, particularly with respect to housing, place pressure on the need to balance cash compensation with an ever- increasing array of benefits. 

In response, employers are expected to:

• Re-evaluate benefit plan design to balance cost and competitiveness
• Explore voluntary benefits such as legal services, financial counseling, and fertility support
• Leverage tax-advantaged programs introduced under the One Big Beautiful Bill, including expanded dependent care and educational assistance exclusions

In short, while cash remains king, benefits are the crown jewels of total compensation. Employers who invest in meaningful, well-communicated benefit programs will be better positioned to attract and retain talent in a labor market that values lifestyle and purpose as much as pay.

Pay equity and transparency

Pay transparency legislation continues to expand across states and municipalities. As of mid-2026, more than a dozen states — including California, New York, and Illinois — require employers to disclose salary ranges in job postings, with additional jurisdictions mandating transparency during the hiring process. Federal legislation such as H.R. 1599 remains under consideration, signaling growing momentum toward nationwide standards.

Many employers have easily adopted the regulatory view of pay transparency but continue to struggle with more meaningful communication or consistent application of the stated values of transparency.

Employers must navigate this complex landscape and proactively address pay equity. Budget constraints may complicate efforts to close pay gaps, but transparency is increasingly seen as a competitive advantage in attracting and retaining talent.

One Big Beautiful Bill changes

The landscape of compensation planning shifted significantly with the enactment of the One Big Beautiful Bill Act (Public Law 119-21), signed into law on July 4, 2025. Two provisions in particular — the exemption of qualifying overtime wages from federal income tax and enhancements to fringe benefit programs — are poised to reshape employer strategies in 2026.

No tax on overtime pay: Starting Jan. 1, 2025, employees who earn qualifying overtime pay may deduct the “premium” portion of their overtime — typically the extra half of “time-and-a-half” compensation — from their taxable income. Key details include:

• Deduction limit: Up to $12,500 for individual filers and $25,000 for joint filers annually
• Eligibility: Applies to W-2 employees whose overtime meets Fair Labor Standards Act (FLSA) criteria
• Income phase-out: Begins at $150,000 (single) or $300,000 (married filing jointly) in modified adjusted gross income
• Reporting requirements: Employers must separately report qualifying overtime on W-2 forms

This provision offers a meaningful tax break for millions of workers and may influence employee preferences for overtime work. Employers should prepare to update payroll systems and educate employees on the implications for take-home pay and tax filing.

Fringe benefit enhancements: The bill also introduced or expanded several fringe benefit programs that employers may leverage to attract and retain talent:

• Educational assistance: Employer payments toward student loans are now permanently excluded from taxable income, with annual limits adjusted for inflation
• Dependent care assistance: Expanded eligibility and increased maximum exclusion amounts for employer-sponsored child care programs
• Paid family and medical leave credit: Extended and enhanced, allowing employers to claim tax credits for qualifying leave programs
• Trump accounts: A new savings vehicle for workers, with employer contributions excluded from taxable income under pilot programs in 2026

These changes encourage employers to revisit their total rewards strategy and consider offering more robust benefit packages that align with employee needs and tax advantages.

Variable pay to slow wages and increase cash compensation

The Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover Survey (JOLTS) shows the quits rate declined to 2.3% in June 2025, down from 2.6% a year earlier, indicating lower voluntary turnover. Employers are shifting focus from sign-on bonuses to retention strategies.

The Conference Board reports increased investment in performance-based pay and promotions, with less reliance on one-time incentives. Employers are refining variable pay programs by:

• Expanding eligibility
• Recalibrating performance metrics
• Aligning payouts with strategic goals

Variable pay remains a flexible tool to reward and retain talent in a dynamic labor market.