Total Rewards Strategy: Six Priorities

The following article was first posted in the Blog section of Mercer’s website. It is reposted here with permission.

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As you head into the back half of 2026, your role has never been more strategic, or more complicated.

The priorities we laid out for HR teams earlier this year remain relevant:

• Managing costs while sustaining talent
• Advancing pay equity and transparency
• Modernizing rewards programs for hybrid and flexible work
• Accelerating skills and career mobility

But the environment has shifted since January. Inflation and wage growth have moderated, the labor market is cooling but still selective for in-demand skills, and AI adoption has accelerated both the kinds of work you reward and the ways you can analyze pay data.

In this article we will outline six priorities you should own for the second half of 2026, each paired with practical, actionable steps you can take now, whether you’re a hands-on practitioner or helping leadership identify priorities and opportunities.

1. Recalibrate Base Pay and Merit Frameworks

Early compensation planning projections were slightly higher than what ended up being delivered. Salary increase budgets in many sectors have moderated.

Candidates in high-demand roles still command premiums, but broad-based inflationary pressure has eased.

What to do:

• Refresh market data for priority roles now (not just at cycle time). Use targeted surveys and real‑time comps for critical skills (tech, analytics, cybersecurity, product).
• Move from one-size-fits-all merit guidelines to differentiated frameworks. Define “strategic roles” that get above‑market adjustments and “bench” roles that follow standard merit.
• Build a rapid approval path for retention adjustments (spot increases, limited-time market premiums) so managers can act quickly when critical talent is at risk.
• Document affordability thresholds linked to workforce planning so wage actions are aligned with budget and hiring plans.

2. Make Pay Equity and Transparency Operational

Pay equity and disclosure remain front-of-mind for leaders, regulators, and candidates.

More jurisdictions and investors are scrutinizing pay practices, and transparency expectations are growing.

What to do:

• Run an updated pay equity analysis mid-year, including base and incentive components, and incorporate adjustments into H2 decisions.
• Turn findings into operational plans: a prioritized list of roles, recommended actions (market adjustment, compression correction, spot increase), budget estimates, and timelines.
• Prepare clear, consistent manager messaging and candidate-facing guidance on how pay is determined (market, role, experience, performance).
• Where your company posts salary ranges, ensure they’re defensible and tied to documented compensation structures; where you don’t publish ranges, standardize manager responses aligned to equity principles.

3. Reshape Incentives for Hybrid, Skills-First Work

With the increase in work involving hybrid models, and more project- and skills-driven work, traditional rewards models (location- or tenure-heavy) are less effective at motivating desired behaviors.

What to do:

• Reassess incentive drivers. Consider shifting a portion of variable pay to skills attainment, project outcomes, cross-functional collaboration, or customer impact.
• Design micro-incentives for short-term outcomes (successful project delivery, critical upskilling) that can be granted quickly and transparently.
• Pilot skills-based pay premiums for roles where external demand outpaces supply, such as AI jobs.
• Track outcomes and adjust: use analytics to measure whether changes increase retention, internal mobility, and performance.

4. Make Career Mobility, Skill Pathways Central to Rewards

Employees increasingly evaluate employers on visible career pathways and upskilling opportunities.

Rewarding mobility and skills development helps you retain talent without always increasing cash compensation.

What to do:

• Link rewards to demonstrable skill progression. Use certification bonuses, accelerated review cycles after skill milestones, or one-time rewards for cross-functional moves.
• Create clear role families and competency ladders, with market-anchored pay bands and explicit criteria for movement between levels.
• Work with learning partners to prioritize the skills that align to your most urgent talent gaps and create short, measurable skill journeys with reward checkpoints.
• Make internal mobility seamless: ensure recruiters, managers, and people support operations share visibility into open roles and candidate skill profiles.

5. Use Analytics, AI to Move From Reactive to Predictive Rewards

AI and advanced analytics can automate routine tasks, reveal hidden pay compression, forecast turnover risk by role, and simulate budget scenarios—accelerating the quality and speed of your decisions.

What to do:

• Invest in a baseline analytics capability: routine churn and market movement dashboards, role-level compensation trend views, and scenario models for merit cycles.
• Pilot generative AI to draft compensation narratives, prepare calibration summaries, or summarize pay equity findings — but always validate outputs and preserve human oversight.
• Use predictive models to identify high-risk roles and prioritize interventions before vacancies occur.
• Ensure governance over data quality, model inputs, and interpretability; keep audit trails for decisions driven by models.

6. Align Rewards Strategy with Workforce Planning, Cost Reality

2026 mid‑year has shown that hiring budgets and cost expectations can shift rapidly. Rewards must support strategic headcount decisions and cost constraints.

What to do:

• Sync with workforce planning: link rewards actions to hiring vs. internal redeployment strategies. If hiring slows, increase emphasis on redeployment and reskilling incentives.
• Build flexible total rewards scenarios (e.g., “grow fast,” “steady state,” “cost control”) to present to leaders so compensation decisions map to broader business scenarios.
• Identify no-regret, low-cost reward levers (recognition programs, non-financial career pathways, targeted stretch assignments) that maintain engagement when budgets tighten.
• Reserve a contingency pool for urgent retention needs with clear governance and reporting requirements.

What’s Changed in 2026 and How It Shapes These Priorities

Labor market. It’s less overheated than 2022–23 but still tight for critical skills. That means targeted premiums and retention tools matter more than across-the-board increases.

Inflation and budgets. With headline inflation easing, merit budgets and salary increases are moderating. You’ll need to be more surgical with limited dollars.

Regulation and transparency. Pay transparency and equity scrutiny continue to expand—be prepared with defensible documentation and clear communications.

AI adoption. Broader adoption of AI tools is changing job value and the types of skills in demand, and it’s giving you more analytics power—but it also requires governance and re-skilling strategies.

You don’t need to do all of this at once, but you should pick a short list of high-impact, time-bound priorities for the second half of the year and build a clear plan to deliver them.

Start with market refreshes for your most critical roles, a mid‑year pay equity check, and one pilot that applies skills-based or micro-incentives.

Use analytics to target limited budget where it will move the needle most.

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About the author: Jack Jones is a compensation and total rewards consultant at Mercer.