'It's cautious optimism in the market and making sure that you're taking care of employees,' says NB's Darcy Clark
Recent findings released by Normandin Beaudry have found that employers are taking a more cautious approach to compensation planning next year, while strategic planning relevant to salary increases will be essential to retain talent and maintain workforce productivity.
Darcy Clark sees a clear shift in compensation trends. While salary increase budgets are on the decline, the pace and reasoning behind the drop suggest a deliberate move, not a reactive one.
"The big story here is budgets are slowly declining," said Clark, senior principal at Normandin Beaudry, emphasizing that organizations aren’t slashing budgets across the board but gradually reducing them after a few years of aggressive post-pandemic increases, notably as 70 per cent of respondents said they have lower budgets than last year.
“It’s not doom and gloom,” he added. “I think it’s cautious optimism in the market and making sure that you’re taking care of employees but not overspending where you don’t need to. Labour markets are balancing out a bit, but that can change on a dime… If you take a draconian approach to that and start cutting your salary increases and if the market changes quickly, employees are going to remember those things. You’ll want to take a guarded approach in case things change either for the better or worse so you're covered on both sides.”
Clark believes this to be a recalibration as organizations are taking a measured, thoughtful approach in contrast to the more reactionary hikes of previous years, a strategy shaped by shifting workforce expectations. Newer employees, Clark pointed out, may only know an era of steep increases.
“Anyone working in the early 2000s or 2010s knows 2.5 per cent or 2.7 per cent was the standard. Other people might not know what ‘normal’ is because they came in during an abnormal time,” he said.
This “slow and systematic reduction,” as he called it, helps temper employee expectations while preserving flexibility for employers, especially critical in uncertain economic conditions. The shift isn’t just about cutting costs but also about reallocating resources to ad hoc budgets. With lower payroll increase costs, businesses have more flexibility to reinvest or retain cash for future uncertainties, especially in industries facing ongoing external risks like tariffs.
According to Normandin Beaudry’s research, organizations are planning to allocate to support market adjustments to salaries (59 per cent), differentiate compensation for high performers (58 per cent), retain employees in strategic or critical roles (54 per cent) and retain employees with a perceived retention risk (27 per cent).
Normandin Beaudry found that salary increase budgets are expected to decline slightly in 2026, with an average projected raise of 3.1 per cent, down from 3.2 per cent in 2025. Just 3 per cent of organizations froze salaries in 2025 - matching earlier forecasts - with only 0.4 per cent anticipating freezes in 2026 and 12 per cent still undecided.
Still, Clark emphasized that salary increases are continuing, just at a more measured pace. With average raises sitting at 3.1 per cent and inflation at 1.9 per cent, employees are still coming out ahead.
Clark also points to the broader economic backdrop as a driver behind these moves. The top three reasons cited for the budget decreases were the state of the domestic economy, inflation trends, and a softening labour market.
Industry pressure and external market forces also vary. While professional services and tech have remained relatively insulated, other sectors like manufacturing have already reacted more aggressively to global conditions and tariffs.
Despite the cutbacks, Clark emphasized that many companies are still investing in their workforce. Over 45 per cent of employers reported setting aside additional budgets on top of the average 3.1 per cent for targeted compensation strategies. These extra funds, averaging about 0.9 per cent of payroll, are being used to address market alignment, reward high performers, and prepare for upcoming pay transparency laws in Ontario.
“They’re carving out additional funds to do those kinds of internal cleanups on compensation before you have to go out to the public and say, ‘Here’s the salary range for this job’.”
Clark cautioned against reading too much into early salary projections, stressing that they're little more than informed guesses until budgets are finalized months later, acknowledging that employers are typically asked around June to forecast their salary increase budgets for the following year.
Still, a lot can shift by the time those figures go through internal approvals as final budgets often require sign-off from senior leadership or even boards of directors, a process that usually wraps up in February. And while it’s rare for boards to approve more than what was requested, the final number can still differ from initial projections depending on broader business conditions, Clark explained.
While early forecasts should be treated as provisional, he emphasized that employers are ultimately intentionally staying close to the middle of the pack.
“You don’t want to stand out in this crowd right now,” he said, citing the uncertain economic outlook over the next 6 to 12 months, adding that employers are avoiding drastic moves in either direction to preserve flexibility and remain competitive in a quickly shifting market.
“Keeping that middle-of-the-road approach is the strategy we’re seeing in the data.”
