How competitive compensation is reshaping the future of pay

How competitive compensation is reshaping the future of pay

Abhishek Sen, Partner, People Advisory Services, EY India
Abhishek Sen

Partner, People Advisory Services, EY India

5 minute read 23 Feb 2026
Related topics
Workforce

Rewards are evolving as organizations shift to skills-led pay, AI‑powered decisions and sharper differentiation to stay competitive.

In brief

  • India’s salary increment trends for 2026 indicate that increases are projected to stabilize around 9.1%.
  • Companies are shifting from broad adjustments to more deliberate, skills-led and performance-linked pay.
  • Attrition continues to normalize at 16.4% as employers redesign rewards with greater precision, pay transparency and equity.

India’s new Labour Codes are prompting organizations to reassess wage structures and statutory obligations, highlighting the impact of these codes on wages and compliance. As the effects of the Labour Codes become clearer, organizations are conducting cost modeling exercises, upgrading payroll systems and strengthening governance frameworks. Investments in modern HR technology platforms are accelerating to facilitate compliance, efficiency and improved workforce visibility.

At the same time, the Union Budget 2026 reinforces workforce competitiveness through tax stability, investments in skilling, incentives for digital infrastructure and sustained public capital expenditure.

Across boardrooms in 2026, one theme is becoming impossible to ignore: the forces shaping compensation have shifted — deeply and permanently. India Inc. is entering 2026 with steady salary budgets, and the salary increase outlook for 2026 across key sectors reflects stabilization. Overall salary increases are projected at 9.1%, in line with emerging compensation trends, following two years of recalibration and cost discipline, as per the EY Future of Pay 2026 report.

Indian employers are redesigning their total rewards strategy, pointing toward sharper performance differentiation, rising AI skill premiums and moderated attrition amid economic normalization. The conversation is no longer about uniform increments but about targeted investment and measurable returns.

Why pay is changing

As analytics and AI adoption accelerate, organizations are moving from traditional models to evidence-based, transparent and capability-driven decisions. Rather than distributing pay evenly, leaders are embracing pay-for-performance and enabling pay differentiation through variable pay and performance metrics.

Intent, not inertia, is guiding how reward capital is deployed. This marks a defining moment in the future of pay in India, where organizations increasingly anchor decisions in rewards analytics and data-backed workforce insights.

Industry dynamics: Where pay is accelerating and where it is stabilizing

Beneath the national average, sector trajectories tell a nuanced story shaped by GCC pay trends and digital transformation priorities.

  • GCCs continue to exhibit the highest salary momentum at 10.4%, powered by global demand and digital specialization.
  • Financial services follow closely with salary projections around 10%, driven by regulatory, risk and platform modernization talent needs.
  • E-Commerce, at 9.9%, rounds out the top-performing sectors, signaling that technology and e-commerce are normalizing, with a sharper focus on productivity and sustainable growth.

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Skills-led pay: Where the real shifts are happening

Close to half of surveyed organizations report transitioning to skills-based pay models, reflecting the rise of structured skills-based pay frameworks and premiums for AI and digital roles. This shift signals that capabilities are evolving faster than job descriptions.
 

Variable pay is rising to 16.1% of fixed compensation in 2025, reflecting a steady shift towards at‑risk structures that link earnings to productivity, adoption and strategic impact.
 

Long-term incentives have become essential for retaining high‑impact talent. Employee stock ownership plan (ESOP) adoption has risen to roughly 78%, and more organizations now operate multiple long-term incentive (LTI) plans to balance retention, ownership and performance alignment. 

Time-bound allowances and differentiated long-term incentives are becoming preferred mechanisms to attract and retain critical digital and AI-led skills without permanently inflating fixed pay, representing a more deliberate approach to attrition and retention management.

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Stabilization of talent movement

Attrition is gradually normalizing, declining to 16.4% in 2025, yet voluntary exits still exceed 80%. Even in a cooled market, employees continue to make intentional choices about their careers, prioritizing growth, flexibility and cultures that feel fair and inclusive. Leaders are responding with stronger internal mobility, clearer career paths and targeted retention levers that balance cost discipline with capability preservation.
 

Total rewards reimagined: Flexibility and personalization anchor experience

The EY Future of Pay report suggests that hybrid work is now the operating baseline for 52% of organizations, but execution gaps persist – from productivity expectations to perceived fairness.
 

At the same time, the benefits landscape is diversifying. Personalized, life‑stage‑aware benefits – such as mental health support, financial wellbeing and inclusive healthcare – are reshaping the employee value equation. Employees today evaluate organizations not only by their pay but also by the experience, balance and support embedded in the broader rewards ecosystem.

92%

78%

3-4x

65%

2.3x

Employers offering mental health support

Employees prefer personalized benefits

Wellness program ROI reported

Employers offering flexible benefits

Higher satisfaction with flexible benefits

Looking ahead: Pay becomes strategic

2026 challenges leaders to rethink compensation not as a cost but as capital, deployed deliberately to build capability, inspire performance and shape culture. The organizations that lead will be those that treat rewards as a strategic system: transparent in design, dynamic in execution and deeply aligned with purpose and long‑term value.

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Summary 

The transformation underway in 2026 signals a broader truth about the future of pay in India: rewards are becoming a strategic lever for shaping talent, culture and enterprise resilience. As AI, skills and new models of work converge, pay will increasingly reflect the capabilities that drive long-term advantage. Leaders who anticipate this shift and design with foresight rather than urgency will build organizations ready for the complexities ahead. The future belongs to those who elevate rewards from policy to strategy.

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    About this article

    Abhishek Sen, Partner, People Advisory Services, EY India
    Abhishek Sen
    Partner, People Advisory Services, EY India
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