Employers Planning Lower Pay Raises in 2025

As inflation and the job market continue to cool down from their previous red-hot pace, U.S. employers are giving more conservative pay raises in 2024—and they expect to go even lower in 2025, according to new reports.

Roughly half (47%) of U.S. organizations report that their salary budgets for the 2024 cycle are lower than the previous year, according to a new report from consulting firm WTW, which surveyed roughly 31,000 organizations. The overall median pay raise for 2024 fell to 4.1%, compared with 4.5% in 2023. Meanwhile, preliminary data from Empsight, a New York City-based human resource consulting firm specializing in compensation, found that salary increase budgets for 2024 are 4%, while median merit budgets are 3.5%.

Employers—at least so far—are pegging overall salary budget increases even lower, WTW found, with organizations predicting a 3.9% jump in 2025. Empsight similarly projects that total salary increase budgets will be 4% for 2025, while median merit budgets are projected to be 3.5% for 2025.

A stabilizing U.S. economy is a primary reason many employers have begun to tighten their purse strings: While around two-fifths of employers (38%) report having trouble attracting and retaining talent in 2024, that figure has dropped almost 20 percentage points from two years ago (57%), WTW found. Overall, the economy is cooling after a period of significant job resignations and turnover during the past few years.

Sydney Ross, junior economic researcher at SHRM, said earlier this month that the most recent Consumer Price Index from the U.S. Bureau of Labor Statistics—which found that annual inflation eased to 3% in June—along with the bureau’s June 2024 Jobs Report, which found that the labor market is starting to balance out, provide evidence that the economy is returning to what it looked like before the pandemic. “The labor market is beginning to stabilize and is not as tight as it was at the beginning of the year,” Ross said.

Inflation can impact salary budgets in both directions, WTW said.

Organizations that lowered salary budgets cited concerns related to cost management, weaker financial results, and inflationary pressures as the leading causes, while those that raised salary budgets this year cited inflationary pressures and a tight labor market.

Long-Term Changes

Despite declining since 2023, salary hikes still remain fairly high when compared to pre-pandemic levels. (The average salary increase in 2018, for instance, was 3%, according to WTW.) The deceleration isn’t expected to significantly hurt talent, said Jeremy Feinstein, managing director at Empsight.

“Although salary budgets are expected to normalize back to pre-pandemic levels, companies aren’t projecting high employee discontent and turnover,” he said.

Many organizations are also looking at nonmonetary rewards to attract and retain employees, especially in light of lower salary hikes.

“Many companies have permanently adopted hybrid and more flexible remote work policies and motivational engagement programs, where greater flexibility and worker satisfaction is projected,” Feinstein said.

The WTW data found that organizations are taking actions to address current market conditions and employee needs, particularly providing more workplace flexibility (52%) and improving the employee experience (52%).

“In light of cost management concerns, employers are taking more of a holistic approach to their reward programs, factoring in bonuses, long-term incentives, and health and wellness benefits,” said Lesli Jennings, North America leader, work, rewards, and careers at WTW.

However, she added that a more targeted review of specific employee groups could allow for greater support for those with in-demand skills or those in lower salary ranges. “Pay equity is top of mind for employers, and giving a big-picture view of what employees are offered ensures the salary increase process is clear and emphasizes the connection to business performance,” Jennings said.