As inflation stabilizes and the labor market cools, U.S. companies are planning more modest salary increases for 2024 and 2025. Employers are shifting focus to non-monetary benefits and targeted pay equity efforts to attract and retain talent in a changing economy.
As inflation slows and the job market shows signs of stabilization, U.S. employers are scaling back pay raises for 2024 and are expected to offer even smaller increases in 2025, according to multiple industry reports. This shift marks a cooling trend following the sharp pay increases seen during the height of the post-pandemic labor shortage.
Nearly half (47%) of U.S. companies report that their salary budgets for 2024 have decreased compared to the previous year, according to a survey from WTW that involved around 31,000 organizations across various industries. The median pay raise for 2024 is projected to be 4.1%, a slight dip from the 4.5% recorded in 2023. Similarly, Empsight, a New York-based HR consulting firm that specializes in compensation analysis, found that overall salary increase budgets for 2024 are hovering around 4%, with merit-based budgets at 3.5%.
Outlook for 2025: Smaller Raises on the Horizon
Looking ahead to 2025, organizations anticipate even more conservative pay raises. WTW reports that employers are budgeting for a 3.9% increase next year, while Empsight projects total salary increase budgets will remain steady at around 4%, with merit-based increases still hovering around 3.5%. These numbers indicate a return to more traditional salary growth patterns, resembling the pre-pandemic era, when the average salary increase was 3%, according to WTW’s historical data.
Why Are Employers Tightening Salary Budgets?
The stabilizing U.S. economy is a key factor behind this trend. According to WTW’s survey, the percentage of employers reporting difficulty in attracting and retaining talent has dropped to 38% in 2024—down nearly 20 percentage points from 57% just two years ago. This suggests that the tight labor market, which had forced employers to offer higher salaries and more perks to secure top talent, is beginning to ease.
Economic indicators support this shift. The U.S. Bureau of Labor Statistics Consumer Price Index report for June 2024 showed annual inflation at 3%, a significant drop from the higher inflation rates seen in previous years. Additionally, the June Jobs Report from the Bureau noted that the labor market is beginning to rebalance, with job openings declining and layoffs increasing, signaling a shift toward a more stable job market.
SHRM junior economic researcher Sydney Ross echoed these findings, stating, “The labor market is beginning to stabilize and is not as tight as it was at the beginning of the year,” reflecting the easing competition for workers.
Inflation’s Role in Shaping Salary Budgets
Inflation has played a complex role in shaping salary decisions for 2024 and beyond. WTW’s research found that organizations that reduced salary budgets cited concerns related to cost management, weaker financial performance, and inflationary pressures. Conversely, employers that increased salary budgets attributed their decision to rising inflation and a still-competitive labor market.
Despite the lower salary increases, compensation experts like Jeremy Feinstein, managing director at Empsight, point out that salary hikes are still higher than they were before the pandemic. “Although salary budgets are expected to normalize back to pre-pandemic levels, companies aren’t projecting high employee discontent and turnover,” he said. This suggests that while raises may be smaller, other factors such as workplace flexibility and overall employee engagement are helping to keep turnover at bay.
Shifting Focus to Non-Monetary Rewards
In response to shrinking salary budgets, many companies are enhancing their non-monetary reward systems to attract and retain talent. This includes permanent hybrid or remote work arrangements, which have become standard at many organizations. “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 explained.
WTW’s data also shows that 52% of organizations are prioritizing workplace flexibility and improving the overall employee experience as key strategies to adapt to current market conditions. Lesli Jennings, North America leader for work, rewards, and careers at WTW, emphasized that companies are increasingly taking a holistic approach to their reward programs. “In light of cost management concerns, employers are factoring in bonuses, long-term incentives, and health and wellness benefits into their total rewards offerings,” Jennings noted.
Pay equity also remains a top priority for employers. Jennings highlighted the importance of taking a targeted approach to reviewing compensation practices, especially for employees with in-demand skills or those in lower salary levels. “Ensuring transparency in the salary increase process and emphasizing its connection to business performance are crucial to maintaining fairness and equity,” she said.
Conclusion: A Return to Normalcy?
Although salary increases are expected to decelerate in the coming years, they remain well above pre-pandemic levels. Employers are likely to continue balancing between modest pay raises and enhanced non-monetary benefits such as flexible work arrangements and comprehensive wellness programs. As the economy stabilizes and the labor market finds its footing, these strategies will be key to maintaining employee satisfaction and reducing turnover.
In a more cautious economic climate, the focus for employers should be on adopting a holistic and equitable approach to compensation—one that not only aligns with business performance but also meets the evolving needs of their workforce.
References:
Empsight Salary Increase Projections
U.S. Bureau of Labor Statistics Consumer Price Index