U.S. companies are projected to raise base salaries by 3.9% in 2025, adding pressure on corporate budgets amid a slowing economy and tight labor market.
For the third consecutive year, salary budgets will rise at one of the fastest rates in two decades, reflecting the challenges businesses face in retaining employees in a shrinking labor pool. Following salary growth of 4.4% in 2023 and 3.8% in 2024, employers are forced to balance wage increases with the need to remain competitive.
Dana Peterson, the chief economist at The Conference Board, pointed out that with fewer workers available, businesses are really focusing on keeping their current employees. This results in steady salary increases and better real wage growth as inflation begins to ease up.
From Base Salaries and Bonuses to Performance-Based Compensation
Though base salary growth remains strong, companies also adjust their broader compensation strategies. Employers are reducing reliance on one-time bonuses, such as sign-on and retention incentives, which surged during the pandemic. Research shows that about 5% more organizations plan to discontinue retention bonuses in 2025 than to introduce them, while 3% more will eliminate sign-on bonuses.
Sectors like insurance, energy, agriculture, and communications are expected to see the highest overall compensation increases. In contrast, industries such as consulting services and utilities are planning modest or declining increases in 2025.
At the same time, businesses are increasingly turning to performance-based compensation and equity incentives to offset base salary pressures. It was noted that nearly 6% rise in companies planning to offer equity compensation in 2025, alongside a 14% growth in those focusing on employee recognition programs.
Pay Equity Remains a Big Focus Amid Budget Constraints
Pay equity remains a priority, with executives seeking to address disparities as mandated by legal and transparency requirements. However, 90% of organizations still need to maintain a separate budget for pay equity, forcing many to cut other spending or delay hiring to fund these initiatives.
Despite the challenges, compensation leaders are working to align salary budgets with strategic goals in a volatile economic landscape.
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