Why 2025 Will See Smaller Pay Raises and What Your Company Can Do About It

As 2025 inches closer, businesses are bracing for a shift in compensation trends. According to a recent survey by WTW, pay raises next year are projected to be smaller, with average increases expected to drop to 3.9%, down from 4.1% in 2024 (and 4.5% in 2023). While this is still relatively high compared to pre-pandemic years, the anticipated decrease signals a potential adjustment period that could be uncomfortable for both employers and employees.

I was curious about what contributes to these annual shifts and how it might impact what CandorIQ’s clients are working on, so I figured some of you might be too. Below is the breakdown of what I found out.

Why Is This Happening?

The root of these smaller projected pay raises lies in the rapid salary growth seen in 2021 and 2022—the fastest pace in over a decade. During those years, the job market was in turmoil, with more than 50 million people quitting their jobs in what became known as "The Great Resignation." Companies scrambled to fill vacancies, leading to a surge in salaries as they competed for talent.

Fast forward to 2024, and the job market dynamics have shifted. Hiring rates have cooled, and the wave of resignations has slowed. The result? A classic case of supply and demand. With fewer openings and a more stable workforce, the pressure to offer sky-high salaries has eased. Nearly half (47%) of U.S. organizations expect their salary budgets to be lower in 2025, reflecting this new reality.

Why Could This Be Problematic?

The shift towards smaller pay raises could present several challenges for organizations.

1. Existing Employees' Expectations: Employees accustomed to the generous raises of recent years may be disappointed by the smaller increases in 2025. This could lead to dissatisfaction, lower morale, or even higher turnover if not managed carefully.
2. Hiring New Talent: Prospective employees, especially those who have been following the trends of the past few years, might come in with higher salary expectations. Navigating these negotiations without breaking your budget could prove challenging.

What Should You Be Doing About It?

To get ahead of those uncomfortable conversations next year, there are a few things you could be thinking about and doing now:

1. Align Compensation Strategy with Company Goals: While keeping up with market prices and industry standards is important, your compensation strategy should ultimately reflect your company's specific goals and values. Consider how pay fits into your broader objectives, such as talent retention, growth, or innovation.
2. Communicate Pay Strategy Clearly: Transparency is key. Ensure that your compensation strategy is clearly communicated across the organization, and work towards getting buy-in from leadership. This will help align expectations and reduce potential friction.
3. Empower Managers: Managers play a crucial role in communicating compensation decisions to their teams. Equip them with the knowledge and tools they need to explain the "why" behind any pay decisions, helping to foster understanding and acceptance among employees (and reducing unnecessary back and forth with your HR team).
4. Highlight Total Rewards: Compensation isn’t just about base salary. Make sure your employees understand the full value of their total rewards package, including benefits, bonuses, variable pay, equity, and other incentives. This comprehensive view can help mitigate any disappointment over smaller raises.

The Importance of Flexibility in Compensation Planning

Compensation standards are always evolving, which is why it’s essential to regularly review and adjust your compensation plans. We always encourage clients to use market data as just one piece of the puzzle when making compensation decisions. By establishing best practices, using the right tools (like CandorIQ!), and reviewing compensation plans multiple times per year, you can create strong workflows that make managing these changes more manageable—even when the future is uncertain.

If you’d like to learn more about how CandorIQ can help, schedule a demo with us today.