What to Expect in 2025: Pay Movement and Merit Budgets

Blue Whale Compensation has prepared the following comprehensive advisory report on current market and economic conditions to provide insights into how these factors may impact companies’ decisions regarding merit and pay increases in 2025.

U.S. WAGE INCREASES IN 2025

A) PROFESSIONAL AND MANAGERIAL JOBS

Pay increases in most white-collar roles are projected to moderate in 2025. This trend reflects the cautious economic outlook and general business sentiment. With economic growth expected to weaken moderately in the U.S. and Europe, some companies are adopting a conservative stance on salary increases. While pay freezes have become more common, especially in industries like tech where major players like Salesforce and Microsoft previously announced no raises, other sectors might follow this trend depending on economic conditions.

In line with this cautious approach, U.S. companies plan to raise salaries by an average of 3.9% next year, slightly lower than the 4.1% median increase observed this year, according to a survey by Willis Towers Watson (WTW). The decrease in planned salary increases corresponds with a reduction in employee turnover and resignations, which have been key drivers of higher pay in recent years. Additionally, the proportion of U.S. companies reporting challenges in attracting and retaining talent has dropped by 19 percentage points from 57% in 2023 to 38% this year. In response to the unusually tight labor market last year, employers had offered a median pay raise of 4.5% to stay competitive. This year’s more restrained increases reflect the stabilizing labor market and companies’ cautious approach in response to evolving economic conditions.

B) MANUFACTURING AND SERVICE JOBS

Contrasting with the slowdown in white-collar pay increases, blue-collar roles are likely to continue experiencing above-average wage growth in 2025. This is driven by factors such as rising minimum wages in various states and continued demand for skilled labor in sectors like construction, manufacturing, and transportation. The ongoing shortage of skilled workers means employers will need to offer competitive wages to attract and retain talent.

In California, for instance, as reported by CalChamber, the minimum wage is set to increase by 3.18% to $16.50 per hour on January 1, 2025, as a result of adjustments for inflation. Additionally, specific sectors, such as fast food and healthcare, will see even higher mandated minimum wages, with fast food employees earning at least $20 per hour starting in April 2024. These increases, alongside the potential for further hikes due to local ordinances and upcoming legislation, underscore the pressure on employers to offer competitive wages to attract and retain skilled labor in these industries. As such, blue-collar roles, particularly in high-demand sectors, are expected to see continued wage growth above the average in 2025.

C) OVERALL PROJECTION: WAGE AND SALARY MOVEMENT

Based on wage growth trends and economic conditions, Blue Whale Compensation expects wage/salary movement for 2025 to drop by 0.5% from 2024 levels. Projections include:

– 4.4% for production and blue-collar classifications

– 4.3% for hourly administrative positions

– 4.4% for professional administrative positions

– 4.3%  for managers and executives

D) PROJECTED MERIT INCREASES, BUDGETS: 2025

When setting budgets, it's crucial to differentiate between overall wage movements and planned increases. While overall wage movements encompass various pay-related decisions, including promotions, cost-of-living adjustments, and compliance with new minimum wage guidelines, planned increases specifically refer to the budgeted payroll percent increases that employers allocate for merit-driven or across-the-board pay adjustments.

Typically, budgeted payroll increases trail overall wage and salary movements by 0.5% to 0.75%. For 2025, projections suggest that merit increase budgets will range between 3.8% and 4.0%.

However, it's important to recognize that different data sources may present varying projections. For example, WorldatWork projects a 3.8% average salary budget increase for the U.S. in 2025, with a median of 4.0%. In contrast, Payscale presents a slightly lower projection, with an average planned increase of 3.5%. These differences underscore the importance of considering multiple sources when planning your compensation strategies. ERI’s projections, based on current trends, has wages and salaries moving at an annual rate of 4.1%. Relying solely on one source might not provide a full picture of the market, and integrating insights from various reputable sources can lead to more accurate and well-rounded budgeting.

Including multiple sources, such as WorldatWork, Payscale, ERI, and Mercer, among others, is highly recommended. This approach will aid in your planning process, ensuring a balanced perspective and providing a range of expectations that can help guide your compensation strategy more effectively.

DIFFERENCE BETWEEN BUDGETED AND ACTUAL INCREASES

Another key point is the distinction between budgeted increases and actual wage movement. While companies may budget for increases based on planned merit or cost-of-living adjustments, the actual increase in payroll costs often ends up higher. This discrepancy is typically driven by factors such as:

-Turnover: Replacing employees often requires offering higher salaries to attract new talent.

- Promotions: Employees moving into higher roles generally receive substantial salary bumps.

- New Hires: Market conditions may necessitate offering new hires salaries above the established range, especially in competitive sectors.

VARIATION BY INDUSTRY SECTOR

The movement of wages in 2024 varied significantly by industry, with figures ranging from 5.1% in some sectors to just over 2% in the IT industry. This highlights the critical importance of understanding industry-specific trends when setting pay policies. For example, while sectors like healthcare and transportation saw stronger wage growth, others like information technology experienced more subdued increases.

CONCLUSION: A STRATEGIC APPROACH TO COMPENSATION

As employers begin planning for 2025, it's essential to take a strategic approach to compensation, ensuring that budgeting is based on a comprehensive view of market conditions. Blue Whale Compensation’s tools, such as BlueComp, can assist companies in staying competitive by offering insights into wage movements and helping adjust pay scales accordingly.

For more information on how to leverage these insights and tools for your organization, please contact a BlueComp representative.

LATEST ON CALIFORNIA WAGE LAWS

CALIFORNIA WAGE LAWS: EMPLOYER ALERTS FOR 2023

By Susan A. Rodriquez, APC

Employers need to take action in response to legislation effective in 2023 that impacts California wage laws, wage requirements and related matters. This blog will discuss three bills: Senate Bill (SB) 3, passed in 2016 with provisions effective January 1, 2023; SB 1162, passed in 2022 and effective January 1, 2023; and a third bill, Assembly Bill (AB) 257, passed into law in 2022 but suspended pending a referendum in the November 2024 election.

Employers must be aware of the requirements enacted by SB 3 and SB 1162. They should review employment policies and procedures to ensure compliance and reposition as needed. While employers may be inclined to wait until the referendum vote is cast to take action regarding AB 257, it would be wise to prepare in advance for the possible changes it would implement.

Employers with California wage and hour questions may contact Southern California employer attorney Susan A. Rodriguez to discuss their changing responsibilities under these laws.

California Wage Laws Impacting Employers

Senate Bill 3 raised the minimum wage in California annually, with the 2023 wage requirements applying to employers of all sizes.  Senate Bill 1162 amended section 12999 of the California Government Code and section 432.3 of the California Labor Code, enacting new requirements for recordkeeping and pay transparency.

If AB 257 survives the referendum, the Fast Food Accountability and Standards Recovery Act, or FAST Recovery Act, will become effective.  The Act would create a Fast Food Council responsible for establishing standards of operation for fast food restaurants, including requirements related to wages, hours and working conditions.  The law also contains provisions related to retaliation and discrimination.

California Minimum Wage Changes under SB 3

SB 3 mandated annual increases in the minimum wage in California, beginning in 2017.  The minimum wage requirement of $15.50 per hour effective in 2023 applies to businesses with any number of employees in California.  Wage increases after 2023 are to be based on the Consumer Price Index. In previous years, employers with 25 employees or fewer were permitted to pay a lower minimum wage than employers with 26 employees or more.

Some municipalities in California have mandated a minimum wage within their jurisdictions that may be higher than required under California wage laws.  The University of California Berkley Labor Center maintains a list of these wage requirements.  Employers must pay the highest minimum wage required by the laws and ordinances that govern the jurisdiction where an employee works.

California Employer Responsibilities under SB 1162

SB 1162 implemented multiple requirements for employers of various sizes regarding pay transparency and records related to positions and wages.  First, employers with 15 or more employees must include a pay scale in all job postings, including those posted or shared by a third party.  This requirement applies if the position may be filled in California, whether the employee works on-site or remotely.  Additionally, an employer must provide an employee with the pay scale for the position he or she holds if requested.

California employer responsibilities now include keeping job titles and wage history records for all employees while employed and for three years after employment ends.  The Labor Commissioner may inspect these records to evaluate or identify wage discrepancy patterns related to race, ethnicity or sex.  An employer’s failure to keep proper records establishes a rebuttable presumption in favor of an employee wage claim.

Private employers with 100 or more employees must submit a pay data report to the Civil Rights Department of the Business, Consumer Services and Housing Agency.  These reports must be filed by the second Wednesday of May each year, beginning in 2023.

California Wage Laws and AB 257: Act Now or Wait and See?

Although the provisions of AB 257 have been suspended pending a referendum vote in the November 5, 2024 election, employers would be wise to evaluate their positions and plan ahead for the vote’s outcome. If the amendments to the Labor Code are approved by vote, the FAST Recovery Act will become effective.

The Act would establish a Fast Food Council responsible for establishing standards for the fast food industry. Cities and counties with a population of more than 200,000 will be permitted to create local councils that may make recommendations to the state council.

The Fast Food Council will have the authority to raise the minimum pay for fast food workers to as much as $22 per hour, with annual increases on the cap based on inflation. This and other standards established by the Fast Food Council will apply to restaurants with at least 100 locations throughout the US.

While AB 257 applies specifically to employers with businesses defined as “fast food restaurants” by the criteria outlined in the bill, mandatory wage increases and other requirements for fast food restaurants would likely put pressure on the restaurant industry in general to increase wages or modify operations to retain employees and keep pace.

Businesses that may be impacted by this law should take steps to evaluate their options and make adjustments that may help offset the potential challenges posed by AB 257.

Contact Attorney Susan Rodriguez with Your California Wage and Hour Questions

As a Southern California employer attorney at the Law Offices of Susan A. Rodriguez, APC, Susan Rodriguez has advised and represented employers in California for more than 30 years.  She helps clients stay up-to-date on changes to California employer responsibilities regarding wages and much more.  To discuss recent and pending updates to California wage laws or other employment law matters, contact Susan by calling (213) 943-1323 or completing the law firm’s online contact form.

Posted by Susan A. Rodriguez, Esq.

The information, comments and links posted on this blog do not constitute legal advice, and no attorney-client relationship has been or will be formed by any communication(s) with the blogger.  Do not send any confidential or privileged information to the blogger.  No information, documents or materials you send to the blog will be considered confidential or privileged by the Law Offices of Susan A. Rodriguez, APC or its lawyers and no information, documents or materials will be returned to you.  If you do send any information, documents or materials to the blog, you give permission for the blogger to include them on or in the blog.

For legal advice, contact an attorney at Law Offices of Susan A. Rodriguez, APC or an attorney actively practicing in your jurisdiction.

Merit and Pay Increases for 2024

Paycheck Increases For 2024: What Can Employers Expect?

Blue Whale has prepared the following summary advisory report on the current market and economic conditions to provide insights into how these factors may impact companies’ decisions regarding merit and pay increases in 2024.

U.S. Wage Increases in 2024

A) White-Collar Jobs

Pay increases in most white-collar roles are expected to slow down in 2024. This deceleration can be attributed to the economic outlook and general business sentiment prevailing in the market. For example, according to the World Economic Forum, most chief economists expect moderately weakened growth in the United States and Europe. Pay freezes – uncommon over the last three years- have become increasingly common as companies face economic headwinds and undertake job cuts. For example, SalesForce, Microsoft, and other leading employers have announced no salary raises for full-time employees in 2023, indicating a shift in the approach adopted by some major organizations.

B) Blue-Collar Jobs

On the other hand, and perhaps due to minimum wage increases in states like California, Washington, and other larger metropolitan areas, blue-collar roles will likely experience continued above-average wage growth in 2024. Beyond increases in the minimum wage, the other drivers for this upward trend are the scarcity of skilled labor and increased demand. Industries such as construction(1), manufacturing, mechanical, supply chain, and transportation, facing workforce shortages, are expected to offer higher wages to attract and retain talent.

c) Overall Projection: Wage and Salary Movement

Based on a review of wage growth, wage/salary movement for 2024 is likely to match or come in only slightly below 2023 levels. Projected pay movements for 2024 are as follows:

• 4.8% for managers and executives
• 5.1% for professional administrative positions
• 5.2% for hourly administrative positions
• 5.0% for production and blue-collar classifications

D) PROJECTED MERIT INCREASES, BUDGETS: 2024

In setting up budgets, it is essential to understand the difference between overall wage movements and planned increases. Overall wage movements include several personnel decisions impacting an employee's paycheck, including promotions, cost-of-living increases, salary adjustments, adjustments to meet new minimum wage guidelines, and merit-driven increases.

On the other hand, planned increases are the budgeted payroll percent increases set by employers for employee increases. Typically those increases are merit-driven, tied to an employee's performance; however, some companies have plans that call for a flat percent increase for all employees. Generally, depending on industry, and other labor factors, budgeted payroll increases trail overall wage and salary movements by .5% to .75%.

As we look ahead to 2024, a number of publications are forecasting budgets for increases ranging between 4.0% and 4.2%.

Understanding today's market is essential

As employers begin to budget for 2024, organizations must conduct wage benchmarking exercises promptly to assess their position relative to the market. Failure to benchmark wages may result in companies being unaware of potential disparities in market pay. According to the Bureau of Labor Statistics wage and benefits growth tracker, US wages across all jobs have increased by 5.0% as of May 2023. However, it is essential to recognize that specific roles in local markets may have experienced higher growth rates, potentially exceeding the overall average.

To illustrate the impact, let's consider a scenario where the market pay for critical roles has risen 8% in the past year. If a company granted its employees a 4% pay increase, they may unknowingly fall behind the market heading into 2024. To bridge this gap and remain competitive, the organization may consider providing an additional 4-5% increase, considering the observed market pay increases.

Our Software HELPS ORGANIZATIONS Maintain Market Parity

If keeping track of market movement is part of your organization's strategy, our compensation software, BlueComp can help. Developed by Blue Whale Compensation, BlueComp is a game-changing cloud-based compensation management application that stands out from the competition. What sets BlueComp apart is its remarkable ability to offer robust features and functionality as a freeware app. While competitors often charge monthly fees that can reach thousands of dollars, BlueComp provides unparalleled value at no cost. BlueComp is available as a freeware application. Its rich and robust compensation management features are ideal for organizations moving from spreadsheets to cloud-based applications. BlueComp comes with a wide range of features:

• Track Market Movements
• Easily Compare the Market Value for Different Jobs across multiple locations
• Manage Pay Bands by Location
• Easily Edit Employee Data
• Simple Visual Representation of Salary Structure
• Salary Suggestions and Compensation Assistant
• Employee-level Suggestions for Reducing Pay Gaps
• Market Differences stats to manage costs, address pay gaps, and keep pay in line with the company's compensation philosophy

Maintain Market Standing with BlueComp's Dynamic Market Capabilities

The estimates used by BlueComp to determine annual compensation changes come primarily from the Employment Cost Index (ECI). Published quarterly by the Bureau of Labor Statistics, the ECI is a comprehensive index that tracks wage and employee-related costs across various industries and sectors.

By leveraging ECI data within their BlueComp account, clients can make informed decisions, refine their budgeting, and ensure their compensation strategies remain competitive and responsive to market conditions.

As of 8/1/2023, all BlueComp accounts have been updated with the latest ECI figures. These figures are based on major industry sectors, metro areas, and employment size.

For more information on wage/salary escalation and how to interpret or use your account's information, contact a BlueComp representative today.

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