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.