Budget planning for 2025 is going to be tricky. After years of high inflation and high wage growth in a precarious economy, organizations especially want to know what their peers are doing when it comes to pay increases.
Fortunately, Payscale’s Salary Budget Survey (SBS) is now open for participation. This is an annual report from Payscale that provides pay increase budget planning data segmented by industry, company size, and location.
According to Payscale’s 2024 Compensation Best Practices Report, the average base pay increase given in 2023 was a whopping 4.8 percent, and the average planned for 2024 is 4.5 percent. This is much higher than the average for decades leading up to the pandemic. The question is whether actual pay increases in 2024 will exceed, meet, or fall short of planned increases—and what the outlook is for 2025.
Employers may be hoping that salary budgets will decrease following a year of layoffs and reduced activity in the labor market, but it’s difficult to say if this will be the case.
Employees are hungry for higher pay increases
While pay increases the past few years have been higher on average than at any time since before the Great Recession of 2008-2009, they have not been high enough to satisfy employees.
Employees are hungry for higher pay increases for a variety of reasons:
Inflation drove up prices. While market pricing is based on cost of labor, not cost of living, pay increases are somewhat influenced by inflation. Inflation hit a high of 9 percent in 2022 in the United States and pay increases have not caught up. When pay doesn’t keep pace with inflation, employees often feel they have had a pay cut, based on reduced buying power.
Job hoppers are rewarded. Employees are aware that the red-hot labor market of 2020-2022 rewarded job hoppers with considerably higher salaries than employees who stayed loyal. While some working professionals who negotiated high salaries during the Great Resignation may have been laid off when the market contracted, wages have still grown faster as a result of more people changing positions in recent years.
Employees feel overworked. Many employees want higher pay because they are currently understaffed and overworked. Some employees have been struggling since the layoffs during the COVID-19 pandemic while others are survivors of more recent layoffs. Regardless, these employees are frustrated by overburdened schedules and “quiet promotions” without increased pay.
The current macroeconomic climate does not favor employees
In 2023, labor market dynamics shifted in favor of employers, especially when it comes to high paying white-collar positions, so much so that some are calling the present economy a “white-collar recession”. This dynamic has continued into 2024. Given the climate of apprehension and relative scarcity of jobs, organizations are enjoying lower attrition rates despite dissatisfaction from employees.
But will employers be able to hold onto this power?
In May, The Fed elected to hold interest rates steady, so nothing is likely to change in the near-term, and opinions are divided about whether the economy will decline or improve in 2025 as a result.
Hiked interest rates have led many organizations to flip from growth-based models to profit-based models, which has stymied hiring and flattened wage growth in some sectors, particularly technology (see Payscale Index). Some economists predict that this tightening of purse strings will eventually push the economy into a recession.
So far, the labor market has remained resilient in spite of these concerns—at least on the surface, as jobs have met or exceeded expectations in recent reports. However, April’s job report showed U.S. employers adding only 175,000 jobs, a drop from March and well below the 240,000 predicted by economists.
At the same time, the labor market has become strained in other ways, with hiring processes that job seekers report to be punishing. While some economists are predicting a recession in 2025, others are saying that a recession has been avoided — or has already come — and that we are poised for the next growth cycle.
Organizations must plan strategically for pay increases in 2025
Whether we reenter a growth period now or after a coming recession, all organizations need to be thinking strategically and competitively about compensation. A new growth cycle will come eventually, and fair pay is always important, even when conditions favor employers.
To that end, Payscale offers insights for planning pay increases via our salary budget survey. In the Salary Budget Survey, participants are asked what base pay increases were on average in 2024, as well as what they’re planning for 2025. Participant responses include data around merit increases, COLA increases, and total increases, with room to note differences by state, province, and country. We also ask about promotional increases and budgets for salary structure adjustments.
The report is further segmented by industry, location, and company size to provide a valuable point of reference to compensation and HR professionals about what the averages for base pay increases are when aggregating the data of all participants.
Participants will receive a free copy of the report. The survey is open for participation now through the end of June, with the report scheduled to launch July 31st in time for salary budget planning season.
