As we approach 2025, crafting an effective salary strategy involves more than just staying updated with market trends; it also requires aligning compensation with the organization's broader objectives and meeting employee expectations. Over the last few years, employers have experienced unpredictable fluctuations in the market. For instance, in 2021, the average salary increase was 1.7%, and in 2023, it rose to 2.8%. Planning compensation has been challenging, and managing the labor budget has proven even more difficult.
So, what are the factors that might influence salaries, benefits, and hiring in 2025? Let’s explore what we currently know.
7 compensation trends to watch in 2025
The upcoming presidential election could be one of the big macroeconomic variables of 2025. Both of the main candidates have their own economic policies, and these policies will impact consumer and business confidence in different ways.
However, externalities such as these don't immediately impact compensation. In general, it takes around a year for macroeconomic factors to start having an effect on recruitment in salaries. For now, we can focus on things that will make a difference in the short term.
1. Salary growth will stabilize and possibly fall
Last year, various experts predicted an average base salary increase between 3.5% and 4.1%. The final figure was 3.9%, which was a drop of almost 0.5% from the previous year.
Salary increases should track along the same lines in 2025. Some of the current predictions include:
- World at Work predicts an average 3.8% increase
- SHRM predicts 3.9%
- Payscale estimates a 3.5% increase
- Aon and Empsight both predict 4.0%
There’s a significant gap between these predictions, but everyone seems in agreement that the labor market will trend toward more modest pay increases in 2025.
2. Higher starting salaries are leading to pay compression
Employers have been offering above-market average starting salaries in recent years, especially when recruiting for hard-to-fill positions. This tactic can disrupt your internal salary structure, leading to a situation where junior salaries are not that different from more senior roles. It can also lead to less tenured employees making more than tenured peers.
This issue is known as pay compression and it became a serious problem in 2024. Around 30% of employers say that they plan to increase salaries in 2025 to tackle pay compression and restore their base salary ranges. For everyone else, it’s an important reminder of the need for a good compensation philosophy.
3. Pay transparency is a major issue
Pay transparency laws are becoming more common, with Illinois, Minnesota, Vermont and Massachusetts launching new rules in 2025. On top of that, more employers are choosing to disclose salaries, which puts pressure on other companies to share salary data. Pay transparency is generally beneficial to organization, but it can cause issues—especially where there are pay disparities.
Approximately 15% of employers implemented salary increases in 2024 as a direct result of pay transparency. In 2025, this is expected to rise to around 18%. All companies would be advised to review their current salary structure and look for disparities, especially if those disparities suggest a DEI issue.
4. Employees are concerned about external factors
Official inflation data suggests that prices are coming down, but that may not reflect the real-life experience of employees. On a day-to-day level, people still see high prices and struggle with the cost of living. As a result, many may feel that they are underpaid.
It's important that employers understand the difference between Cost Of Living and Cost Of Labor. Cost Of Labor is a result of local job market conditions and competition from other employers. However, that doesn't necessarily reflect the Cost Of Living, which is based on expenses like housing, taxes and bills. To keep your team happy, you'll need to help them deal with the cost of living.
5. Market matching is the biggest driver of increases
Market forces will be the driving force behind most salary increases in 2025. Around 65% of businesses expect to increase their compensation spending to keep up with market averages. The level of increase will depend on broader market trends. Last year, over 70% of businesses made market-driven adjustments.
Internal pay equity is another major factor, as some existing salary structures may not reflect each employer’s DE&I values. Around 45% of businesses made equity-related increases in 2024, and this is projected to rise to 50% in 2025. Some businesses (33%) are also planning increases related to upskilling and staff retention.
Need help with compensation strategy in 2025?
Compensation strategy is a difficult balancing act, especially in these uncertain times. Employers need to attract, engage, and retain top talent—but you also need to balance your labor budget.
The best path is to have a clear compensation policy and a dynamic Total Rewards strategy that leverages healthcare and wellness benefits, professional development, recognition, and remote work arrangements.
It’s hard, putting it all together into a strategy that works. If you need some guidance, book a call with one of Helios HR’s compensation experts. We’ll help you find a solution that works for your employees—and for your business.
