Macroeconomic trends have an impact on day-to-day business decisions, such as recruitment and compensation strategy.
However, those impacts are not always immediately felt.
It often takes 6-12 months before external factors begin to impact operations. This is why it’s important to take a moment at year-end to review what has happened recently and think about how these events might impact your approach to total rewards in 2025.
With that in mind, let’s take a look at some of the most important trends that might affect your compensation planning.
Overall Economic and Labor Market Trends
2024 was generally more stable than previous years, although there were some variations that may impact the labor market:
Job growth has slowed, and high-profile layoffs have continued. Unemployment is at 4.3%, its highest level since 2021.
Labor force participation has risen to over 62%, the highest rate in some time.
Average salary increase budgets in 2024 were 3.9%, down from 4.4% the previous year.
88% of employers still have concerns about the rising cost of living.
These signs suggest that recruitment pressure might ease in some sectors, slowing the overall rate of salary increases. That said, compensation expenditure will continue to rise overall, especially when recruiting for hard-to-fill positions or in high-demand regions.
Top Compensation Trends for 2025
Here are the main factors to consider in your next compensation planning session:
Salary budgets stabilize.
After hitting 4.4% on average in 2023, salary increase budgets are moderating closer to 4% for 2025. However, 4% is still high compared to the 3% pre-pandemic norm.
Salary increase budgets are fairly consistent across industries, ranging from 3.5% to 4.2%. Budgets tend to be higher in smaller organizations.
In addition to general and merit increases, 70% of organizations are planning for pay equity adjustments in 2025.
Most are earmarking 0.5%-1.0% of payroll for other off-cycle adjustments like promotions and market/retention adjustments.
Remember that salary is just one way to reward top performers. Benefits, perks and flexible working options are also important elements of a total rewards strategy that can help encourage employee engagement and retention.
Pay structures should be reviewed.
Sharp salary increases in recent years have created some serious issues. Many organizations are now struggling with pay compression and internal inequalities. Both of these can impact engagement and retention unless the organization reviews its salary structure.
For 2025, the average salary structure increase is projected at 2.5%, lagging the 3.8% average budget for individual increases.
Executives may see a lower 2.2% salary structure adjustment even as their overall compensation rises.
Best practice is to review ranges annually, but some organizations may choose to review more frequently
Salary structures work best when they are linked to a clear total rewards philosophy. If you don’t have such a philosophy in place, it’s worth discussing your strategy for using compensation to attract, engage and retain the best people.
Leave benefits more important than ever.
Various forms of leave benefits are a key employee retention strategy, according to 57% of employers. Paid leave benefits have been evolving over time, and these are some of the recent trends to watch:
Parental leave is expanding, with a 5% increase in employers offering more than six weeks of maternity leave. 58% of employers also offer parental leave for all parents.
PTO is the most common form of leave, with 58% of employers using this system compared to 29% that offer traditional vacation plans.
71% of employees agree that technology has made it easier to self-manage their leave benefits.
Leave benefits are one of the most important elements of a total rewards strategy. It’s important to speak to your team and learn more about the type of leave benefits they require to maintain a healthy work-life balance. For more information about leave benefits, download the latest US Leave Management Benchmarking report from NFP.
Pay transparency legislation expands.
2025 will see pay transparency laws put into force in Illinois, Minnesota, Massachusetts and Vermont. These laws, as with similar laws in other states, will give employees more information about the pay structure within the company.
Currently,17 states require pay scales in job postings and/or disclosed to applicants. By the end of 2025, that number will rise to 21.
The recent election outcome means that the federal government is unlikely to implement a national pay transparency law.
However, employees increasingly expect pay transparency. Candidates may ask for a salary range before applying, while sites like Glassdoor allow users to access compensation information.
Pay transparency is another reason to review your current compensation structure. It’s also a good idea to work with your HR team to develop a communication strategy that allows productive conversations about salary and benefits.
Incentive pay is here to stay.
As companies try to rein in their salary expenditure, many are using one-off bonuses to drive engagement and retention. These bonuses might focus on performance targets (not including sales commissions) or reward loyal employees for length of service.
On average, organizations are budgeting 6%-7% of payroll for broad-based variable pay in 2025, with much higher targets of 30%+ for executives.
Actual bonus payouts often exceeded targets over the past two years and may revert closer to budget in 2025.
Long-term incentives, including non-qualified deferred compensation plans, are increasingly popular for retention.
Recognition is another key element of a successful total rewards strategy. Remember that cash bonuses aren’t the only valid approach. Employers can also offer perks, prizes, professional development opportunities, and public recognition of a job well done.
Looking Ahead to 2025
Nobody can predict what lies ahead. Instead, we must prepare as best we can by developing a robust strategy and being ready to adapt to changing circumstances.
NFP’s Human Capital Solutions practice is here to help you stay ahead in the evolving landscape of compensation and benefits. We can provide guidance on how to engage with your team to understand their needs, review your current strategies, and ensure that your total rewards program is both competitive and comprehensive. We’ll work closely with your HR department to refine your compensation structures and develop an effective communication approach that fosters transparency and trust. By taking these steps, you can build a motivated and loyal workforce that drives your organization forward.
Contact the Human Capital Solutions team today at humancapitalsolutions@nfp.com.
Co-authored by Jessie Swedberg, Senior Compensation Consultant, Helios HR, an NFP company, and Megan Nail, VP, Total Rewards Practice, NFP.