Improve your compensation planning strategies for 2025 

After several years of disruption and the longtail effects of the COVID-19 pandemic, the US labor market showed a return to normalcy in 2024. Quit rates are in line with pre-pandemic, non-recessionary historical norms, layoffs remain low (below pre-pandemic levels), and low unemployment persists.

The unprecedented labor market in 2022 and 2023 resulted in rapidly escalating compensation growth due to talent demand far outpacing supply. But this year, the narrowing gap between supply and demand has led to a decrease in pressure on employers to offer compensation premiums, with less emphasis on reactive pay changes, such as off cycle salary adjustments for retention or premiums for new hires.

But we’re still in an environment of economic mixed signals: inconsistent job gains cast uncertainty, the depth and speed of federal interest rate cuts are hard to predict, and with economic policies remaining in question. Leaders should take all this context into account when making their salary increase budgets for 2025.

Understanding year over year changes is also an important part of the annual planning process. Leaders can use the data from the U.S. Mercer Surveys including QuickPulse: Job Architecture Edition, November 2024 Compensation Planning, and the Benchmark Database surveys to glean insights across multiple industries, guide decisions, and set budgets for 2025.

This blog highlights the top four trends from the data we’ve gathered: workforce supply and demand, merit process modernization, frontline workers, and pay transparency.

Supply and demand of talent drives compensation

This year, there’s still a gap between talent supply and demand, but it has cooled to levels comparable with the “hot” job market of 2019. The closing gap is likely to be reflected in budgets for salary increases next year.

After salary budgets were elevated from 2021 to 2023 due to high demand for talent, organizations cut back increases in 2024. Although the labor gap has cooled further from 2024, 2025 budgets are currently projected to hold steady with 2024’s reduction. And while preliminary salary increase budgets are still elevated from 2019 pre-pandemic levels, 49% of clients reported they are still early in the budget planning process (as of November 2024) and a lot can change.

_{^{Source: Compensation Increase Budgets from Mercer US Compensation Planning Surveys; 2025 Projections based on the November 2024 edition; Ratio data from Bureau of Labor Statistics; measures are based on January of the respective year; with 2025 projections based on data reported for November of 2024}}

Download the full article to learn more about how Mercer’s comprehensive data, consulting services, and analytical tools can help organizations with their talent needs.