Key Findings

  • U.S. companies plan to increase salary budgets by 3.9% in 2025, a near-record increase driven by a persistently shrinking labor supply, The Conference Board said Monday.
  • Although the salary budget increase is lower than the 4.4% in 2023, it will still exceed this year's 3.8%. The organization's conclusion is based on a survey of 300 "compensation leaders" regarding base salary plans.
  • "Despite a slower pace of hiring and a slight rise in the unemployment rate, high wage levels are expected to persist into 2025. A shrinking labor supply is prompting companies to focus on retaining existing employees, leading to continued wage increases, while real wage growth accelerates as inflation eases," said Dana Peterson, chief economist at The Conference Board, in a statement.

Deeper Analysis

The U.S. Labor Department reported Friday that average hourly earnings rose 0.4% month-over-month last month, higher than expected; the unemployment rate fell 0.1 percentage point to 4.2%. Nonfarm payrolls increased by 142,000, below expectations but an improvement from August.

"The data received over the past three days indicates that the labor market is continuing to soften but not deteriorate, a judgment that is crucial for our upcoming decisions," Federal Reserve Governor Christopher Waller said in a speech Friday.

According to the CME FedWatch tool, interest rate futures traders on Monday priced in a 71% probability that Fed policymakers will cut rates by 0.5 percentage points at the end of their two-day meeting on September 18. The central bank has kept its benchmark rate in a range of 5.25% to 5.5% since July 2023.

Since the worst of the pandemic, the job market has gradually loosened and returned to long-term trends. At that time, employees quit at near-record rates in search of better pay and benefits.

The quits rate—the proportion of workers leaving jobs relative to total employment—hit a record high of 3% in both November 2021 and April 2022, but has since declined, falling to 2.1% in July.

The cooling job market has led Fed Chair Jerome Powell to suggest that the risk of unemployment is now on par with the risk of resurgent inflation. Powell said on August 23 that the Fed is more focused on the health of the job market than earlier this year, aiming to avoid the widespread job losses often seen during policy tightening. "We do not seek or welcome further cooling in labor market conditions," he said.

The Conference Board noted that, given post-pandemic changes in the labor market, companies no longer rely solely on salary levels to retain and attract employees.

"To remain competitive and respond to market dynamics, employers need to adjust their compensation strategies. Given volatile market conditions, leaders are increasingly adopting compensation strategies that do not depend on base salary, such as performance incentives and other strategic priorities," said Diana Scott, head of the organization's U.S. Human Capital Center, in a statement.

For example, a growing number of companies plan to reduce reliance on signing and retention bonuses. "As pandemic-related job losses have recovered and employee turnover has slowed, the premium on these short-term incentives may be fading, giving way to more sustained retention and talent priorities," The Conference Board said.

Meanwhile, the organization said the number of companies planning to expand recognition programs next year will increase by nearly 14%, and another 6% will increase equity incentives.