Rethinking Raises: Evolving Compensation Strategies for Today’s Labor Market
A new Mercer study found 2025 salary budgets are sliding back to pre-pandemic levels as the labor market shows signs of stabilization. For compensation leaders dealing with slightly smaller salary budgets this year, it’s about getting strategic with every dollar.
The Job Market is Shifting: The reset reflects a changing market reality.
While 2019 was a tight labor market with nearly a 1:1 ratio of job seekers to openings, the pandemic spiked unemployment.
But 2022-2023 marked a significant labor shortage as employers struggled to fill positions and salary budgets increased accordingly.
This ratio has begun to climb back to 1:1, suggesting a cooling labor market.
Budget Growth is Down: The narrower labor gap will impact 2025 compensation budgets.
2024 budgets dipped to 3.6% in 2024, from a peak of 4.1% in the prior year.
2025 actuals fell slightly below the 2024 levels at 3.5%.
The number of jobs seeing 5%+ increases dropped by more than 80% in one year.
Merit budgets (from March projections) show a national average at 3.5% with certain industries like healthcare and retail trailing behind.
Stop Spreading Merit Like Peanut Butter. Mercer’s most pointed takeaway: the traditional merit increase model giving a little to everyone and pleasing no-one is outdated and can lead to pay stagnation, inequity and inefficiency. Yet, only 6% of organizations differentiate merit budgets by utilizing strategic compensable factors like skills, experience and the business criticality of the role.
Mercer recommends a smarter, data-backed model:
Set zero-based budgets based on needs, goals, and costs. Examine gaps and risks. This may mean zero budgets for some – focus on the greatest impact.
Provide managers with the necessary insights and guidelines to make smarter pay decisions.
Bake in pay equity analytics to address concerns before they grow.
Megan Wolf
Director, Practice, HR Policy Association and Center On Executive Compensation
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