U.S. employers are shifting compensation strategies as labor conditions normalize and early signs of market cooling emerge in 2025, according to Mercer’s latest compensation planning report.
The labor market has returned to pre-pandemic patterns after years of disruption, with unemployment at 4.2% but rising, and fewer job openings leading to more unemployed individuals than available positions. Salary increase budgets, which peaked during talent shortages in 2022-2023, have declined to 3.3% for merit increases in 2025, slightly below 2024 levels.
“The narrowing supply-demand gap has reduced pressure on employers to offer compensation premiums, resulting in fewer reactive pay changes,” the report indicates, noting that economic policy uncertainty is causing companies to adapt cautiously.
Most industries are clustering around the national average for projected 2025 increases, though healthcare (2.8%) and retail (3.0%) lag behind despite continued high demand for workers in these sectors.
Mercer’s analysis reveals significant cooling in off-cycle compensation activity, with year-over-year base pay movement for employees who stayed in their positions slowing from 5.6% between 2022-2023 to 4.5% between 2023-2024. New hire premium salaries have also decreased, and the number of jobs experiencing market rate jumps above 5% has plummeted by more than 80%.
Pay transparency and modernizing merit processes
The report highlights ongoing challenges with traditional “peanut butter spread” merit allocation approaches, noting only 6% of organizations differentiate merit budgets using strategic factors like experience, skills, location or performance.
Organizations are increasingly embracing pay transparency, with 19% now sharing ranges on all job listings compared to just 8% in 2022. This shift comes as more states and countries adopt pay transparency legislation and job seekers demand this information, with 46% of candidates unlikely to apply for positions without compensation details.
“Transparent pay has proven to be a critical competitive advantage for proactive employers – employees at these companies are 60% more committed to the organization and 82% more engaged in their work,” the report states.
Frontline workers see highest increases
Despite overall cooling, frontline sectors continue showing high demand, with job postings still 10-20% above pre-pandemic levels while software and IT sectors have fallen below 2020 levels. This demand disparity drove the largest 2024 salary increases in transportation services (5.4%), hospitality (5.3%), construction (5.1%), real estate (5.0%), and retail (4.9%).
The report recommends employers adapt by developing data-driven compensation strategies that align with talent gaps and business needs, proactively addressing pay equity, and equipping managers with necessary skills to communicate pay decisions effectively.
