Employers’ 2025 Annual Pay Raises Have Been Lower Than Expected

A softening labor market and economic concerns are driving employers to issue lower-than-anticipated annual pay increases.

So far in 2025, employers delivered an average merit increase of 3.2% — the percentage of payroll given to employees as a base salary increase for merit — below the 3.3% they projected they would give last November, according to the March 2025 Mercer QuickPulse U.S. Compensation Planning Survey of more than 800 U.S. organizations.

Meanwhile, employers delivered an average total increase of 3.5%, which accounts for all salary increases, including merit, promotional, cost-of-living, and other adjustments, in 2025. That’s also lower than their fall projections, when U.S. employers said they expected to deliver an average 3.6% pay bump.

As always, different industries are looking differently at pay. For instance, the health care services and retail sectors reported lower increases than other industries, Mercer found, with mean merit increases of 2.8% and 3%, and total increases of 2.9% and 3.2%, respectively. Meanwhile, the insurance and services sectors delivered higher total increases of 3.7% and 3.8%.  

The slight dip in actual pay increases reflect “the evolving dynamics of the labor market,” said Lauren Mason, Mercer’s U.S. workforce solutions leader. “With heightened economic uncertainty, employers are focused on maximizing compensation impact through strategic decisions, such as proactively rewarding high performance.” 

Mercer’s new data is evidence of how economic tailwinds are affecting pay plans. The figures also suggest a return to pre-pandemic norms, as annual pay increases were higher in the past few years as a result of factors including the pandemic and sky-high inflation. 

“Uncertainty surrounding future economic conditions, and whether broad changes to immigration and trade policies will be implemented, have employers feeling anxious regarding the direction of compensation costs this year and beyond,” Sydney Ross, economic researcher at SHRM, said last month.

Employees are feeling anxious, too: Employee optimism is near a record low, driven by economic and political concerns, according to an April SHRM pulse survey of 1,067 U.S.-based workers and 2,060 HR professionals. 

“In such an uncertain environment, it is likely that many employers are in wait-and-see mode and will take a more cautious approach as they devise their pay and compensation strategies going forward,” Ross said. 

More Promotions

Although annual pay raises are slightly lower than anticipated, other pay strategies are gaining steam this year.

Considering smaller compensation budgets, 86% of employers are increasingly focusing on performance-based pay, Mercer’s data found. This year, employers expect to promote approximately 10% of their workforce, up from 8% in 2024, with an average pay increase of 8.5% associated with promotions. For the 44% of companies using five performance ratings — the most prevalent approach — top performers received average pay increases of 5.6%, compared to 3.3% for those in the middle category.  

Incentive payouts for 2025 are also appearing consistent. Among organizations providing short-term incentives, 36% plan to pay near target and 30% above target, Mercer found. For long-term incentives, 34% of organizations reported payouts above target and 37% at target. 

Overall Spend Down

Mercer’s survey on pay is the latest to indicate that organizations are pulling back on compensation spend.

In March, research from Seattle-based compensation firm Payscale found that some organizations have pulled back on pay spend, including reducing pay increases (a strategy embraced by 18% of employers), hiring less experienced talent (15%), and lowering salary offers (14%), to take advantage of an employer-friendly labor market.

“We are labeling 2025 the year of contention, in which the labor market and demands for fair pay could heat up amid a deepening political divide and growing awareness of wealth inequalities,” said Amy Stewart, principal, research and insights at Payscale. 

Meanwhile, roughly a quarter of organizations (23%) are expecting tariffs and ongoing economic volatility to result in reduced pay increases for the remainder of the year, according to a pulse survey of 218 respondents conducted in April by consulting firm WTW.