Employer-Employee Friction on Compensation Will Result in ‘Year of Contention’

A push and pull is playing out with compensation due to a shifting labor market and decreased employee satisfaction over pay, causing what researchers say will be a “year of contention.”

Employees continue to have higher expectations for their compensation, thanks in part to more pay transparency and pay fairness initiatives, as well as the high cost of living. Overall, data shows, employees are feeling less positive about their compensation.

At the same time, some organizations have pulled back on compensation 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, according to new data from Payscale’s 2025 Compensation Best Practices Report, released this week. The company surveyed 3,500 participants between November and December 2024. 

Employers also are eyeing smaller raises: On average, organizations are reducing pay increases by 0.3% — planning for 3.5% pay raises in 2025, compared to the 3.8% given in 2024, Payscale found.  

“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,” Amy Stewart, principal, research and insights at Payscale, said during a press call last week discussing the report findings.

Lexi Clarke, chief people officer at Payscale, added that “the employer-employee friction has always been there, but I think it’s really been building for the last few years, with compensation at the center of it.”

“Employees have more data at their fingertips than ever on how they should be paid or what that pay should look like or what their peers are making or what roles at similar companies are making,” she said. “That friction point isn’t going away. In fact, [the] cat’s out of the bag, the can of worms is open — we can’t put it back in.”

Emphasizing that point, a recent BambooHR report found that one-third of employees (33%) feel negatively about their current financial remuneration — a significant jump from 23% in 2023 — and 50% struggle to make ends meet due to rising costs. 

Cooling Labor Market

The new data suggests that the cooling labor market is causing employers to take their foot off the gas when it comes to aggressive pay strategies.

Employers overall are feeling less concerned about losing talent than they were in prior years, with the Payscale report finding that the median voluntary was 13% in 2024, down from 21% in 2023 and 26% in 2022.

“The first couple months of 2025 is broadly consistent with a notable cooling of the labor market, which will, all else equal, tend to dampen compensation growth, as employers don’t have to compete as much for available talent,” said Justin Ladner, labor economist at SHRM. 

At the same time, the cooling has been very inconsistent, Ladner said, so although he isn’t surprised that some organizations are planning to pull back on compensation spending this year, he doesn’t think it will be a widespread strategy. 

“Demand for certain skill sets or in certain industries has fallen significantly, whereas competition for other types of workers remains fierce,” he said. “My expectation is that firms have developed very different expectations about compensation growth in 2025 depending on conditions in their specific industry and the types of workers they are attempting to attract and retain.”

Smaller Pay Increases, Pay Transparency Efforts

Although employers are planning smaller pay increases this year, pay increases still remain elevated compared to pre-pandemic levels. 

Payscale’s estimates are in line with other reports that have found that employers are eyeing smaller increases than in the past couple of years, when pay increases were the highest they’ve been in years. Consulting firm Mercer last fall found that U.S. employers are budgeting for 3.3% merit increases and 3.6% increases for their total salary budgets for nonunionized employees this year. Meanwhile, Gartner found that just 61% of CFOs plan to increase average employee compensation in 2025, compared to 71% in 2024 and 86% in 2023.

Interestingly, smaller organizations are offering higher raises than larger ones, Clarke noted. “This can be for a number of different reasons, but typically, smaller organizations offer lower salaries out of the gate but may offer larger raises — which is the opposite of what we see in larger organizations,” she said.

Meanwhile, organizations are pulling back on pay equity analyses (57% of organizations said it is a planned or current initiative), compared to previous years (62%), and on publishing pay ranges regardless of whether it is required by law (56% of employers currently advertise pay ranges in job postings, compared to 60% last year), Payscale found. Although those efforts have declined slightly, Ruth Thomas, pay equity strategist at Payscale, said it’s still important to note that efforts have come a long way and are up significantly from a few years ago.

“We know organizations are very much committed to addressing pay equity within their organizations,” Thomas said. 

Even though employers are pulling back on some compensation trends, that may not be in their best interest, Payscale researchers cautioned. The Payscale report noted that resignations may occur “as employees seek to depart frustrating work environments for better opportunities, whether because of return-to-office mandates, insufficient benefits, a clash of values, or perceptions of unfair pay.”