‘Year of Contention’: Employers Mull Tight Budgets, Pay Expectations

Amid rising labor and political tensions, 2025 will most likely be a “year of contention” between employers tightening budgets and employees advocating for fair pay and better working conditions, according to Payscale’s latest Compensation Best Practices Report. Released in March, the report revealed workplace and compensation trends, analyzing data and insights from nearly 3,600 primarily U.S.-based industry professionals.

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Don’t Underestimate the Power of Non-Financial Rewards

Key findings from the compensation software and data company’s report include:

Participating organizations plan to give, on average, a 3.5% pay increase in base salary in 2025, down slightly from last year’s 3.8%, with smaller organizations leading with higher raises.
47% said they are experiencing increased tension between ensuring fair pay and optimizing spend.
A significant 31% of organizations identify unfair pay as the primary reason for losing talent, highlighting the damaging impact of pay inequity.
While investment in pay equity has declined 5% since 2024, it has increased 19% since 2020 and remains a focus for most organizations (57%).

“In 2025, the tension isn’t just economical — it’s emotional,” said Alicia Scott-Wears, a compensation content director at WorldatWork. “Inflation has cooled and salary budgets are returning to that prepandemic ‘normal’ of around 3% to 3.5%, but employees haven’t reset their expectations.”

She noted how employees are seeing higher costs and price hikes, and in some cases, are dealing with commuting and childcare costs.

“Employees are feeling the squeeze,” Scott-Wears said. “For employers, this means their compensation narrative matters more than ever. Without proactive, empathetic communication, even fair decisions will feel unfair. That perception gap can lead to disengagement, turnover and brand damage.”

Balancing Costs

According to Jason Adwin, a compensation and career strategies practice leader at HR/benefits consultancy Segal, when employer confidence decreases in the economy (stemming from tariffs, monetary policies, etc.), it also can create uncertainty in the organization’s financial forecasts.

“This uncertainty leads organizations to limit investments — both in capital and in employees,” he said.

Ruth Thomas, a pay equity strategist at Payscale, stated, “With a slow-growth economy and softer labor markets, employers are keen to take back power, evidenced by headcount reductions and falling wage rates. However, employee expectations remain elevated.”

Stress and burnout are also driving contention, said Monica Martin, a senior director and total rewards leader at risk management consultancy WTW.

“Employers may not be fully replacing workers, as many are preserving capital in anticipation for investing in technology, [mergers and acquisitions,] or weathering recent economic uncertainty,” she said. “But the work still must get done — and so, employees are feeling the pressure to deliver.”

Communicate Transparently

In this uncertain financial environment, the experts in this article agree transparency is important.

“When raises are lower than expected, silence or vague justifications do more harm than good. Be direct, be transparent and, above all, be human,” Scott-Wears said. “Don’t get overly technical. Keep the language understandable and lean into the full value proposition of total rewards. This is where non-financial rewards can shine.”

Equip your managers to have conversations about pay, said Lulu Seikaly, a senior corporate attorney at Payscale.

“Many employees already believe they are being underpaid, which will continue as organizations post salary ranges in job postings to comply with pay transparency laws,” she said. “Proactively communicating the rationale behind compensation decisions and how pay is calculated fosters trust. When employees trust an organization, they’re more likely to stay.”

Future Trends

Looking ahead, Martin said employers would be best served by keeping a strong pulse on what is on the minds of their employees.

Engage in scenario planning, such as how labor costs may change, and how workforce needs may change based on economic and labor markets, she explained.

Thomas advised employers to embrace artificial intelligence to augment compensation management and to utilize a balanced approach combining automated tools with traditionally structured compensation tools and human expertise.

Despite this forecasted year of contention, Segal’s Adwin called this moment an “intense blip.”

“We’ve experienced other intense blips — the dot.com bubble burst in the early 2000s, the 2008 mortgage crisis and the 2020 global pandemic — but markets have proved resilient,” he said. “It won’t be long before we’re having more conversations about a tight workforce, and companies need to be prepared for those shifts.”

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