Setting your 2025 Salary Increase Budget

2025 Salary Increase Budget Projections

It’s hard to believe, but 2025 is closer than we’d like to admit. For many companies, that means that it’s time to get ready for your next salary or merit review process. That also means that compensation planning starts now! 

One key question that many HR and Total Rewards professionals are asking right now is: “What should I set as my salary increase budget?”

Organizations like WorldatWork, WTW, and Mercer have already conducted their annual salary increase surveys to determine the overall sentiment and projections for what organizations are looking to set for their compensation review budgets going into 2025. 

The latest insights from WorldatWork’s Salary Budget Survey highlight a drop in total salary budget increases across the globe. For instance, in the US, the mean is expected to drop from 3.9% to 3.8%, in Canada from 3.8% to 3.7%, and in the UK from 4.3% to 4.2%.

Although not a major drop in salary budgets when compared to last year, there is still a softening that is inline with the overall shifts in the labor market and a focus on capital preservation. With that said, the numbers haven’t dropped back to pre-pandemic levels where, according to WTW, the average salary increase in the US in 2018 was at 3%. 

What about promotion budgets? 

A lot of these increase surveys focus primarily on salary increases and do not necessarily include promotion budgets as part of the analysis. 

The WorldatWork survey showed that over half (56%) of organizations who participated, budget for promotional pay increases. Even so, almost a quarter of them (24%) simply use their merit increase budget pool towards those promotions, while 39% had a separate promotional budget pool.

Key Findings from WorldatWork's Salary Budget Survey

• Global Decline: Projections indicate a further contraction of salary increase budgets in 2025, with US budgets expected to drop from 3.9% to 3.8%, and similar trends in Canada and the UK
• Pay Equity Actions: 70% of organizations are actively addressing pay equity issues
• Geographic Variation: Although geographic variation between the US and Canada is modest, budgets vary around the world with regions like India and Brazil having projected budgets of 9.5% and 5.5%, respectively
• Consistent Reductions: Salary increase budgets are trending towards pre-pandemic norms, following a year-over-year decline

What Should I Set as My Salary Increase Budget for 2025?

When it comes to setting your salary or merit increase budget for the year, you may think that simply looking at benchmarking data from “salary increase surveys” is sufficient.

There’s a lot of value in leveraging these surveys as benchmarks, but every organization has its own unique circumstances, goals, and constraints.

Below are some of the factors you should take into consideration when setting your salary increase budget for 2025:

Salary Budget Surveys

These surveys are conducted by a number of organizations such as WorldatWork, WTW, Mercer, Payscale, and others. Their purpose is to get an understanding of actual salary increases from the previous year and to have a gauge of what organizations are forecasting for the following year. They are a helpful reference to get a sense of the overall market, but remember that they are “just benchmarks” and do not reflect the unique needs or goals of your organization. Some of these surveys have great segmentation of data so that you can better benchmark against similar or competitive companies, and look at different percentiles of the market as well.

Geographic Differences

It’s tempting to establish a consistent salary increase budget and approach for all of your employees. However, when looking at pay in different parts of the world, you will find that market expectations for pay increase could look very different (this is especially true when it comes to high growth economies). Take into account your different geographic “Pay Zones” and consider having different salary increase budgets per Pay Zone. 

Internal Pay Equity Analysis

‍Your salary increase process is an important moment to remediate and internal equity issues you may have. As part of your compensation planning, you should conduct a pay equity analysis to review different cohorts of your employees to identify potential pay discrepancies. With this analysis, you will want to set aside a remediation budget and determine how this budget will be incorporated as part of your overall salary review budget.

External Market Review

‍You likely have a compensation philosophy that includes what percentile of the market your salary bands are based on. As you know, the external market is not stagnant and continues to shift. As part of your salary review planning, take the time to review your internal compensation structure against the external market. You may find that for some roles that you may be lagging behind the market (and the percentile that you have set to benchmark against). If that’s the case, you may want to also consider how the external market data informs the salary increases that you will be making for the year. 

Employees Below Band

‍As your compensation bands evolve, you may find that you have some employees who are now below their pay band. This is a good time to identify how large those gaps are and set aside some budget to ensure that any of your budget guidelines also take into account the increases required to bring employees into their salary bands. 

Promotion Planning

‍As noted previously, some organizations lump in their promotion budgets within their overall salary increase budgets. Even if that is the case, you will want to conduct some promotion planning before going into the salary review process. Work with your People Leaders and Managers to get an understanding of the promotions they anticipate to propose for the upcoming year. You will also want to think about your rules for what a promotion means when it comes to salary increases. Do promoted employees move into a certain position of their promoted band (e.g. range penetration or compa-ratio)? Do you set guidelines for what increase comes with a promotion? It’s typical that a promotion comes with a larger pay increase than a merit increase. If you anticipate a large number of promotions, this will have a material impact on your salary increase budget. 

Compensation Philosophy Updates

‍Are you updating your approach to location-based pay? Are you changing the percentile of the market that you are benchmarking against to become more competitive? Updates to your compensation philosophy will have an impact on your salary increase budget. You may not be able to address all of those updates in a single compensation review, so having a plan or a stepped approach usually works best. 

Employee Retention / Turnover

‍What do your employee retention metrics look like? Are you seeing a higher than average turnover rate? Is a primary turnover reason compensation or salary related? Having a good handle on your turnover metrics can and should influence how you think about your salary increase budget. Usually, turnover related to compensation ties back to issues like falling behind the external market or pay equity issues. As part of your compensation planning process, take a moment to review your retention metrics and pay special attention to “regrettable turnover” and any turnover that is pay related. If you are not capturing reasons for an employee turnover, it’s time to start tracking that information and centralize it in your HRIS for future reporting purposes. 

Salary Budget Scenario Planning and Forecasting

Taking all of these different factors and inputs mentioned above, now it is time to conduct some scenario planning and build out your forecasts. 

This is where you will work closely with your Finance Team to determine what’s in the realm of possibility with potential spend constraints in mind. In an ideal world, we could allocate as much budget as possible to address all of your organization’s compensation planning needs in one shot. 

However, the reality is that we all need to balance organizational goals, profitability or cash flow goals, internal equity issues, market competitiveness, employee satisfaction, and so much more. It’s not an easy task! 

When it comes to budget forecasting for your comp review, consider both a top-down and a bottom-up approach. 

Top-Down Budgeting

This is where you are simply given an overall budget and you need to figure out how to best allocate that provided budget to best address your compensation planning goals.

Bottom-Up Budgeting

‍This is where you look at pay changes one employee or department at a time and build up to the overall budget that will be needed to make those compensation planning changes a reality. 

The bottom-up approach will be helpful in having a tactical dialogue with Finance to explore the potential of a higher budget. The end goal being that the decisions on salary spend will have a net benefit to the organization. With proper salary increase budgeting you could: 1) Reduce Employee Turnover 2) Increase Employee Engagement 3) Drive Better Business Results.

Setting Budget Guidelines and a Merit Matrix for your Managers

Now that you have established your budget, it’s time to allocate the overall budget down to your Managers. One element is providing each Manager with their budget. Another component is providing them with specific increase guidelines (usually powered from a defined merit increase matrix). 

How to Set Guidelines for Managers

• Decide What Data to Share: Determine the level of detail and data to be shared with managers. For example, their employees’ pay change history, the salary bands for each employee, performance ratings, etc. 
• Provide an Increase/Merit Matrix: A best practice is to build an increase matrix that takes into account different factors such as performance rating and comp-ratio to drive pay change guidelines. You could provide them with the actual merit matrix as a point of reference or leverage compensation management software to auto-generate and manage the guidelines. 
• Control or Flag Outliers: Implement mechanisms to identify and address deviations from set guidelines. Having a process to easily spot outliers will ensure that you stay on top of potential pay equity issues that may be introduced and drive deeper conversations on any exceptions that you are making. 

Why Setting Salary Increase Guidelines Matters

Providing managers with clear guidelines is crucial for:

• Empowering them to take ownership of the process
• Ensuring open and transparent communication
• Helping managers understand the company’s salary framework
• Building confidence in assessing their direct reports’ performance

How to Build your Merit Matrix

There are different approaches to building your merit matrix. If you have an established performance management process, you may decide that “paying for performance” is a part of your compensation philosophy. Leveraging a merit matrix will allow you to link your performance rating (and other factors) to the salary increase guidelines for each employee.

As noted previously, when it comes to pay across different geographies, consider building a different merit matrix by Pay Zone. If you are leveraging compensation management software to streamline your compensation review process, ensure that the system is flexible enough to support managing multiple merit matrices at the same time. 

Level Up your Comp Review Process

Why You Need to Streamline Salary Reviews

Traditional salary reviews often rely on spreadsheets, which are time-consuming, hard to update, and challenging to identify gaps. Moving to compensation software like Barley automates and simplifies this process, freeing up time to focus on strategic pay decisions.

How to Streamline Salary Reviews with Compensation Software

1. Pay (Merit) Guidelines: Use compensation management software to build and allocate your salary increase guidelines.

2. Team Budgets: Manage, allocate, and monitor your salary increase budgets across different teams efficiently.

3. Budget Forecasting: Leverage forecasting tools (e.g. guidelines forecasting and sandbox / test compensation reviews) to plan and adjust salary budgets accurately.

Preparing for the 2025 salary reviews involves more than just having a budget. It requires a strategic approach that includes budget allocation, setting guidelines, and scenario planning. 

Additionally, leveraging compensation software can streamline the process, making it more efficient and effective.

By implementing these strategies, you can ensure your organization remains competitive while effectively managing compensation costs.