Outlook for 2025: More cautious approach to salary increases

After several years of aggressive wage growth fueled by inflation and competition for talent, compensation projections for 2025 show signs of cooling.

The average base salary increase is expected to range from 3.4 per cent to 3.7 per cent, according to recent surveys.

The national average base salary increase for 2025 is projected at 3.6 per cent, excluding planned salary freezes, reports Eckler. That marks a drop from projected increases of 4.2 per cent for 2022 and 3.8 per cent for 2023.

Average salary increases are projected to be 3.4 per cent, down from 2024’s 3.6 per cent, according to a survey by Normandin Beaudry.

Canadian organizations are predicting average increases of 3.5 per cent, found a Gallagher survey, while Western Compensation & Benefits Consultants said employers nationwide plan to raise wages by an average of 3.7 per cent , with the typical (or median) increase hovering around 3.5 per cent.

Pay increases: Lagging behind inflation

Jason Foster says what he’s seeing is exactly what he was expecting.

"We saw a bit of a spike in the last year or two in terms of compensation increases, that was obviously directly connected to inflation. As inflation is starting to ease, it's natural to see that wage increases will also come down with it,” says the professor of human resources and labour relations at Athabasca University in Alberta.

However, Foster cautioned employers not to reduce pay increases too quickly, given the lagging effect of wage boosts compared to inflation.

"Pay increases are a lagging indicator, they lag the actual inflation rate. And so, if an employer sees that inflation's now down to two per cent and thinks they only have to give a 1.5-per-cent wage increase this year, know that that could be an error."

Workers still feel they are catching up from the financial setbacks of recent years, he says.

"If you look at the broader numbers, workers have definitely fallen behind in the last three years," he says. "For a year or two, wage increases need to be above the official inflation rate as workers start to feel like they can catch up."

‘More cautious approach’ to salary increases

There’s a shift in how Canadian companies are approaching pay increases compared to the highs of the past few years, according to Elizabeth English, senior principal at Mercer in Toronto.

"At this point, our average total increase projection of 3.4 per cent is a decrease from the highs we've seen two years ago," she says. "Anecdotally, we're hearing from our clients and Canadian organizations that they're taking a slightly more cautious approach."

This caution is largely driven by the economic uncertainty that persists, coupled with more restrained company financial performance, says English.

After the "hiring frenzy" that characterized the previous years — complete with hefty new hire premiums and off-cycle adjustments — companies are “going back to basics” and refocusing on governance and taking a broader view of employee value propositions, she says.

"Organizations really need to set a budget that works for them," says English. "Knowing that others have an average 3.4-per-cent increase is great, but you need to set a budget that reflects your own market competitiveness, your own financial situation, and your own attraction and retention opportunities."

Tough times for employees

It’s been extra difficult for many employees in the last couple of years, with high inflation and wages not keeping pace with the high cost of living, says Christian Cook, human resources professor at Mt. Royal University in Calgary.

"There's been a couple of reductions in the prime lending rate of late, but that hasn’t really reconciled things for most people," she says.

Cook also pointed out that many organizations have not fully restaffed since the pandemic, leaving some employees shouldering additional workloads.

They might think, "Is the organization aware that I've been doing my job and half of somebody else's for two years?" she says, highlighting the need for employers to assess whether they are paying employees in line with their compensation philosophy.

Variable pay and performance differentiation

In 2024, about half of responding organizations allocated an additional budget averaging one per cent beyond their general salary increase budget, found Normandin Beaudry, and this trend remains for 2025, as 44 per cent of Canadian organizations plan on granting the same average additional budget of one per cent.

"Contingent payments can have both positive and negative impacts on the workplace… so it all depends on how you manage it," says Foster.

“Setting a little money aside to give yourself some flexibility as an employer probably makes some sense, but practices of differential payment based on performance can be very divisive.”

It’s not only about being fair and equitable, but being seen as equitable, he says, “or else you create more problems for yourself than maybe it might even be worth the small bonus payments.”

And if you offer up a performance bonus one year, it’s “human nature” that people may consider that the norm and expect it the next year, says Foster.

Cook says that while variable pay can be motivating, transparency around the metrics for who gets rewarded is essential.

"It's profoundly important… otherwise, you potentially are spending multi-millions of dollars just to just make people angry — and that’s not what anybody intended,” she says.

“What can be problematic is when the money is doled out and people perceive that it's done by favour of favouritism, or it's just [about] the loudest guy at the table, or that person isn't actually furthering the organization — where that person gets results at all costs and doesn't adhere to the values of the organization yet — then we're publicly going to give them money. That's a pretty tough pill to swallow.”

Pay transparency: A cultural imperative

The Mercer survey also found that 25 per cent of the responding employers are looking at sharing pay ranges beyond what’s required by law. Another 15 per cent already share pay ranges, both internally and externally, in a standard way.

About half of Canadian employers are only including salary ranges on postings where legally required while another 18 per cent are sharing ranges nationally in job postings

But employers need to act wisely and consider both the external candidates and internal employees, according to English.

"We always have to remember that our own employees have Google and the internet so they can see what you're posting externally or what other employees are sharing on different platforms," she says.

And if a competitor is posting a very narrow range, that should be on the radar of your talent acquisition team, she says.

"To me, the most important thing is that it's a bona fide, legitimate range. They're not just posting a range from A to Z. You have to give something real.”

Foster underscored the necessity of transparency regardless of the compensation landscape.

"Being transparent about remuneration packages across an organization is about building a culture of openness and accountability, whether that be in a high inflation, high wage increase period, or a more stable period," he says. "Any employer who thinks they can try and keep salaries secret from one worker to another is kidding themselves… you might as well be upfront about it.

“That way, you can also then explain your rationale, explain the matrix that you built.”

It’s great that people share information in this way, with these disclosures, says Cook, “because I think that without those systems, there are a lot of inequities that just stay hidden. And so people don't necessarily know that there's an opportunity to lobby for something better.”

Fewer promotions, more lateral moves

Another trend in Mercer’s survey is a slight decrease in employee promotions, as organizations expect to promote around 7.5 per cent of their non-unionized workforce in 2025, down from eight per cent in 2024.

"While promotions have decreased slightly, we know that organizations are focusing more on lateral movements and helping employees understand their career paths and the different opportunities that exist," English says.

And employers are increasingly providing pay increases for lateral job changes, found Mercer.

"If companies want to encourage lateral transfers as a way to develop new skills and invest in their employees, they might want to consider offering a salary increase," she says. "When an employee makes a lateral move within a company, it also represents a risk for the employee — they're working with a new team, a new people manager — so there is some kind of element of rewarding them for taking on that risk, which is often in the form of a base salary increase."

The perception of the employee plays a crucial role in whether a pay increase is warranted, says Foster.

“An employer needs to be sensitive that if they're asking for added responsibility or a broader scope of work, that is not unreasonable for a worker to think that that should come with greater remuneration.”

Managing employee expectations

With ongoing economic uncertainty, Cook highlighted the importance of employers managing employee expectations around compensation.

"If an employer isn’t confident they’re going to be able to budget increases that they think their employees are going to want, they should really start to get ahead of that now… it’s [about] managing expectations.”

She recommends that employers explore other ways to offer value to employees beyond base pay, such as benefits programs.

"Where an employer is hesitant or feels unable to commit, maybe there’s something else they can be doing that can create for their employees at least the perception that ‘We’re trying to do all we can for you,’” says Cook.

Employers can look for any inefficiencies to uncover underutilized funds, she says, such as outdated benefits that aren’t used.

“Are there ways that we can step back and instead of just trying to find another 1.5 per cent of existing [funds], are there some things that we could look at and say, ‘Is there a way that we could do that better or more efficiently?’ And then hopefully direct those funds to the employees, rather than just more profits.”