After a pay boom, raises are shrinking

The era of hefty pay increases is over, and companies are already making plans to trim raises again next year. 

The shrinking raises are the latest sign—alongside last week’s lackluster jobs report—that workers have lost much of the leverage they’ve had with bosses in the past few years. With hiring now slowing sharply, employers are controlling payroll costs by cutting or freezing bonuses, doling out fewer and smaller merit increases, business leaders and compensation consultants say.

Some companies are also trying to fill roles as they open in lower-cost cities, paying smaller salaries than what the previous person was making.

Meanwhile, fewer workers are getting pay bumps from switching jobs than they did late last year, new data show. 

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Among 1,900 U.S. companies polled in the second quarter, nearly half said they had downsized their budgets for salary increases this year. That has lowered the median raise to 4.1% this year from 4.5% in 2023. They plan to spend even less next year, projecting a median raise of 3.9% in 2025, according to employer-advisory firm WTW, which conducted the survey. 

Ellen Teeter, 23 years old, said she’d hoped for more than the 1.5% raise she received this year.

"I was underwhelmed," said the bank operations analyst in Charlotte, N.C. 

When she joined her company a year ago, she received a 10% signing bonus and was told this year’s raises would range from none at all to 10%. She wasn’t the only one with an increase on the low end. Most co-workers she spoke with also received between 1% and 2%, and one received 4%. 

For now the disappointing raise isn’t enough to leave, Teeter said, since she expects to be able to move to a higher-level position in the next year. If she doesn’t, she’ll start looking for other jobs: "I’d like to make more money and do more work that matters."

Raises remain high from a historical perspective, but they’re hardly the generous boosts companies doled out to keep workers two to three years ago. Tech companies that boomed during the pandemic snapped up workers with lofty pay offers even before having anything for them to do and, across the economy, employers tried to prevent staffers from leaving with outsize pay hikes. 

As that largess has shriveled, new hires appear to be bearing the brunt. In the second quarter, 58% of people hired to jobs in recent months got more pay with the switch than they were earning previously. That’s down from 70% in the fourth quarter of last year, according to a survey of 1,500 recent hires by jobs platform ZipRecruiter. About one in seven received signing bonuses, compared with nearly one in three in the fourth quarter.

Some companies are making a concerted effort to reset pay rates. At agriculture giant Syngenta, CEO Jeff Rowe said executives are more closely scrutinizing where to add new jobs or replace existing roles once people leave, part of a larger corporate effort to reduce costs and find efficiencies.

That means hiring talent in cities with cheaper salary costs, such as Manchester, England, or Budapest, as opposed to higher-cost locations. The goal is to take advantage of "geographic arbitrage," Rowe said.

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A cooling job market also means managers have their pick of hires, which is helping to rein in pay, said Julia Pollak, ZipRecruiter’s chief economist. In the ZipRecruiter survey, a quarter of recent hires said they had felt emboldened to try to negotiate their salary offers. That’s down from 43% in the first quarter of the year, suggesting job seekers are well aware employers have other qualified candidates to choose from. 

An even smaller share of them—85%—was actually successful in negotiating a better offer, compared with more than 90% last year.

"You don’t need to deliberately reset pay," Pollak said. "You just have more applicants prepared to accept your first offer." 

(Don’t bet on an outside job offer to pressure managers to pay up: Roughly 16% of new hires in the survey said their employer countered an offer when they announced their departure, down sharply from the start of the year.)

Pay rates for new hires across industries are 7% lower than they were for new recruits for the same roles in 2022, according to new data from Gusto, a payroll and benefits software company serving more than 300,000 small and midsize businesses. Some of the biggest drops have been in white-collar roles, including in finance, where new-hire pay rates have fallen 9.2% since last year.

Curtailing raises by even a few tenths of a percentage point can save hundreds of millions of dollars in annual payroll costs for big companies, said Lori Wisper, a managing director at WTW. 

The challenge: Reserving enough to reward high performers and keep them motivated to stay.

"I’ve been saying to my clients, ‘Use the money wisely. Don’t spread the peanut butter around where everyone gets the same,’" she said. That means being more discriminating with merit raises and bonus amounts. 

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Jim Chung, a compliance specialist with a financial-services company in New York, expected to get a bigger bonus this year, but it stayed the same—roughly 15% of his salary. With inflation, he said, it feels like he earned a smaller bonus than a year or two ago.

Still, he fared better than many colleagues who didn’t receive any bonus this year and a bump in his base salary helped, too.

A flat bonus "wouldn’t be the sole factor for me to look elsewhere," he said.

Chip Cutter contributed to this article.