Anxiety about the economy is forcing two-thirds of U.S. employers to yank budgets for raises

Economic concerns drive smaller compensation budgets. The report, which draws on a survey of more than 1,500 Payscale clients conducted in May and June, finds respondents expect workers will see their base pay go up by 3.5% next year, on average, down just 0.1% from this year.

But for organizations planning to shrink their compensation budgets, economic concerns loom much larger than in previous years. Of the respondents who said their 2026 budget for salary increases is expected to be lower than their 2025 budget, nearly two-thirds (66%), said they were “concerned about future economic conditions or business performance,” up 17 percentage points from last year.

This isn’t necessarily surprising given the economic backdrop. Inflation rose by 2.7% in June, reaching its highest level since February, and the Trump administration recently imposed sweeping tariffs on trade partners, potentially hampering businesses’ appetite for hiring and raising worker wages.

These tough economic conditions have the potential to affect workers, too, noted Ruth Thomas, chief compensation strategist with Payscale. “It’s going to be a really challenging time,” she said. While data indicates wage growth now exceeds inflation, Payscale’s survey suggests workers “are still feeling a hangover from the high level of inflation that we had previously.” What’s more, she said, tariffs may affect how much employees are spending on goods.

How to handle a limited budget. When navigating discussions with employees who are seeing lower pay raises than previous years, Thomas recommended “setting the economic context for them,” and explaining how industry trends affect compensation budgets. As a result of pay transparency, “employees are a much more informed audience now, so you have to be ready to inform them,” she said.

She also encouraged organizations to use their budget for pay increases “discerningly” in light of the fact that it may be the lowest it’s been in several years. Rather than grant 3.5% raises across the board, employers should consider rewarding “key talent,” particularly if they’re in a sector with lower demand for labor, such as tech.

HR should consider “the talent that’s going to drive transformation in your business next year, because they’re going to be the key talent that you want to keep, and which is the talent that is most at risk in your business,” Thomas said.

This report was originally published by HR Brew.