In a landscape where economic pressures are squeezing both businesses and their employees, navigating compensation has become a delicate, high-stakes balancing act. To shed light on this, we are joined by Sofia Khaira, a leading expert in diversity, equity, and inclusion, whose work focuses on building sustainable talent management practices. Today, we’ll explore the complex dynamics behind the current stagnation in pay raises, the tension between corporate affordability and the rising cost of living, and what these trends signal for the future of employee retention and real wage growth.
With 44% of employers holding pay raises at 2026 levels, what are the primary business pressures causing this stagnation? Could you walk me through the difficult conversations HR leaders are having with executives about balancing budgets against employee morale right now?
Those conversations are incredibly tense, and they’re happening in boardrooms everywhere. The primary pressure, cited by an overwhelming 96% of employers, is simply affordability. Executives are looking at tight budgets and uncertain economic forecasts, and for them, holding pay raises steady feels like the most prudent fiscal decision. As an HR leader in that room, my role is to bring the human cost to the forefront. I have to paint a vivid picture of what a stagnant paycheck feels like when the price of groceries and gas is climbing. It’s about translating disengagement into dollars, showing them the high cost of turnover, lost productivity, and the erosion of trust when employees feel undervalued. We’re constantly fighting the battle to prove that investing in our people isn’t just a cost center—it’s the most critical investment for long-term stability.
Affordability is a concern for nearly all employers, yet inflation is a growing worry, with a 3.4% CPI increase noted last year. How are companies navigating this conflict between what they can afford and what employees need? Please describe the metrics they use to make these trade-offs.
It’s a genuine conflict, and companies are caught right in the middle. The navigation process is less of a straight line and more of a complex triangulation. On one hand, you have the hard budget numbers and profitability forecasts. On the other, you have external market data, including that 3.4% CPI figure, which directly impacts an employee’s real-world earnings. The most sophisticated companies are looking beyond just these two points. They are running attrition risk models to identify which employee segments are most likely to leave, and they’re conducting compensation benchmarking to ensure they aren’t falling dangerously behind competitors. The trade-off often comes down to a risk calculation: can we weather the morale dip from a 3% raise, or do we risk losing key talent by not stretching to 4%? It’s a gut-wrenching decision where data can only guide you so far.
There seems to be a disconnect: only 11% of undecided employers are targeting pay awards of 4% or more, yet 26% of deals already agreed have hit that mark. What does this suggest about early negotiators versus those who are still deciding?
That discrepancy tells a fascinating story about confidence and strategy in the market. The 26% who have already locked in raises of 4% or more are what I’d call the proactive players. These are often companies in highly competitive sectors or those with strong union representation who know they cannot afford to delay or lowball their offers. They moved quickly to secure their talent and remove uncertainty. Conversely, the much larger group of undecided employers, where only 11% are even considering that higher bracket, are the cautious followers. They are likely feeling the budget squeeze more acutely and are in a “wait-and-see” mode, hoping the market settles at a lower rate. This hesitation reveals a deep-seated anxiety about affordability, but it’s a risky gamble that could cost them talent if the market moves against them.
Given that most pay awards are settling between 3% and 3.99%, how does this compare to the recent private sector wage growth of 4.5%? What challenges does this create for companies trying to retain talent, and what non-monetary rewards are proving most effective?
This gap creates a significant retention challenge. When your employees see a national average wage growth of 4.5% but their own raise is hovering around 3.5%, they immediately feel like they’re falling behind. Even if that raise technically beats the 3.4% inflation rate, the psychological impact is powerful and demoralizing. It sends a message that they could be earning more elsewhere, which is a huge motivator for them to start looking. To counteract this, companies absolutely must lean into non-monetary rewards. We’re seeing a major emphasis on radical flexibility in schedules and location, aggressive investments in professional development and clear career pathing, and enhanced wellness benefits that address burnout. These aren’t just perks anymore; they are essential tools for showing employees they are valued beyond the number on their paycheck.
What is your forecast for pay awards and real wage growth over the next 12 to 18 months?
Looking ahead, I foresee a continued period of tension and moderation. I don’t expect a dramatic surge in pay awards; the cautious approach we’re seeing now will likely persist as businesses navigate economic uncertainty. Most awards will probably remain clustered in that 3% to 4% range. However, if inflation continues to be a persistent issue, the pressure from employees will become undeniable. This will force companies that want to retain top talent to get more creative, likely leading to a greater emphasis on variable pay, performance-based bonuses, and equity. Real wage growth will be modest at best, and for many, it may feel like they are treading water. The smartest companies will be transparent about these financial realities while doubling down on creating a workplace culture so compelling that employees will choose to stay, even if the raise isn’t as high as they had hoped.
