Compensation planning for 2025: Five trends that matter

2. Pay equity and transparency

A growing number of states and local governments are adopting some form of expanded pay transparency that requires an urgent response by some for 2025, and a more proactive employer response for others. While pay equity and transparency are top of mind for most companies heading into 2025, the pressure on labor costs and allocation of limited compensation budgets will create challenges for employers who seek to remedy any pay disparities they uncover during their reviews.

Significant variations in pay transparency regulations exist from state to state, creating a troubling environment for many employers to navigate. In addition, pay transparency was introduced at the federal level, where H.R. 1599 requires, per the Fair Labor Standards Act (FLSA), the disclosure of “wage range.” The trend for the different approaches taken by various states is to require a similar level of pay disclosure. At a minimum, employers may be required to supply certain information about their compensation programs upon request. This information may include salary ranges and other forms of compensation for the role, as well as the general benefits that are available. 

3. DOL new minimum salary test for overtime exemption

Due to new regulations to the FLSA, enacted in April, employers will need to review the minimum salaries paid to their exempt, salaried employees to meet the U.S. Department of Labor’s (DOL) new minimum salary test. This review is needed to ensure compliance, effective Jan. 1, 2025. On July 1, 2024, this minimum salary threshold changed to $844 per week ($43,888 annually) and is set to increase to $1,128 per week ($58,656 annually) on Jan. 1, 2025.

The change is significant for both employers and employees, as it affects who qualifies for exemptions from overtime pay requirements under FLSA. The minimum salary test is a threshold set by the DOL that determines if certain employees can be classified as exempt from minimum wage and overtime requirements. To qualify for exemption, an employee must meet specific criteria related to their job duties and receive a salary that meets or exceeds the set threshold.

For employers, these changes mean reassessing the classification of employees and possibly adjusting salaries or reclassifying some positions to ensure compliance with the FLSA. Employers will need to determine the trade-off to make necessary salary adjustments to meet the new threshold or convert all affected job incumbents to hourly pay arrangements.

For more detailed information and resources, employers can visit the DOL website or consult with a labor law expert to navigate these regulatory changes effectively.

4. HR readiness — AI and expanded analytics

In a 2024 Grant Thornton study of HR leaders, respondents expressed concern about their organization’s AI implementation in the future. When asked to choose the three most important challenges to successful AI adoption, respondents chose data privacy concerns (51%), integration with existing systems (49%) and lack of clear business case (38%) as their top concerns. More than six in 10 HR leaders say artificial intelligence is being used to assist with performance reviews at their organizations. AI is also being deployed in chatbots to drive employee engagement, and as a tool for monitoring employee wellbeing. Although 43% of respondents say they are using AI for candidate sourcing, the technology provides both opportunities to prevent bias in hiring and risks for introducing bias into the process. A growing number of organizations are testing the use case for generative AI in HR functions, particularly when creating compensation and talent solutions. To do so requires access to private information of employees, which HR leaders may see as a potential data privacy risk.

5. Use of variable pay for retention

If the trend in voluntary separations that are initiated by employees (see BLS’ quits rate) continues and voluntary turnover slows, companies will likely refocus on growing and engaging current employees. Grant Thornton’s HR leaders survey confirms the commitment that employers have to developing their workforce for the future. A study from The Conference Board indicates that companies will be relying on sign-on and retention bonuses less, instead focusing their dollars on other compensation strategies, including performance initiatives and promotions. Companies have typically responded to different economic scenarios by adjusting their use of variable pay, including expanding eligibility, refining payout opportunities and recalibrating performance metrics used to fund and allocate available variable compensation. We believe employers will explore these vehicles as an important talent management solution.