In a shift that may come as a surprise to many employees who have enjoyed two consecutive years of salary increases, companies are curbing their budgets for merit raises in the upcoming year.

According to a survey of U.S. employers conducted by Aon Plc, which compiles compensation data for over 5,500 employers, the average merit raises across all industries are expected to be around 3.7% next year. This is a slight drop from the 3.9% recorded this year, reflecting companies’ efforts to tighten labor budgets as inflation levels ease from the peaks seen last year. A separate survey by workplace consultant Mercer also identified this trend, with merit-based salaries projected to rise by 3.5% next year, down from 3.9% in 2023.

Tim Brown, a partner at Aon, noted, “People are not going to spend what they spent last year. Also, inflation has come down since last year, so there’s more pressure on salaries.”

Leaders in the workforce corroborate these findings. Bob Toohey, Chief Human Resources Officer at Allstate Insurance Co., expects compensation budgets in the U.S. to be lower compared to the previous year. This trend is not limited to a specific industry; it spans across various sectors.

However, it’s important to note that the salary increases projected by Aon and Mercer still surpass pre-pandemic levels when raises hovered around 3% annually. This is attributed to the ongoing strength of the labor market and historically low unemployment rates. Lauren Mason, Senior Principal at Mercer, pointed out that initial jobless claims in September reached their lowest levels in over five decades, according to Labor Department data. Additionally, U.S. inflation, which exceeded 9% last summer, has now declined to less than half that figure.

Nevertheless, Mason suggests that further reductions in compensation budgets may occur in the coming year as companies adapt to the evolving economic landscape.

The technology sector has been particularly affected, with only 5% of tech firms indicating aggressive hiring, down from 22% the previous year, according to Aon. Despite usually leading in projected salary increases, tech companies are now expected to provide merit raises of just 3.3% next year, according to Mercer, trailing behind sectors like energy and consumer goods.

A separate survey from technology job site Hired revealed that tech salaries have reached a five-year low when adjusted for inflation. However, jobs requiring specialized skills, such as machine learning engineers and data scientists, continue to be in high demand.

Furthermore, Mercer’s findings indicate that salary increases linked to promotions will also slow down next year due to fewer planned promotions. In the hiring surge of 2021 and 2022, many companies granted raises and promotions to white-collar employees, even mid-year, to retain their top talent. In fact, a survey by workplace consultant Willis Towers Watson found that seven out of ten companies exceeded their planned pay adjustment budgets during that period.

Another report from Willis Towers Watson revealed that organizations are budgeting for overall salary increases of approximately 4% next year, down from the 4.4% increase provided this year. Although salary hikes may not be as substantial as in previous years, companies are becoming more generous with perks and benefits, such as flexible work schedules and paid parental leave, according to a recent survey by staffing firm Robert Half Inc.