Tariffs and Compensation

Tariffs are reshaping the economic landscape in 2025, and their effects on employee compensation are becoming a central concern for businesses and workers alike. Here’s what the latest research and executive surveys reveal about how tariffs could impact pay, bonuses, and job security.

Profitability Squeeze and Pay Decisions

A majority of business leaders anticipate that tariffs will directly affect their profitability. According to Willis Towers Watson 76% of CEOs predicting negative or very negative impacts on their businesses this year. As margins tighten, many organizations are reconsidering their compensation strategies:

• Salary Increases: Among firms expecting substantial tariff impacts, 42% are contemplating reductions in their annual salary increase budgets, compared to just 18% of all companies surveyed.

• Incentive Plans: Half of these highly affected companies have already adjusted their short- and long-term executive incentive plans, and 58% are considering further changes.

• Delayed Compensation Actions: Many businesses are deferring non-essential pay decisions, with nearly half indicating that any changes to salary increases will be pushed to 2026 budgets.

Wage Pressure and Household Impact

Economic modeling suggests that tariffs could reduce long-run GDP by about 6% and average wages by 5%, with the typical middle-income household facing a $22,000 lifetime loss. These declines are projected to be more severe than those caused by an equivalent increase in corporate taxes, highlighting the broad and deep impact tariffs can have on American workers’ compensation.

Industry and Regional Disruptions

Industries most exposed to international supply chains—such as manufacturing, automotive, and metals—are expected to feel the brunt of tariff-related disruptions. Companies in these sectors are actively scenario-planning, potentially shifting production, reducing hiring, or freezing pay to adapt to increased costs and supply chain uncertainty. Regions with high concentrations of these industries, like the Midwest and Southeast, are likely to experience sharper impacts on jobs and compensation.

Broader Labor Market Effects

The labor market as a whole is expected to contract, with forecasts suggesting the loss of up to 309,000 jobs and a 0.6 percentage point increase in unemployment by the end of 2025. As businesses face higher input costs and weaker demand, downward pressure on wages and benefits is anticipated, especially in sectors unable to pass on higher costs to consumers.

How Companies Are Responding

To navigate this environment, effective leaders are:

• Conducting scenario planning to assess potential compensation impacts before making decisions.

• Prioritizing pay and staffing actions based on their unique circumstances, rather than adopting one-size-fits-all solutions.

• Delaying non-essential compensation actions until there is greater clarity on tariff structures and economic conditions.

• Modeling the impact of tariffs on benefits, healthcare costs, and pension plans as part of a comprehensive workforce strategy.

Conclusion

Tariffs are already prompting many organizations to rethink compensation, with the potential for reduced salary increases, changes to incentive plans, and even job cuts. The overall effect is likely to be downward pressure on wages and benefits, particularly in industries and regions most exposed to global trade. As the tariff landscape continues to evolve, both employers and employees will need to stay agile and informed to navigate the challenges ahead