Navigating Compensation: From Data to Dollars – AI & Pay for Performance

Technology is transforming the way we work. At the center of this change is artificial intelligence (AI). While headlines often warn of massive job losses, the reality is more nuanced: AI is reshaping roles, automating routine tasks and creating entirely new opportunities for workers with the right skills. At the same time, compensation strategies are evolving, as employers rethink pay structures to attract, retain and reward talent in a rapidly changing market. From AI specialists to skilled trades, understanding these trends is essential for businesses and employees alike.

Q4 2025: Key Trends

AI Disruptions to the U.S. Job Market

The impact of AI on the U.S. job market is complex and ever-evolving. While some major employers have indirectly stated that future AI strategy is a contributor to reductions in force, trends of widespread job losses due to task automation are accelerating across industries, resulting in displacement in specific sectors. At the same time, demand for AI-specific skills and roles is growing rapidly, creating new career pathways and commanding premium salaries. The demand for AI-related skills has created a noticeable “AI premium,” with roles requiring these capabilities commanding salaries up to 25–30% higher than traditional equivalents (HR Brew, 2025).

Industries involving routine cognitive or manual tasks, along with some entry-level white-collar positions, remain most at risk of automation, while roles that require complex problem-solving, interpersonal skills and strategic thinking are more resilient – particularly, skilled trades such as electricians, welders, machinists and HVAC technicians are among that group. These roles rely on hands-on skill, on-site judgment and customer interaction, areas where machines still fall short (Forbes, 2025). In fact, AI tools are helping tradespeople work more efficiently, from diagnosing problems faster to improving productivity, rather than replacing them. Coupled with high demand and looming worker shortages, these factors make skilled trades increasingly lucrative, positioning them as the “next millionaire-making” careers (Cilio, 2025).

Companies are primarily adopting AI to enhance productivity, reduce operational costs and gain a competitive advantage, but these efforts are often constrained by challenges, including technology integration, uncertain short-term ROI, high costs for AI infrastructure and talent and gaps in leadership and workforce readiness.

Pay for Performance

Companies are increasingly linking compensation to performance, shifting away from uniform base salary increases toward more data-driven, variable pay structures (Sequoia, 2025). Organizations are allocating larger portions of payroll to performance-based incentives, including long-term and refresh equity awards tied to measurable outcomes, rather than time or tenure alone. This trend requires robust performance measurement systems and transparent communication to ensure employees understand how their contributions directly impact rewards, while also safeguarding against perceived unfairness or bias (NFP, 2025). HR and compensation leaders must adopt pay structures to reflect faster-changing business priorities, support retention and maintain equity, as the increasing emphasis on pay-for-performance becomes a key driver of organizational competitiveness and employee engagement.

Merit trends

Recent survey data from the Mercer QuickPulse U.S. Compensation Planning Survey shows that U.S. employers awarded an average merit (base salary) increase of 3.2% and a total salary increase of 3.5% in 2025 — both slightly down from what was expected (Mercer via WorldatWork, 2025). These figures reflect a deceleration in pay growth from the pandemic-era crunch, when wage inflation was higher, and signal a return to more typical pre-COVID-19 compensation norms (typically around 3%) as labor market pressures ease (SBAM, 2025). Employers remain cautious, noting that the cooling of the labor market, combined with economic uncertainty and prior elevated wage adjustments, has led to more measured pay budgets and a stronger emphasis on performance differentiation and role-specific pay levers rather than across-the-board base pay hikes.

What Employers Need to Do Now

Create a Link Between Performance and AI Strategy

The world of work is changing quickly. Staying ahead means connecting your approach to AI and pay strategy, not treating them separately. Start by helping your employees feel confident using AI. Investing in AI literacy and hands-on training can turn uncertainty into opportunity, empowering employees (not just tech teams) to work smarter, faster and more creatively. Next, take a fresh look at how you reward performance.

Base Pay Matters, But It’s No Longer the Whole Story

The most forward-thinking companies are blending steady salary growth with performance bonuses and equity incentives that clearly connect effort to results. When employees see that link, motivation and retention tend to follow naturally. Now is the time to ensure your merit matrix framework and holistic total compensation practices align with the behaviors your organization is trying to drive. In today’s economy, it’s important to consider what employees are experiencing when determining the appropriate strategy.

Keep the Conversation Going

State legislation continues to create waves about the level of sharing employers must provide. Transparency around pay, performance expectations and how AI is changing work builds trust and reduces anxiety. During a time when change is constant, honest communication might just be your strongest competitive edge.