Retaining Key Talent During a Salary Freeze

Key Takeaways

• A salary freeze threatens your ability to retain top performers, but its impact can be minimized through transparent communication and strategic alternatives to cash compensation
• Offering flexibility, additional time off, and professional development opportunities demonstrates your commitment to employee well-being when pay increases are not possible
• Non-monetary incentives like public recognition, meaningful projects, and workplace improvements can maintain engagement and motivation during financially constrained periods
• The way you communicate a pay freeze matters more than the decision itself—early, honest, and empathetic messaging from senior leadership builds trust and reduces turnover risk

A salary freeze is a decision by an organization to temporarily halt all pay increases, including raises and bonuses, for a set period. It is typically a response to economic uncertainty or internal financial constraints. From an HR perspective, a salary freeze is a high-stakes challenge. It directly impacts your ability to motivate and retain employees and can make it difficult to attract new talent. Your role is to manage this process with transparency and find alternative ways to keep your workforce engaged and valued.

A freeze is almost always a defensive business decision made to protect the company’s financial health. The most common triggers include:

• Economic downturns force companies to make difficult choices. During a recession or market instability, companies use freezes to reduce costs and avoid layoffs. This approach attempts to preserve jobs by sacrificing compensation growth, but it places significant pressure on HR teams to maintain workforce stability.
  
• Internal financial constraints present another common trigger. If the company is facing declining revenues or budget cuts, a freeze is a direct way to control costs without immediately reducing headcount. This situation requires careful management because employees can see through vague explanations and will lose trust if they perceive the decision as arbitrary.
  
• Market and competitive pressures also drive these decisions. Sometimes, a freeze is a strategic move to align with industry trends, especially if competitors are doing the same. However, this reasoning carries risk—if your competitors later reverse course or if your freeze lasts longer than industry norms, you will struggle to retain your most marketable talent.

The different types of salary freezes

Not all freezes are the same, and the type your company implements will determine your retention strategy.

1. A blanket freeze is the most common type, where all salary increases are stopped for all employees across the entire organization. This approach is the easiest to administer but creates the greatest risk because high performers feel penalized for circumstances beyond their control, often triggering voluntary turnover that damages business performance.
2. A targeted freeze takes a more selective approach where the freeze only applies to certain groups, departments, or levels. Executive-only freezes can build goodwill with frontline staff, while department-specific freezes may be necessary when certain business units face unique financial challenges. This approach requires careful communication to avoid resentment from affected groups.
3. A partial freeze represents a more moderate approach where the amount of salary increases is reduced, rather than completely halted. For example, instead of eliminating raises entirely, the company might cap increases at one or two percent. This strategy acknowledges employee contributions while still controlling costs.

Salary freeze vs. hiring freeze are two distinct strategies that are often confused, and clarity matters for both employee understanding and your broader talent strategy.

• A salary freeze stops pay increases for current employees. Its main goal is to reduce costs without reducing headcount. This decision affects your existing workforce’s compensation trajectory and requires immediate attention to morale and retention.
• A hiring freeze stops the company from recruiting new employees. This is done to control labor costs by not adding new salaries to the payroll. While this may seem less painful than a salary freeze, it creates its own challenges—existing employees often face increased workloads as positions remain unfilled, which compounds the frustration of frozen compensation.

Announcing the freeze: the “when” and “if”

Is it required? While not always a strict legal requirement, announcing a freeze is a business necessity. Legally, the requirement depends on employment contracts and local labor laws. Strategically, the answer is always yes. Failing to announce a freeze will lead to rumors, destroy trust, and cause far more damage than the announcement itself. Employees will discover the reality during performance review season, and by then, the damage to your credibility will be irreversible.

When should you announce it? The timing of your announcement is equally critical. Announce the decision as soon as it is final and, crucially, before the next cycle of performance reviews or expected raises. This prevents employees from feeling blindsided and gives them time to process the information before they have already mentally committed to a salary increase. Waiting until the last minute or allowing managers to deliver the news inconsistently will create unnecessary chaos and negatively impact morale.

How to communicate a salary freeze with empathy

The way you communicate the salary freeze is just as important as the decision itself. 

Be immediate and honest. Do not delay the announcement or try to sugarcoat the situation. Communicate the freeze early and clearly explain the business reasons behind it. Employees can handle difficult news better than they can handle dishonesty or uncertainty. Provide specific financial context—whether it is market conditions, revenue declines, or cost pressures—so employees understand this is a business necessity, not a management failure. If your company is simultaneously announcing workforce reductions, follow proven frameworks for how to lay off employees with compassion to protect both departing and remaining staff.

Have senior leaders deliver the message. The CEO or other executive leaders should communicate the freeze to demonstrate accountability and show that the decision was taken seriously at the highest level. When leadership owns the decision, it signals that this is a company-wide challenge, not an HR policy change.

Acknowledge the emotional impact. Openly state that you know this is disappointing news. Validate your employees’ feelings and create a safe space for them to ask questions. This is particularly important when communicating compensation changes—employees need to feel heard, not just informed. Allow time for reactions and be prepared to have difficult conversations with individuals who feel the freeze will disproportionately affect them. Apply the same principles you would use to communicate a salary delay with transparency, emphasizing empathy and concrete next steps.

Highlight the alternatives and support. Immediately after announcing the freeze, follow up with the short-term supports and non-monetary incentives you will be offering. This shows you have a plan to continue supporting employees and that the company is not simply cutting costs without considering employee well-being. Consider how these alternatives fit within your broader strategic approach to employee wellbeing to maintain organizational health.

Be clear about the timeline. Provide a timeframe for how long you expect the freeze to last and when you will review the decision. This provides a light at the end of the tunnel and reduces the anxiety that comes from open-ended uncertainty. If you cannot commit to a specific date, commit to regular updates so employees know they will not be left in the dark.

Short-term supports to offer affected employees

While employees may show initial support and understanding when a freeze is well communicated and justified, disappointment and demotivation often develop if the freeze lasts longer than expected or if follow-up communication is lacking. Maintaining trust requires ongoing updates, recognition of employee efforts in other ways, and a clear roadmap for resuming salary growth once conditions improve These actions can help soften the blow and maintain morale during financially constrained periods.

1. Offer more flexibility

Provide options like remote or hybrid work arrangements, flexible hours, or compressed workweeks. This gives employees more control over their work-life balance, which is a highly valued, low-cost benefit. For many employees, the ability to avoid a daily commute or adjust their schedule for family responsibilities can partially offset the disappointment of a frozen salary.

2. Provide additional time off

Consider offering extra paid or unpaid leave. This allows employees more time to rest and recharge, which can be a meaningful way to show appreciation when a pay raise is not possible. Even a few extra days can demonstrate that the company values employee well-being beyond just financial compensation.

3. Invest in immediate skill development

Sponsor employees to attend a workshop, get a certification, or access online courses. This shows you are still invested in their long-term career growth. Professional development opportunities signal that the freeze is temporary and that the company remains committed to helping employees advance their capabilities.

4. Provide non-cash perks

Small gestures like wellness stipends, meal vouchers, or company-paid phone plans can make a tangible difference in employees’ daily lives and show that you care. While these perks do not replace a salary increase, they demonstrate that the company is actively looking for alternatives to support its workforce.

Non-monetary incentives to consider during a salary freeze

During a pay freeze, you must shift your focus to other powerful, non-monetary ways to reward and recognize your employees. These alternatives can be highly effective at keeping your team engaged and motivated when financial rewards are off the table.

Public and personalized recognition becomes even more important when cash compensation is frozen. Make a conscious effort to publicly praise good work through thank-you notes, shout-outs in team meetings, or formal company awards. Recognition costs nothing but can be incredibly powerful in making employees feel valued. The key is authenticity—generic praise feels hollow, but specific acknowledgment of individual contributions reinforces that the company sees and appreciates their efforts.

Meaningful professional development extends beyond short-term training. Offer opportunities for employees to take on special projects, join innovation teams, or participate in mentorship programs. For high performers, the opportunity for growth is often as important as a pay increase. These experiences build skills, expand networks, and create pathways for advancement that will benefit employees long after the salary freeze ends.

Workplace upgrades may seem minor, but they improve the daily experience of your employees. Invest in improvements to the physical work environment, such as ergonomic chairs, better equipment, or healthier office snacks. These changes signal that the company is still willing to invest in employee comfort and productivity, even when budgets are tight. Creating an ideal workplace environment through tangible improvements demonstrates your commitment to employee well-being.

Increased employee involvement can transform a difficult period into an opportunity for empowerment. Involve your staff in decision-making processes by asking for their input on company policies or giving them new responsibilities. This approach fosters a sense of ownership and demonstrates that you value their expertise beyond their job titles.

A salary freeze will negatively impact morale if you do not act. The research is clear—compensation signals an employee’s worth, and when that signal is frozen, employees question their value to the organization. However, the damage is not inevitable. Your immediate response determines whether the freeze becomes a catalyst for turnover or an opportunity to demonstrate your commitment to your workforce in new ways.

A salary freeze does not have to result in a mass exodus of your best talent. As an HR leader, your role is to shift the company’s focus from what it cannot give—money—to what it can give: recognition, opportunity, flexibility, and a supportive culture. By immediately offering short-term supports, leaning heavily on non-monetary rewards, and communicating with transparency and empathy, you can guide your organization through this difficult period and emerge with a more resilient and loyal workforce.

When the freeze ends, leverage data-driven insights from the Talentnet-Mercer Total Remuneration Survey to realign your compensation with market realities and rebuild competitive advantage. Partner with experts in salary structure consulting to design fair, strategic pay frameworks that prevent issues like pay inversion and support your long-term compensation strategy for employee retention.