Sometimes it creeps up quietly— comments during annual evaluations or conversations during exit interviews, but the risk of underpaying employees isn’t just about missing a number. It’s about missing all the hidden costs that come with it: lost loyalty, disengaged employees, challenges in hiring, and an overall weaker employer brand.
In this article, I’ll walk you through what underpayment really means, how to spot the warning signs, the hidden price businesses pay, and how to start fixing it.
What’s inside?
- What Does It Mean to Be an Underpaid Employee?
- How Can I Tell If I’m Underpaying My Employees?
- What Are the Hidden Costs of Underpaying Employees?
- What Business Risks Do Companies Face?
- How Can I Correct Employee Compensation Problems?
- What Are Industry Best Practices?
- FAQs About Pay Equity and Retention
What Does It Mean to Be an Underpaid Employee?
An underpaid employee earns less than the fair market rate for their skills, role, and contributions—or less than required by law. Sometimes it’s obvious: No raise in years, or clear evidence the market has moved without you. Other times, it’s subtle: more responsibility without more pay, “off the clock” requests, or sales targets that never seem to boost compensation.
Recent data highlights how pay is still a major motivator for change: In a recent SHRM survey, around one in five employees (20.5%) who quit their jobs said it was primarily due to not feeling they were paid fairly for the value they brought. Interestingly, employers often think pay is an even bigger factor—more than one in three exit interviews cite pay as the top reason for leaving. This gap in perception means leaders can easily overlook when their best people are about to walk out the door.
Common symptoms include:
- No raise in more than two years or after major new responsibilities
- Making less than peers with similar skills and tenure
- Raised concerns about pay are routinely ignored or dodged by leadership
- Employees struggling to “stay afloat” as living costs rise
In my experience, the major turning point comes when pay stops matching progress. Teams sense when their loyalty isn’t being rewarded; it quickly becomes a culture problem, not just a payroll one.
How Can I Tell If I’m Underpaying My Employees?
When hiring managers ask, “Are we keeping up?”, we recommend starting with an audit of your pay rates. Ideally, this should be done annually, but additionally after role changes, promotions, or major market shifts. Then use market pay data (from BLS or companies like DISHER Talent that will help you get role-based salary reports) to compare your roles to industry competition. Make sure you take into account more than just base salary, including bonuses, overtime, incentives, and benefits. Watch for patterns in your organization, like high turnover in one department, difficulty filling a certain role; these can also be signs of misalignment. If you are asking, “Are we underpaying?” it means it’s time for a review— and that proactive check can prevent bigger problems down the road.
What Are the Hidden Costs of Underpaying Employees?
It’s tempting to focus on payroll as a neat, predictable line item. But the indirect costs of underpayment can quietly wreck your budget and break team morale.
- Direct costs: Higher turnover, costly recruiting, onboarding, and lost productivity during vacancies or ramp-up times.
- Hidden costs: Poor engagement, absenteeism, lack of innovation, errors from exhausted or distracted staff. Teams that feel shortchanged are less likely to stay late, solve hard problems, or represent your brand with energy.
Underpaid teams don’t just churn, they disengage. The signs show up as lower productivity, passive job-seeking, and even “quiet quitting.” It doesn’t take long for disengagement to spread, affecting the entire culture. A high-turnover environment sends a message to remaining staff: “You’re replaceable, not valued.”
What Business Risks Do Companies Face When They Underpay?
Legal Risks: Wage violations can lead to huge fines, back pay awards, and even criminal liability for willful violations. The rise of wage theft lawsuits and new underpayment laws brings added scrutiny.
Reputation Damage: Social sites, review platforms, and word-of-mouth can paint your company as an employer to avoid. Once that happens, recruiting gets harder and more expensive.
Brand Risk: Pay inequity creates trust issues not just with employees, but with customers and potential business partners.
How Can I Correct Employee Compensation Problems?
Start with a transparent audit:
- Review all pay rates and compare them to current benchmarks and legal minimums.
- Look for patterns—certain teams, levels, or demographics affected more than others.
- Communicate findings honestly. Staff appreciate transparency, even when the news isn’t perfect.
- Develop a plan to close pay gaps; don’t wait for annual reviews if a fix is overdue.
- Document fixes, back pay, or corrections in writing, and update your system to prevent recurrences.
Tips for implementation:
- Use automated payroll systems to minimize manual errors.
- Review state and local law annually or after any regulatory update.
- Bring in an outside consultant for a fresh perspective if the picture gets murky.
What Are Industry Best Practices for Fair Employee Compensation?
- Audit your pay annually—more often if you’re in a fast-moving space like tech or healthcare.
- Use transparent salary bands and communicate them clearly, so staff know where they stand.
- Tie pay reviews to both performance and market movement.
- Stay updated with resources like the Bureau of Labor Statistics, compensation surveys, or industry groups.
- Some organizations use anonymous salary review boards, others appoint “pay equity champions” in HR to monitor gaps.
FAQ’s About Employee Pay Equity and Retention
Q: How do I open a pay conversation when I think a team member is underpaid?
A: Be direct, bring data, and focus on the value the employee brings. The best experiences come from organizational leaders who take initiative, not those who wait for a frustrated team member to ask. When you think a team member might be underpaid, reach out to schedule a private 1:1.
Q: How often should I conduct a pay audit?
A: Annually is the minimum best practice, but consider an additional review after major business changes (new business lines, mergers, expansion to new locations).
Q: What if I discover a pay gap?
A: Address it immediately: issue back pay, update compensation for future pay periods, and communicate changes clearly to everyone affected.
Why This Matters—And What’s Next
Today’s employees expect honesty, fairness, and real conversations about pay. Underpayment isn’t just a “cost-saving measure”—it’s an invitation to lose your best people and damage your culture from the inside out. Some businesses recover from pay mistakes with transparency and action, and others never quite regain trust.
If you suspect your team’s pay structure might be holding you back, now’s the time to act. Get in touch with our team to get a salary report or to talk numbers. Don’t let an invisible cost be the reason your best people leave.
