When your promotions feel like punishment, your best people will promote themselves. To your competitors.
It’s a mistake many businesses make. In an effort to control costs, leaders offer below-market salaries or drag their feet on raises. At first glance, it looks like a smart financial decision. Payroll stays lean, margins appear stronger, and the budget looks a little healthier. But look closer, and the savings are an illusion. The true cost of underpaying employees shows up in turnover, morale, and productivity losses that far outweigh whatever short-term money you thought you saved.
Hidden Expenses That Eat at Your Budget
When employees feel undervalued, they don’t stick around. Turnover isn’t just inconvenient, it’s expensive. Recruiting, onboarding, and training new hires can cost anywhere from 50% to 200% of an employee’s annual salary, depending on the role. And that’s just the measurable cost. What’s harder to quantify, but equally damaging, is the lost institutional knowledge, the disruption to client relationships, and the strain on the employees who remain behind to pick up the slack.
Think about it this way: saving $5,000 by underpaying a talented employee could result in a $30,000–$50,000 expense when they leave. And the cycle often repeats, because if the underlying issue, compensation that doesn’t match market value, remains unresolved, new hires will eventually walk the same path.
The Silent Productivity Killer
Compensation is more than a paycheck; it’s a signal of value. When employees believe they’re not being paid fairly, resentment builds. They may continue to show up, but their enthusiasm wanes. Engagement drops. Instead of thinking creatively or going the extra mile, they do the bare minimum to meet expectations.
Low morale is contagious. It spreads through teams, creating an environment where cynicism replaces collaboration. The message becomes clear: if leadership isn’t willing to invest in employees, why should employees invest their best effort in the company? Over time, that lack of energy chips away at productivity and makes it even harder to attract and retain strong performers.
It’s tempting to think that underpaid employees will simply “work harder to prove themselves.” The opposite is almost always true. Productivity suffers when employees feel undervalued, either because they disengage or because they’re distracted by the search for a better-paying job. Even worse, high-performing employees are often the first to leave, taking their efficiency and expertise with them. What’s left is a workforce that may be less experienced, less motivated, and less capable of delivering at the level your business needs to grow.
Costs You Can’t Cut
The lost productivity isn’t always obvious in day-to-day operations, but it reveals itself in missed deadlines, lower quality work, and dissatisfied customers. Over time, these problems directly affect your bottom line, undermining the very financial “savings” that led to underpaying employees in the first place.
Its Pays Off
On the flip side, fair compensation delivers a measurable return on investment. Employees who feel valued are more engaged, more loyal, and more productive. Retention rates improve, reducing costly turnover. Morale stays higher, strengthening team collaboration and innovation. Productivity rises as employees devote their full energy to their work rather than job hunting or silently disengaging.
Research consistently shows that companies with competitive pay structures outperform those that lag behind. The investment in fair pay often pays for itself many times over by reducing turnover expenses, increasing output, and boosting customer satisfaction. In other words, paying people what they’re worth isn’t just the right thing to do, it’s the profitable thing to do.
Building a Compensation Strategy That Works
Moving toward fair pay doesn’t mean throwing your budget out the window. It means being intentional and strategic. Benchmark salaries against industry standards and regional averages. Build pay structures that are transparent and equitable, so employees understand how compensation decisions are made. Consider total rewards, benefits, flexibility, and growth opportunities, as part of the package, but never use those as excuses to undercut base pay.
When compensation reflects both the market and the value employees bring to your business, you build trust. And trust is what keeps employees invested for the long haul. The companies that get this right don’t just retain their people, they turn their workforce into a competitive advantage.
Pay Fair
Underpaying employees might feel like a cost-saving measure in the short term, but it’s really a slow leak in your business’s potential. The money you save upfront is quickly lost to turnover, low morale, and reduced productivity. Fair pay, on the other hand, generates returns that ripple across your organization: stronger loyalty, higher performance, and a healthier culture that attracts top talent.
At Peoplyst, we help businesses design compensation strategies that make financial sense while also honoring the value employees bring. Because when you invest fairly in your people, you’re not just paying salaries, you’re fueling growth.
Let’s Partner for Success!
Your team is at the heart of your business, and Peoplyst is here to help you cultivate a thriving, engaged workplace. From onboarding and compliance to employee development and beyond, our HR experts are ready to support your unique needs with tailored, results-driven solutions. Let’s work together to create a positive environment that strengthens your team and boosts your business. Ready to take the next step? Contact us today to schedule a consultation because building a better workplace starts here.