Are You Overpaying or Underpaying Employees?

By Kimberly Blake

Senior HR Consultant

Most employers believe their compensation is fair until they dig deeper. Many only discover compensation gaps after losing top talent or struggling to hire.

In today’s Canadian labour market, compensation is one of the biggest drivers of employee decisions. In fact, 76% of Canadian employees say competitive salary is the top factor in deciding whether to stay or leave an organization. At the same time, turnover is becoming increasingly expensive, costing employers an average of over $30,000 per employee.

That means getting compensation wrong isn’t just a people issue. It’s a significant business risk. At the same time, overcorrecting can be just as risky, leading to unsustainable payroll costs and internal inequities.

So how do you know if you’re getting it right? There are important things that signal if you are paying too much or not enough. Benchmarking is a key step to ensure you get your compensation levels right. 

Here’s what we’ll cover:

• What are the signs you’re underpaying employees?
• What are the signs you’re overpaying employees?
• What are the core considerations when evaluating compensation?
• How do you find the right level of compensation?
• Why is salary benchmarking so important? 

What are the signs you’re underpaying employees?

Underpaying employees doesn’t always show up on a balance sheet, but it will impact your workforce. If you’re underpaying your people, there is a good chance they will voice their displeasure. 

Common warning signs include:

High turnover rates: Employees leave for higher-paying opportunities

Low offer acceptance rates: Candidates decline offers due to compensation

Disengagement and low morale: Employees feel undervalued

Frequent counteroffers: You’re reacting instead of planning

Pay transparency issues: Employees discover pay gaps through market data or peers

Even small gaps between your salaries and market expectations can have a measurable impact on retention, particularly in competitive or high-demand roles. When employees feel underpaid, they are far more likely to explore other opportunities, increasing hiring costs and disrupting team performance.

What are the signs you’re overpaying employees?

You’re likely to have employees complain about getting paid higher than the industry average. While underpaying gets more attention, overpaying can quietly create long-term challenges for your business. Watch for these signs:

• Salaries are significantly above market benchmarks without a defined strategy
• Payroll costs are limiting growth or hiring capacity
• Pay compression starts to happen. Newer employees earn as much as or more than experienced team members
• Salary creep occurs. Compensation increases over time without alignment to market data or performance
• Compensation not tied to measurable outcomes or business impact

Overpaying may solve short-term hiring challenges, but without structure, it can lead to internal inequities and make your compensation model difficult to sustain.

What are the core considerations when evaluating compensation?

Effective compensation strategies go beyond base salary. You need to look at compensation from a holistic perspective and consider all factors affecting compensation. Employers should evaluate:

Total compensation: Salary, bonus, benefits, vacation, and perks.

Location: Regional differences and remote work dynamics.

Market demand: High-demand roles may require premium pay.

Experience and performance: Skills, tenure, and contribution.

Internal equity: Fairness across teams and roles.

How do you find the right level of compensation?

Getting compensation right requires a structured, repeatable approach. You need to define your compensation philosophy. 

There’s no universal answer for the right level of compensation. But your approach should align with your business goals, industry, and hiring strategy. Without a clear philosophy, compensation decisions often become inconsistent and reactive.

Here is a simple framework to follow:

1. Define roles clearly: Ensure responsibilities, not just job titles, are accurately scoped
2. Gather reliable market data: Use trusted salary benchmarking sources relevant to your industry and location
3. Position your pay (P25, P50, P75): Decide where you want to sit in the market
4. Check internal equity: Ensure fairness across your organization
5. Review regularly: Update compensation based on market changes and business needs



Organizations that take this approach move from reactive pay decisions to a proactive compensation strategy.