6 Unintended Consequences of Underpaying Your Employees

Underpaying your employees, unintentionally or not, can have big consequences for your company. As they say, you get what you pay for. The decision to underpay your employees or pay less than the industry average is risky. As executive recruiters, we understand that budget restraints and financial considerations always play into decisions about how you compensate your employees. But is paying your employees less worth the risk?

When employees feel underpaid, it can lead to a lack of engagement, less efficient performance, and many other things that can affect your company and your bottom line. In this blog, we’ll discuss:

How underpayment of employees happens
The consequences of underpaying your employees
What employees can do if they feel underpaid

Toronto Technology Recruiters share 4 Unintended Consequences of Underpaying Your Employees

How Does Underpayment Happen?

There are a variety of ways employees can be underpaid. Employee underpayment is widespread across all industries and roles. Here are common ways it can happen:

Employers are unaware of average salaries for specific skills and experience
Employers offer salaries lower than the industry average
Employees are not paid for extra time (overtime, off-the-clock work)
Employees wait for employers to offer a raise (instead of requesting a pay raise)
Employees don’t accurately record their time
Payment miscalculation and clerical errors

The Consequences of Underpaying Your Employees

1. Increased Employee Turnover

Salary is always at the top of the list of reasons why employees exit an organization. Underpaid employees often feel underappreciated. When people don’t feel like they are being fairly compensated for the value they provide to an organization, they are not going to be loyal. They will keep an eye out for better opportunities and when one arises, they will leave.

When employees feel slighted, they tend to stop being loyal and will leave when they have the chance. They have one foot out the door.

2. Lower Performance

People who feel as though they are not being paid fairly typically do not put in the same effort as others. They are not motivated to put in maximum effort. It’s more likely the employee will do what is minimally required of them.

3. Lack of Recruiting Leverage

If you are not willing to offer reasonable compensation, you will immediately lose leverage to compete with other companies when hiring. As a Toronto recruitment agency, we understand finding top talent is challenging enough, but when you are not willing to pay, you significantly reduce your chances of finding great talent. In-demand employees are not going to take less than they are worth.

4. Poor Employer Brand Reputation

Word will spread quickly if you are known for not paying your employees well. People will post about it on social media and recruiting communities online. If you are known within the industry as being cheap, it will impact your employer’s brand reputation. Not being willing to compensate your staff communicates that you do not take care of them. When this happens, fewer people may be willing to apply for or work for your company. This is part of the trickle-down effect.

5. Poor Company Culture

How much you pay your employees can have a big impact on morale. When morale is low, people are less motivated, they can have a poor attitude, are not as engaged, and will be less likely to go above and beyond. Performance can suffer as a result. A poor culture will lead to more people leaving, have a negative impact on your employer brand, and hurt your recruiting leverage.

6. Legal Repercussions

If you knowingly circumvent employment laws and underpay people, you could face legal issues. Employees can take legal action against their employer for underpayment. You could be in a situation where you are required to give retroactive pay to any employees who were found to be underpaid. In some cases, intentionally underpaying employees can be a criminal offence.

What Can Employees Do If They Think They’re Being Underpaid?

If you believe you are underpaid, there are some steps to take to address the issue. Here is what you should do:

Start with your manager: Discuss your compensation concerns with your manager.
Contact HR: If your manager can’t help, you can contact your company’s human resources department.
Contact the Labour Program: If the issue still isn’t resolved, contact the regulatory board in your region.

A Final Word About Underpaying Employees

Underpaying your employees is a short-term decision that can have significant long-term effects. Think twice about how much you pay your employees. You could have legal issues if you don’t follow compensation rules and regulations.