Pay Disparity – Internal Promotions vs Lateral Hiring – Asrar Qureshi’s Blog Post #1068

Pay Disparity – Internal Promotions vs Lateral Hiring – Asrar Qureshi’s Blog Post #1068

Dear Colleagues! This is Asrar Qureshi’s Blog Post #1068 for Pharma Veterans. Pharma Veterans Blogs are published by Asrar Qureshi on its dedicated site https://pharmaveterans.com. Please email to pharmaveterans2017@gmail.com  for publishing your contributions here.

Credit: Ivan Samkov

Credit: Ketut Subiyanto

Preamble

This phenomenon—where long-term, loyal employees are often underpaid compared to external hires—is a well-documented issue in corporate compensation structures. Research consistently shows that external hires are often brought in at a premium of 15-20% over internally promoted employees, despite the latter having institutional knowledge, proven performance, and loyalty to the company.  

Why Does This Happen?

First reason is that there is a disparity between market compensation and organization’s internal pay scale. Companies benchmark external hires’ salaries against the current job market, which often pushes them to offer higher pay to attract top talent.  However, internal employees are subject to incremental raises which are not high, meaning their salaries lag behind the market rate over time.  

Second reason may be termed the "Loyalty Penalty". Employees who stay with a company for a long time receive smaller, predictable raises, while job hoppers often negotiate higher salaries with each move.  Some companies also assume long-term employees won’t leave, leading them to prioritize attracting external talent over fairly compensating loyal employees. This is particularly true for very long-standing employees. They become almost a permanent fixture because they may keep cribbing but do not leave the organization.

Third is “Internal Promotion Bias”. Internal promotions often come with modest raises (10-15%), while external candidates can negotiate significantly higher salaries (20%+ premiums). Their new salary is calculated from where they are coming. A modest increase is awarded as if a great thing is being done. Companies certainly undervalue experience within their own walls, assuming an external hire brings in "fresh perspectives" that justify higher pay. In the pharmaceutical industry, I have this happening a lot. Every new hire at senior position is projected as if a diamond has just been discovered. He/she is given privileges that were not given to homegrown people at similar positions.

Fourth, budget constraints and legacy pay practices may become a hurdle in giving better salaries to existing employees. Companies may have salary compression issues, where longtime employees are still tied to old pay scales, while new hires come in under revised (higher) salary bands.  HR often operates under fixed salary increase caps, making it harder to adjust pay for existing employees without a full-scale compensation review.  

The Consequences of Pay Disparity

Low Employee Morale & Engagement – Long-term employees feel undervalued and resentful, leading to disengagement. They spend more time complaining rather than working. The actively disengaged employees spread negativity among other employees.

Higher Turnover of Experienced Employees – Once loyal employees leave for better-paying opportunities, taking institutional knowledge with them. 

Costly Talent Drain & Knowledge Loss – External hires often take longer to ramp up, while experienced employees leaving disrupts workflows.  

Wage Compression Issues – Over time, new hires may earn more than tenured employees in the same or similar roles, creating internal pay inequity.

Replacement Issues – Every leaving employee’s replacement cost hugely in terms of money and time, which if calculated will run into hundreds of thousands. But the trend continues all the same.

Companies Can Fix This  

Regular Market-Based Salary Adjustments – Conduct annual pay reviews to align internal employees’ salaries with market rates. Market salary surveys are available from reputed companies, and these can be used to see the internal employees compensation remain market competitive. 

Offer Competitive Raises for Internal Promotions – Instead of a 10-15% raise, companies should match market rates for promotions. This is the thorniest area because companies do not wish to open this pandora box. 

Retention Bonuses & Loyalty Pay Adjustments – Reward long-term employees with adjustments beyond standard merit raises. Some companies celebrate long service by distribution certificate, and/or some cash which is one off. 

Greater Pay Transparency – Employees should know their market value, and companies should audit salary fairness across roles. It can be done through regular market surveys or taking information from contacts in similar organizations.

Encourage Internal Job Mobility – Allow employees to switch roles and departments more easily so they can negotiate higher salaries internally. Making a strong dividing line deprives employees from opportunities and employers are deprived of having some great talent in the making.

Sum Up

Current practice of lateral hiring is against the claim of offering a career track. If the new slots are offered to market and new hires are taken against those, the old employees shall have very slow growth as compared to new hires.

The discrimination is not just limited to pay package, the new hires negotiate to get better perks and benefits, including but not limited to new cars and so on.

Failing to fairly compensate loyal employees leads to higher turnover, disengagement, and the costly loss of institutional knowledge. Companies that proactively adjust salaries to match market value will retain top talent and reduce long-term hiring costs. Instead of taking long-term employees for granted, businesses should reward their loyalty with fair and competitive pay.

Concluded.

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