The loyalty tax: why internal promotions are paid less than outside hires

This has happened more times than I care to remember. I promoted someone internally into a regional sales leadership role. He had been with the business for six years, knew the markets and customers, and understood how the organisation actually worked.

We offered him a 15% increase, and he accepted. Six months later, we hired someone externally into a comparable sales role. She came from a larger organisation, interviewed well, and worked at a competitor with a very different philosophy and culture. We paid her 30% more than the previous incumbent's salary to join. We never talk about what that comparison meant. We don't need to.

Most companies run a loyalty tax. It is not written down anywhere, but most organisations have one. It operates through the gap between what you offer the person who stayed and what you pay to attract the person who did not. The team member who learned your business, absorbed your culture and earned their way into a bigger role is often paid less for it than the stranger who interviewed well.

This isn't just a compensation issue. It is a signal, and your best internal people are reading it clearly.

I have hired externally when internal capability was not available, or we did not have the skill to develop it, and I would do it again. But I have also watched many companies spend significant money importing credentials from larger organisations while the person who actually understood the market sat three desks away on a salary that told them exactly what the business thought of them. If you are wondering why your internal pipeline is thin, it is worth asking what you are actually rewarding people to do.

Stay and grow inside the business, or leave and come back more expensive.

First published on LinkedIn, 11 May 2026.