Is your firm overpaying for external hires?

Research shows that only one in four CPAs (26%) feel their pay is “very competitive” today. That’s not trivial because if you drill deeper into the data, you’ll see that among respondents who say they are “highly satisfied” in their careers, two-thirds (63%) believe their pay is “very competitive.”

With accounting talent in short supply, many firms are paying a premium for external hires instead of promoting their internal talent. My firm’s compensation data, collected in 2024 and 2025, shows that accounting firms paid 7% more to bring in outside senior analysts in tax and audit than they paid internal staff in the same positions. And the spread grew to 8.6% for first-year managers. Sound familiar?

Just know that by paying such a premium for external hires, you may be getting talent in the door, but you’ve created a lose-lose system going forward. That’s because as a profession, we’ve created an incentive structure in which job hopping will result in higher compensation despite it often making employees and their firms worse off.

We’re sending a message to our talent, particularly high performers, that they need to leave their firms if they want to be paid competitively. In exchange for a bigger paycheck, however, candidates risk losing connections and relationships that may have paved their path to a partnership. They must also worry about having a “job hopper” label on their resumes, which can be a big turnoff for many employers. Constantly changing jobs is also stressful, exhausting and a huge mental burden. It consumes tons of energy that could be better used for building skills and relationships at one’s existing firm. 

Job hopping is burdensome for employers, too. There’s a substantial cost to hiring new employees constantly. With technology playing a greater role in firm productivity, the cost of training new employees keeps rising because there is more training to do for each piece of software. Losing staff also disrupts the culture of the firm. There’s a loss of institutional knowledge, a loss of relationships built with clients, and a loss in productivity from fully ramped employees. 

How do we fix this?

Despite the challenges described above, the solution is simple. Your firm just needs to stop treating external hires differently than you treat your internal talent. For starters, make sure the salaries you’re paying internally promoted employees are comparable to salaries you’re offering external hires for the same job.

I know this advice sounds simple, but I’ve found this pay (and morale) gap occurs because many firms don’t have a comprehensive plan for benchmarking salaries. They are often assuming a flat percentage increase based on the prior year. This causes them to drift away from what actual market compensation is. At the same time, they’re too willing to accept salary demands from external candidates because they need to fill the position and they don’t have hard data on real market-rate pay for certain jobs and locales. Compensation that’s in line with market rates should be available to all employees, with firms staying attuned to compensation benchmarking at all times in an employee’s tenure.

So, have some conviction in your numbers. Keep abreast of market-rate compensation for each position that you have on your org chart (adjusted for your geographic location and cost of living) and then stick to your established salary ranges. This will also help you avoid pay inequities across gender and racial groups. 

By the way, these pay gaps are common at all size firms including the Big Four. Back when I was initially analyzing the data around the “loyalty tax,” I posted a chart breaking down this trend on a Reddit thread. The chart generated numerous comments from people who had similarly seen new hires get paid significantly more than internally promoted staff for the same position. In each of those cases, the proposed solution was that you’d have to leave the firm to get that desired salary elsewhere. In today’s world, employees have more access to salary information than ever. There’s just no hiding pay discrepancies. Again, the only solution is to keep on top of market rates for compensation and apply the same rates across the board for all employees. 

If you want to prevent your best employees from job hopping, create the right incentives to train, retain, develop, mentor and promote them. You’ll be glad you did. How is your firm handling the war for talent? I’d like to hear more.