Revisiting Loyalty Tax Trends & Why it Matters

I recently wrote an article for Accounting Today on the loyalty tax, and how it’s hurting both firms and employees. This is a topic I’ve touched on in the past, but today we’re diving even deeper into why this is the case, why it matters, and how to fix it.

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What is the Loyalty Tax?

The Loyalty Tax is the surplus being paid to externally hired employees in the same position when compared to an internally promoted employee.

The most common reason for this happening is that firms are willing to pay more for talent to solve an acute need - so when the firm is lacking capacity to meet client deliverables, they’re going to be willing to pay more to bring talent through the door. I also believe this is happening largely based on firms not having a good enough pulse on market rates of compensation when setting internal salaries, but being open to negotiation or candidate feedback on compensation as a part of the external hiring process.

Why is This a Problem?

By creating a loyalty tax, firms are essentially creating an incentive structure where everyone loses.

The employee loses because in order to be paid competitively with market rates, in many cases they need to leave their existing job to go somewhere new. An employee may be otherwise perfectly happy in a firm and feel a need to “reset” at a new firm to get back to the top of a pay band. This can cost you in terms of social capital which may hurt future progression or support to one day make partner. Changing firms too often can get your resume labeled as that of a job hopper, and there’s just a lot of overall burden and disruption to having to leave for a new job.

The firm loses because there is a very significant cost to bringing in new talent. If using an external recruiter that might be a 25% placement fee, and then you need to worry about onboarding, training a new employee on your tech stack, on your operations, and getting them up to speed client files. Clients also prefer continuity, so if you’re losing an employee who manages a client relationship this could also cost the firm business.

What are the Loyalty Tax Trends?

And at this point, you might be wondering - are people really jumping ship over a small pay discrepancy compared to external hires? Well I know first-hand and based on conversations that I’ve been in that it creates a lot of discontentment to be paid less for the same work, and in many cases it’s not actually a small difference - for first year managers in tax and audit based on 2024 and 2025 YTD data, that gap can actually be over $10,000.

And the trend seems to be going in the wrong direction - that gap is showing signs of widening.

And it’s not just in US tax and audit roles either, this is also happening in the Canadian market, as well as in different service lines.

How Can We Fix This?

I actually think Big 4 Transparency can play a part in fixing this broken incentive system. For firms, regardless of what your resource of choice is for salary benchmarking (let’s talk if you’re looking for help with this), you should be applying market rates not only to salaries for external hires, but for internal promotions as well. And if you’re having trouble hiring externally, it may not only be a sign that you need to make an exception to get an employee through the door, it is very likely a sign that you need to apply that market feedback to internal roles as well to avoid unnecessary employee churn.

For accountants, this involves advocating for yourself and having a conversation with someone at your firm when you find yourself falling behind market rates for compensation. This does not need to be accusatory or a disagreement, but rather just a discussion about where market compensation is at. For accountants considering leaving over compensation, I think it’s always best to have an open conversation about this rather than presenting a competing offer and hoping for a counter-offer because of the damage that can cause to internal relationships.

I've been helping a few firms source candidates through the Big 4 Transparency Talent Pool lately and noticed something - a lot of firms do not have a strong process in place to quickly evaluate candidates and shorten the time it takes to make a decision on the hiring process.

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