The recruitment phenomenon, that is, the reduced dynamic range between threshold and uncomfortable level, is attributed to the loss of instantaneous dynamic compression on the basilar membrane. Despite this, hearing aids commonly use slow-acting dynamic compression for its compensation, because this was found to be the most successful strategy in terms of speech quality and intelligibility rehabilitation. Former attempts to use fast-acting compression gave ambiguous results, raising the question as to whether auditory-based recruitment compensation by instantaneous compression is in principle applicable in hearing aids. This study thus investigates instantaneous multiband dynamic compression based on an auditory filterbank. Instantaneous envelope compression is performed in each frequency band of a gammatone filterbank, which provides a combination of time and frequency resolution comparable to the normal healthy cochlea. The gain characteristics used for dynamic compression are deduced from categorical loudness scaling. In speech intelligibility tests, the instantaneous dynamic compression scheme was compared against a linear amplification scheme, which used the same filterbank for frequency analysis, but employed constant gain factors that restored the sound level for medium perceived loudness in each frequency band. In subjective comparisons, five of nine subjects preferred the linear amplification scheme and would not accept the instantaneous dynamic compression in hearing aids. Four of nine subjects did not perceive any quality differences. A sentence intelligibility test in noise (Oldenburg sentence test) showed little to no negative effects of the instantaneous dynamic compression, compared to linear amplification. A word intelligibility test in quiet (one-syllable rhyme test) showed that the subjects benefit from the larger amplification at low levels provided by instantaneous dynamic compression. Further analysis showed that the increase in intelligibility resulting from a gain provided by instantaneous compression is as high as from a gain provided by linear amplification. No negative effects of the distortions introduced by the instantaneous compression scheme in terms of speech recognition are observed.