There are almost no situations where pillow shading is appropriate. Even front lighting doesn't create pillow shading on most objects.

Instead of pillow-shading the character, un-pillow-shade the monster. Both characters have banding too (bands of different-coloured pixels lining up, making the image look blocky).

I think you have appropriate levels of contrast and brightness. The playable parts stand out well, but the background is still visible, even though I have a fairly dark screen. Since there isn't much going on in the background, it doesn't need to be more visible than this. In-game, you should also provide gamma settings for users whose monitors render the background too dark, or too bright. This is a common thing to do in dark-looking games since there's no one level of brightness that works for everyone while still looking dark.

The character doesn't fit with the monster because the monster and locations have a very strong red cast, while the character appears to be lit by a neutral light. Which you change depends on what you're trying to do with the game, the atmosphere and light you want to depict. It may be appropriate to change the colours on the character, or on the monster, or both.

It looks odd that the character is standing overlapping the rocks, when the monster doesn't. Did you mis-position the character a pixel too low?