In your organization, do two coworkers sitting next to each other at the office know the salary of the other? Do remote workers doing the same job in different states know how much the others earn? Can women knowledgeably compare their salaries to those of their male colleagues? Do team members know how much their boss’s salary exceeds theirs or by what percentage company executives earn more? Do you encourage workers to discuss their salaries? Until recently, in most situations, the answer to all these questions would have been a resounding no.
Restricting access to pay information gives businesses an edge when negotiating with workers, enabling them to take advantage of situations when new hires don’t know the going rate for their skills or when the policy is to offer compensation based on salary histories. Simultaneously, such restrictions can engender a sense of resentment and mistrust among workers, which can, over time, lower morale, reduce effectiveness, and cause workers to abandon positions that are not always easy to refill.
That’s why the topic of pay transparency and pay transparency practices has become more common in recent years. Employees are demanding it, and companies are responding with an understanding that the transition may be challenging but worth it in the long run. Companies that are more transparent about pay build trust, enhance their reputations, and gain the benefits of a more dedicated team.
In the sections below, we explore pay transparency, including what it is, why it is becoming more common, the advantages and disadvantages for companies, how the gender pay gap is impacted by it, and what the future looks like for this trend.
What Is Pay Transparency?
According to the Harvard Business Review, “Pay transparency refers to a pay communications policy in which a company voluntarily provides pay-related information to employees.” That information could include details about the payment process or pay rates. Pay transparency may also refer to policies that support employees sharing specifics about their own pay. Other pay transparency policies include requiring companies to post pay ranges in job postings or disallowing interviewers from asking about interviewees’ pay histories.
All these policies are contrary to trends in which workers are reluctant to discuss their pay with colleagues (or even forbidden to do so by their employers), kept in the dark about payment processes, forced to accept lowball salary offers, or paid based on previous salaries that may have been unfairly low.
Benefits of Pay Transparency
Pay transparency is being encouraged by employees, job seekers, visionary board members, pay equality advocates, and managers and executives who see the benefits of this approach. Some of these benefits are listed here.
Increased Trust and Engagement
Studies show that employees are most satisfied in environments with high transparency — that is, openness between managers and employees. Pay transparency is just one aspect of transparency in general, and an important one. Such factors can lead to greater loyalty, which can increase morale, lower hiring costs, maintain institutional knowledge, and boost the company’s reputation.
Better Candidates
According to the Center for Association Leadership (ASAE), “Being open and honest about your organization’s culture, priorities, financial picture, and salary ranges in your job posting and during the interview process allows candidates to self-select more efficiently. You’ll find that your recruitment efforts will attract people who are truly invested in your mission and organization and more likely to be successful within your culture once they are hired.”
Decreased Discrimination
Pay transparency is part of a larger move to achieve pay equity, which means paying every employee fairly, regardless of their gender, race, sexual orientation, familial status, physical ability, and other personal characteristics. See the Pay Transparency and the Gender Pay Gap section below for more on how these topics intersect.
Avoidance of Legal Consequences
As cities, states, countries, and industries continue to establish laws and regulations regarding pay transparency, companies will have little choice but to comply. The sooner a business begins the process of moving toward greater pay transparency, the better off it will be as these laws and regulations become more commonplace.
Reputational Boost
Companies that value pay transparency are seen as being good corporate citizens, something that is valued more now than in the past, especially by younger generations. In an age of online everything, reputation carries more weight, and even companies that have enjoyed a good reputation for years or even decades can quickly fall into irrelevance if they are seen to ignore the needs of employees. On the other hand, those that adopt progressive policies are seen as better cultural stewards and are likely to attract better employees.
Chance to Update Pay Policies
For companies just starting to be more transparent with pay information, some uncomfortable conversations could ensue. For example, a team member may find out that their colleague with the same duties and similar education and experience has a considerably higher salary for the sole reason that they negotiated for it when they were hired. The team member may become resentful, not understanding that asking for more than the stated salary had been an option.
In this situation, the company must address two things: the specific situation with this team member and the policies that led to the situation in the first place. The former may involve perhaps raising their salary to match that of their colleague. The latter may be more complicated, perhaps involving the creation of a strictly defined salary range for each position, based on specific criteria for education, experience, and knowledge.
Potential Pitfalls of Pay Transparency
Despite all the benefits of pay transparency, and the problems with not supporting it, companies find that it comes with some pitfalls, including those listed here.
- Managers must defend pay decisions they did not make. When employees discover that their pay is unfairly lower than that of some of their peers, they go first to their immediate supervisor, who may not have been involved in the pay decision. This scenario puts these supervisors in a tricky position, having to decide whether to side with the company or the employee. They may also need to take time away from their regular duties to address salary concerns and raise requests.
- Average salaries drop. There are three ways to make pay among workers with similar duties more equal (a practice known as pay compression): raise lower salaries, drop higher ones, or a combination of the two. Employees whose salaries are lowered may complain, become disgruntled, perform their work less effectively, or even quit. All these actions cost companies money even though they save by lowering some salaries.
- Employees may demand other compensation. A paycheck is just one way for employers to compensate employees. Others methods include benefits like health care insurance, career development such as training, or other perks like transportation reimbursement. As companies feel pressure to make up for decreased pay amounts, they may find themselves having to improve or build benefit packages, a process that can be costly in terms of time, money, and resources.
Companies can prevent these pitfalls by ensuring employees understand the objectives they must achieve to get a particular compensation package. Using this method relieves managers of the burden of having to subjectively decide “how good a job” employees are doing.
Pay Transparency and the Gender Pay Gap
According to many sources, women are paid 82 cents for every dollar earned by men. While this number represents progress, the goal has always been pay parity. And, unfortunately, setbacks are possible. The following video touches on the gender pay gap within the topic of pay transparency.
The pay gap increased during the COVID-19 pandemic as many women were forced to drop out of the workforce or switch to lower-paying part-time work to care for children at home. As a result, the World Economic Forum expects it to take 100 more years than before the pandemic to close the gender pay gap.
One possible way to speed up this process is to institute pay transparency on a more widespread basis. TechRepublic states, “If workers are in the dark about what their coworkers earn, it means they lack information that could be necessary to know their own value on the job, which is essential in negotiating better salaries and combatting pay discrimination.”
Yet, in a recent study conducted by Glassdoor, 63% of employees said they want their employer to be transparent about pay information, but only 19% said their company does so. In fact, according to the survey, 28% of employees stated their company discourages discussing salary with coworkers.
Pay transparency on its own is not a panacea that will close the gender pay gap, but it can help. For example, one of the ways pay transparency can help close the gender pay gap is to reveal unfair practices in determining salary and addressing them. Say that salary at Company Y is based partly on “experience,” with beginner, intermediate, and advanced levels.
But what if years of experience determine who is at which level and more men have been at the company longer? This sort of situation raises questions about why men have greater longevity and poses new issues to be addressed, such as the time gap that occurs when women leave the workforce for several months or years to look after children.
Such matters are societal in nature and present just a glimpse into the complexity of the gender pay gap issue. However, that complexity shouldn’t be a barrier to starting down the path to greater pay equity and more pay transparency.
What to Look for in 2023 and Beyond
More pay transparency legislation may be on the horizon. According to the International Labour Organization, some countries already have laws reflecting the following mandates.
- Allowing employees to request and access information on pay levels in their enterprise
- Requiring employers to disclose individual pay information to employees
- Requiring employers to disclose an advertised position’s salary to prospective employees, either during the interview process or in job advertisements
- Prohibiting employers from requesting an employee’s or prospective employee’s salary history
- Creating an independent body to provide employers with equal pay certification if they meet certain requirements around gender-neutral pay
- Obliging enterprises with a certain threshold level of employees (for example, 50) to publish information on gender and pay within their organization
- Carrying out regular audits on gender and pay in enterprises with a minimum threshold level of employees
- Undertaking regular pay assessments in enterprises with the involvement of employee representatives
- Promoting the discussion of equal pay and pay audits during collective bargaining
In the U.S., some jurisdictions have enacted pay transparency laws. The state of Washington requires employers with 15 or more workers to post salary ranges beginning in 2023. A similar law in Rhode Island will also take effect next year. New York City recently passed a law requiring companies to publicize salaries for open jobs. A proposed New York state bill would prohibit companies from asking interviewees about their salary history.
In Colorado, the Equal Pay for Equal Work Act went into effect in 2021 and applies to any entity that employs workers within the state. It requires employers to track job descriptions and wage rates for every employee throughout the duration of their employment and for two years afterward. It prohibits employers from paying one employee a higher rate than another for similar work, asking about job applicants’ salary history, and disallowing employees from discussing salary with each other.
Further, companies employing workers in Colorado must post the compensation range and benefits in job postings, including for remote positions. They must also announce promotional opportunities to employees before making promotion decisions. Companies that violate these rules can be charged between $500 and $10,000 for each violation.
Some companies are disclosing pay range information without being required to do so by law. Others are changing their payment policies to make them more consistent and fairer. Some of them are responding to workforces and unions that — in an increasingly influential position due to low unemployment — are pressuring them to do so. Boards of directors and shareholders are also exerting pressure as they see the benefits of and greater demand for transparency.
According to CNBC, companies can expect to struggle in their efforts to become more transparent about pay and other matters. HR teams must make changes to policies, communication, and paperwork to accommodate new laws and regulations. Even something as seemingly simple as listing salary ranges on job postings can be cumbersome if professionals have not had to develop these numbers before. Such challenges are added to others, such as finding ways to hire in a tight labor market and dealing with higher service costs due to inflation.
The Road to Pay Transparency
Given the complexities of salary assignment, pay transparency is not something that can be achieved overnight, especially for organizations that buy into a more secretive approach. The first thing to do is determine the disparity between where you are now and where you would like to be. One method is to survey employees to find out their ideals in terms of what they would like the company policies to look like. For example, workers might say they would like a more objective means for determining compensation and the ability to know anyone’s salary.
The next step is to take this information and think about how to get from point A to point B. Address one issue at a time. For instance, start by creating objective compensation matrices for one department. Move all team members in that department to the new standard and use it during the hiring process. After six months, evaluate the progress and see what needs to be adjusted. Use the well-tuned process in another department, and so on.
Another place to start might be laws and regulations that impact your region or industry. Those policies are a good motivator and can steer you in the right direction.
In the process of making the conversion, communicate to employees often about what’s changing and why. Identify a person or group to receive and respond to employee questions and concerns. Give workers both the big picture and the details about what is happening, how long it is expected to take, how it will likely impact them, and so on.
For companies that are reluctant to move toward pay transparency, keep in mind that current team members and potential employees already have access to a good amount of pay information — as well as more general feedback on how workers of each company are treated — on various websites. Over time, the differences between you and your competitors will become more apparent, enabling them to snap up the better talent. It’s better to begin to align with pay transparency trends now than to wait until it’s too late.
