What is Pay Transparency? Pros & Cons of Salary Transparency
Salary transparency can be a controversial topic. Let's weigh both sides of the conversation!
by Nikhil Bendre - July 1st, 2022
As the workforce continues to be revolutionized, priorities are shifting for both existing employees and potential candidates. With the younger generation entering the workforce, organizational transparency is now a prerequisite for many people before they even consider joining a company.
With inequality issues reaching astounding levels and inflation affecting us all, the topic of pay transparency is incredibly buzzy now – specifically its morality and implications. There are obviously pros and cons to sharing salary details, often depending on whether you’re a part of upper management or not. Let’s unpack those and take a look at some thoughts on this topic from professionals in the HR community.
What is Pay Transparency?
Pay inconsistencies (like the gender wage gap) are well-documented. For example, research from Payscale finds that women earn 99 cents for every $1 that men earn – even when performing the same job at the same location and other shared factors. This gap is even more pronounced when you compare women of color’s earnings to men's.
Over time, this seemingly small gap grows and becomes more significant and pronounced – consider all of the bonuses and raises that are based on a percentage of your salary, for example. Two people who start off with a $5,000 or $10,000 salary differential will have compounded a much more significant gap a decade later. And that doesn’t even include the fact that women are more likely to take time away from work for maternity leave or other caregiving responsibilities – which can last well over a year, equating to an even deeper loss in earnings for women specifically.
Pay transparency is designed to bridge that gap. It’s also designed to avoid pay differences that we see on the basis of race and ethnicity. By making it illegal to consider salary history, for example, people of color will no longer experience a lifetime of reduced offers solely because they started their career in a role that paid 20% under the market rate.
Compensation is a critical component that impacts how valued employees feel; earning less than their peers is certain to cause demotivation and reduce organizational commitment. Ultimately, pay transparency is an ethical approach that promotes greater diversity. Working in an equitable and diverse environment will promote performance, productivity, cohesion, and commitment – all things that businesses need more now than ever.
Benefits of Pay Transparency
In addition to promoting an equitable and diverse environment, offering salary transparency has a number of other benefits.
Preventing Wage Gaps and Discrepancies
Unfortunately, it’s not uncommon to find that people doing the same job yielding the same results can be receiving drastically different compensation. Sometimes that’s based on age and/or experience level, and other times it’s absolutely undefendable, such as when pay gaps are based on gender.
Encouraging and implementing salary transparency – starting with posting set rates in job descriptions – eliminates any concerns of unethical pay practices coming to light. If your organization is looking to start along this path but knows that there are some concerning inequalities to address, this is your chance to rectify and prevent those instances from taking place in the future.
Echo Wang, Founder of Yoga Kawa, actively encourages making wage gaps known and addressing them head-on:
Making pay disparities known to the public can stimulate discussions about pay equity and highlight specific instances of wage inequality. It hasn't always been that way, but after I talked to my staff about it, they were eager to learn their salaries. It did raise questions about why some people made more money than others, and I was happy to respond that the disparity had more to do with experience, skills, etc. than anything else, with more seasoned yogis earning more than their less experienced counterparts. Transparency is not a problem for me personally.
Furthermore, here’s what Linda Shaffer, Chief People Operations Officer at Checkr, had to contribute:
In organizations who want to battle inequality, salary transparency may be the best way to do it. It would help close the gender and race pay gaps, and give employees a sense of how their compensation compares to others in their organization. SHRM's 2017 Employee Job Satisfaction and Engagement report found that 43 percent of employees said that salary information influences whether they stay with their current employer.
Simplification of Salary Negotiation
If the base rate for a role is made clear from the start of the interview process, hiring managers and HR can save a lot of time by cutting out the back-and-forth associated with salary negotiation. A simple, “This rate is what it is, and that’s what everyone else in this role within our company gets” is really all it takes!
Keep in mind that this may deter potential talent if they have different expectations in their job search, but you can always work with them to see if you can meet in the middle by offering supplemental benefits. On the other hand, however, you may consider a strategy of offering a base salary that is quite competitive to hopefully attract top talent.
Phillip Akhzar, CEO of Arka, has implemented this strategy:
We encourage salary transparency because we want to attract the best employees. If you offer the best, you will be met by the best, plain and simple. We want to thrive in a competitive market and one way to do that is through salary transparency. Our employees agree that salary transparency is crucial to any company and transparency in general from any business is always appreciated.
More Trust From Employees
Employees are undoubtedly more willing to show up for a company that they know isn’t exploiting them. The phrase “respect is a two-way street” needs to be emphasized within professional relationships. Give your team the respect of equal pay and moral hiring practices, and they’re sure to repay you with trust, appreciation, and quality results!
Dan Barrett, CEO of Social Vantage, carries on this sentiment:
I do encourage salary transparency within my organization. Trust is the cornerstone of every successful business. To build trust, I know I need to be forthcoming about every issue that concerns my employees, especially those to do with compensation. For this reason, our entire pay structure for each role within the organization is readily accessible to all of our employees.
On top of this, we've provided supporting documentation to explain how the compensation for each role was arrived at. We also have a straightforward and transparent mechanism for addressing complaints about compensation, which further heightens our employees' trust in us.
Moreover, we've clearly outlined the criteria for promotions, raises, and bonuses to ensure everyone has equal opportunity and access to these processes. I highly credit our transparency about salary matters to our high employee retention rate, which is well above current industry standards.
Disadvantages of Pay Transparency
Are there any drawbacks to salary transparency? If it’s not executed properly, there certainly can be. Imagine, for example, two employees performing the same role for the same length of time, but one brings an additional 15 years of experience to the table that strengthens their performance in the role. Understandably, that employee may receive a higher salary. But if this isn’t communicated directly, it can (also understandably) breed anger, confusion, or resentment for the employee earning less.
Ultimately, there are a number of factors that go into determining someone’s salary – and many times, employees may negotiate a lower or higher salary in exchange for adjusting some of the other compensation components (like PTO or flex time) in a way that works for them. But these other factors may not be visible or apparent if we’re solely posting names and salaries on a spreadsheet. In other words: salary doesn’t always tell the whole story, and employers should be careful to discuss these elements when rolling out pay transparency initiatives.
Initial Aftermath of Implementation
If your employees’ salaries are currently all over the place, this may get a bit messy. Be ready to give your team some rightfully deserved answers and justifications for compensation differences. If your responses and reasonings are valid, this preliminary phase will pass. However, if there isn’t a good reason as to why someone’s getting paid less than the next person, it’s time to do an audit and overhaul of your hiring practices, and question their ethicality.
In hopes of avoiding a potentially tense situation, Devin Schumacher, Founder of SERP, takes a more neutral approach:
We don't condone or prohibit salary transparency from a leadership standpoint. If the employees wish to engage in that discussion among themselves, we do not get in the way. Conversely, we also do not promote it among the team. From a leadership standpoint, it can be a lose/lose situation.
On one hand, if we promote it, that could open up some animosity among team members and have some unintended consequences. To not promote it can also be perceived as a vote against it. We believe an employee's salary is their personal information that they can choose to share or not share.
Pay transparency has worked at some places, and it has caused a lot of headaches at others. It really depends on the culture of the company, the size and roles of the workforce, and a host of factors.
Meanwhile, Zachary Weiner, CEO and founder of Finance Hire, discourages salary transparency due to potential conflict:
One of the reasons we do not provide salary transparency is because it can cause resentment and hostility between employees. We provide salaries based on many variables such as employee experience, skills, certification, and previous salary, and even give bonuses based on employee performance.
If two people are doing the same job, technically, they’d expect to get paid the same. However, the skills can differ, the qualifications, and even the degree can result in a pay difference. We choose to keep these things confidential to prevent demotivating employees but also add development skills for them to work on to achieve a pay raise.
Administrative Action May be Necessary
Now that the policy is in place, it’s time to adhere to it. When assessing the workings of your payroll, HR and upper management will have to agree on rates for each position, enforce them with current employees, and keep them solid for any new hires afterward. When executing this, remember that no one appreciates a pay cut. Consider standardizing the salary of the highest-paid individual in each position! Something else you can do is standardize pay raises based on experience and/or seniority within the company. That way, seasoned vets aren’t necessarily making the same amount as entry-level new hires, but transparency and trust are still maintained.
Concerns for Individual Performance-Based Pay
Following performance reviews, bonuses can still be completely based on individual achievements and metrics. Clearly communicate to your employee that salary transparency and standardization mainly applies to base pay rates. Obviously, make sure you’re being fair and just in how bonuses are allocated as well so that if and when those are discussed among employees, you don’t run into any issues.
Kevin Huang, Options Trader at Ambient Home US, reflects this idea by opening up his company’s compensation structure while still respecting the privacy of individual employees:
I do not encourage full salary transparency within my organization because some employees are very private or sensitive about it, and we respect that. However, I do not prohibit team members from speaking with each other about it; all employees have access to the entire compensation structure.
We encourage open communications horizontally and vertically in our organization, and our compensation plan is clear, fair, and transparent. If employees do discuss salaries among themselves, we do not feel uncomfortable. We know our compensation structure is equitable and followed rigorously. Besides, our employees are free and welcome to take up any salary matter with management.
The key with this topic, whether you encourage salary transparency within your organization or not, is to make sure your business practices are always ethical and justifiable. Employees are legally allowed to discuss salaries should they choose to do so, so it’s really in your own best interest to pay your team fairly from the start. Hopefully, you’ve found these perspectives helpful in your analysis of salary transparency! However you choose to proceed, remember to treat your employees with respect and integrity - that’s how to secure the success and longevity of your business.
TL;DR - Can We Tell Employees Not To Talk About Their Pay With Each Other?
Generally not. The National Labor Relations Act (NLRA) grants all non-supervisory employees (not just those in unions) the right to organize and engage in “concerted activity” for the purpose of mutual aid or protection. Concerted means “in concert,” meaning more than one employee is involved. Activities for mutual aid and protection could include discussions about wages, benefits, treatment from managers, safety issues, and just about anything else that two or more employees might have a stake in. As a result, the protections provided by the NLRA are broad. Here are a few examples of protected activity:
Employees discussing their pay, whether via email, break room chat, or social media
Individual employees complaining about wages or employment conditions if they reflect general workforce discontent or are attempting to get the support of coworkers to correct a problem
Employees circulating a petition asking for better hours
Employees refusing to work in unsafe conditions
Employees joining with coworkers to talk directly to the employer, a government agency, or the media about problems in the workplace
While the NLRA doesn’t protect supervisory employees in this way, employers should be careful about whom they classify as supervisory. Only those who have real authority will be exempt from the NLRA’s protections — an assistant manager or shift manager, for example, would in many cases not qualify as supervisory.
Which States Require Pay Transparency?
A number of states have enacted pay equity or pay transparency laws that protect all employees’ ability to discuss their wages — even those in the C-suite. Under these laws, you wouldn’t be able to enforce wage confidentiality policies, even for supervisors.
Eight states currently have pay transparency laws enacted:
California
Colorado
Connecticut
Maryland
New York
Nevada
Rhode Island
Washington
In addition to these states, some cities, such as Cincinnati, OH, and Jersey City, NJ, have their own pay transparency laws on the books. Many other states are considering adding salary transparency laws in the coming years, so this list is likely to grow quickly.
How to Successfully Implement Pay Transparency
Gather Buy-In
It often isn’t just up to HR, so first, try talking through the feasibility and logistics for creating it with other members of the leadership team. Collectively, you can decide what’s the best approach for the size and scope of your organization. While it may work well for some companies to list direct salary information, for others a range is ideal, and for extremely large corporations an entirely different approach may be best. But before doing this, revisit your pay model to make sure it’s fair in the first place, and identify any areas of interest that may require further inspection.
Make It Up Front
Pay transparency starts with recruitment. Many of us are familiar with government job listings that include salary bands or ranges. One of the benefits of this approach is that it allows candidates to opt out if the range isn’t suitable for them, and it allows candidates who may otherwise under-sell their desired compensation (whether that’s because their current offer is under-market or because they’re from a historically marginalized identity group) to receive a more equitable pay band.
It can also help potential candidates determine if they can even afford to leave their current role for the new one, and it can help ensure that what’s listed matches what current employees are earning. One caveat is that for a particularly wide range, it’s often best to describe what skills or talents equate to the highest end of the range.
Conduct Audits
Make it an annual practice to conduct a comprehensive review of policies, procedures, hiring and compensation data, and hold discussions with managers and team leads about potential wage gaps. You can also use this to go beyond pay transparency to discuss and work on elements like career transparency and opportunities for growth, development, promotion, and advancement – as determining a starting salary is really only the first in ensuring long-term pay equity.
HR technology via a modern HRIS can help with performance management by helping you streamline and regulate performance reviews, feedback, salary discussions, and more so that your employees are kept in the loop on where they stand and what their milestones are. Additionally, employees can provide feedback or anonymous feedback to help you gauge their happiness and understand if you are compensating fairly.
Updated 8/25/2023
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