Companies are increasingly adopting pay transparency practices to address gender pay gaps and increase employee engagement to build trust. Pay transparency is a policy in which companies voluntarily give compensation-related information to all employees.
You might be asking, “why is pay transparency so important right now?”
- Inc. has called 2022 “The Year of Pay Transparency.”
- LinkedIn lists Pay Transparency among it’s “Ideas that will change the world in 2022.”
- This Forbes article features a state-by-state listing of pay transparency rules. Requirements vary by type and form of disclosure as well as the types of jobs, but the trend is clear.
Before your next employee salary reviews or before you plan to confront your boss about compensation, it’s important to clarify the pay transparency rules for your state with your HR team. It is also important to note that pay transparency does not always mean pay equity. In fact, most pay transparency rules don’t compel employers to explain pay variances.
However, the absence of articulate answers on pay disparity questions, especially in the context of historically egregious gender and racial pay variances, will be a problem in the years ahead. Our advice to employers is to get out in front of this process. That means:
- Acknowledge that pay transparency is coming. Be upfront with employees with the facts.
- Pay transparency can be a positive when it comes to attracting applicants because pay transparency removes a common source of mistrust. In fact, many firms (Netflix and Whole Foods as examples) offer employees access to co-worker’s salaries.
- Get good HR/legal advice on your state’s regulations. Non-pay compensation like commissions, tips, performance bonuses, incentive pay, sign-on bonuses, allowances and non-cash rewards (sales trips) can make rule making complicated
- Structure job definitions and salary ranges that make sense to employees. Too broad of a job description and too big of a pay range and the information is useless. Too narrow of a job description and too small of a range and compliance will break down as managers make exceptions.
- Job ads and job postings may require overt pay disclosure.
- Applicant interview questions regarding salary history are now banned in many states.
I personally advocate for a high level of pay transparency, but not everyone agrees with me. These BBC and WSJ articles describe some of the downsides of pay transparency:
- Pay transparency can lead to poor operating results. This WSJ story tells an interesting story from a research paper by James Flynn. Flynn analyzed player pay and performance data from the NHL. No surprise, the NHL owners paid for goal production. Score more, get paid more. With pay disclosure, defensemen started to shoot and score more. They got paid more, but their teams had less success because offense was emphasized over defense. The role of the defenseman was twisted by the compensation system. The lesson here is simple, if you run a finance team or a plant floor, you better make sure your pay related metrics align with team success, not individual success.
- Pay differentials between jobs are often very subtle; ‘in the eye of the beholder’. Since the bosses set the pay ranges, their reasons for variations might cause more friction than good will.
- Most people love to learn what everyone else is making, but those same people often don’t like it when their own compensation is revealed. This is where salary ranges really help.
- Compensation variances can sometime be related to confidential issues that, by law, can’t be shared. The BBC article argues for the company to find the sweet spot between transparency and privacy.
The bottom line on pay transparency is twofold:
- The trend to transparency is coming. Don’t ignore it; get in front of it.
- How you design your compensation and job structures really does matter. It’s not just a HR staff job. Operating managers, finance, and legal all need to be in the room with HR leaders when the final decisions are being made.
If you want to talk about sourcing a compensation professional, either full-time or contract, email our CEO, Lana Johnson. I know she’ll have some ideas to share!