Pay transparency is one of the more popular topics in compensation trends right now. Pay transparency legislation has been passed or is under consideration in over a dozen locations across the United States. On paper, the idea of pay transparency seems great. Job seekers want to know the compensation range of a job when they apply. Organizations want to be competitive about compensation to attract top-tier talent. Everyone wins, right?
Maybe.
As with any other trend, it’s important to consider the pros and cons of pay transparency to best understand how to execute pay transparency effectively.
What is pay transparency?
Pay transparency is when organizations are forthcoming about the compensation for a job — what it pays, how that pay is determined, where an individual falls within the pay range, and why. We’ve said before that pay transparency is a spectrum, with total secrecy on one end and complete public transparency on the other. New legislation is forcing some organizations down the spectrum by requiring that they publish pay ranges in job ads, though the nuances for these laws vary by location.
No matter where an organization falls on the spectrum, there are pros and cons to the new levels of pay transparency now required in some places. The key indicator of how well an organization will execute pay transparency depends on their compensation strategy and compensation maturity. Organizations prefer to have a compensation strategy and pay structures in place before they can be transparent. If they don’t, they are much more likely to fumble pay transparency by exposing pay inequity or inconsistency in how pay is determined.
The pros of pay transparency
Pay transparency can help reduce turnover
Compensation is a critical aspect of employee retention and engagement. Unfortunately, most organizations do a poor job at pay communications, meaning that even when employees are paid well, they may not know it, leading to turnover.
Payscale’s research has found that even when employees are paid above market, employees tend to believe they are paid below market. We also found that when employees don’t feel they are fairly paid, they are more likely to leave. Higher pay transparency also decreases the likelihood that employees will seek a new job, painting a clear picture of what organizations can do to reduce turnover and increase retention.
Perception matters. According to our research, 57 percent of employees who were paid at market believed they were below market. Of employees who were paid above market, 42 percent believed they were below market. For people who were paid below market, 72 percent knew or suspected they were below market. All employees who are paid below market or perceive they are paid below market are at risk of turnover.
These high numbers are concerning because they indicate that pay communications are woefully underemphasized in many businesses. They also indicate the risk that organizations are taking by not investing more in their pay strategies and pay communications so that valued employees know they are valued.
Pay transparency can help close wage gaps
While it isn’t a solution on its own, pay transparency can help move the needle regarding race and gender wage gaps. Transparency brings accountability. Mandated pay transparency means organizations can no longer cloak compensation in secrecy, which can lead to better outcomes for employees who traditionally face discrimination based on gender and/or race.
According to our research, the controlled wage gap (the gap between what men and women earn for the same job) disappears when analyzed against pay transparency. We found that women who say pay is transparent at their organization earn between $1 and $1.01 on average for every $1 a man earns. This is the pay equality we want to see, and it isn’t just evident in our own research. For instance, Denmark closed the pay gap by 13 percent after the country passed pay transparency legislation in 2006.
Pay transparency increases the candidate pool
When salary ranges are included in job listings, organizations report seeing increases in applicants. When Buffer implemented pay transparency, their applications more than doubled. According to a study in 2020, jobs that publish salary ranges see 43 percent more applicants than jobs that do not.
The cons of pay transparency
Before we get into the potential negative aspects of pay transparency, it’s important to understand that if your organization is seeing these negatives, it could be a sign your compensation strategy and pay structures are immature and should be refined. When a compensation strategy is done well, pay transparency is much easier to execute. A poor approach to pay transparency can result in the following:
Performance issues
If employees know they are being paid less than others in the same role (with all other factors like experience and skills being the same), their performance can suffer. What motivation do they have to perform when they know they earn less than their counterparts for no discernable reason? Similarly, if employees see published salary ranges for their roles at other organizations and those salaries are much higher, they might be motivated to jump ship.
How to avoid this: Ensure your compensation strategy uses current market data in order to remain competitive and that you regularly review whether or not pay is keeping up with the market. Also, continually revisit your compensation strategy rather than approaching it as one-and-done.
Employee resentment
Transparency without a clear compensation strategy is tricky. Resentment builds when employees don’t understand how compensation is determined. If you are transparent about salaries but not about how you calculate compensation, pay differences can be taken out of context, which leads to disgruntlement.
It’s difficult for employees to understand nuances within levels and job families, especially because compensation is an emotional topic. To really engage employees, you need to help them understand how salaries are determined. This is why pay transparency needs to go beyond the surface level of simply publishing numbers. It must also include sharing how your organization came to those numbers.
How to avoid this: Does your organization have a pay communication strategy? If not, it’s time to invest in creating one. Learn more here.
Expose pay compression or pay inequity
Compliance with pay transparency legislation can reveal pay compression or pay inequity problems in the organization. Current employees may look at the published ranges and question their pay rates. Research from Harvard Business Review indicates that supervisors assume a self-protective approach when this happens and “take steps to reduce differences in compensation within the same job level.” As a result, pay can become compressed between tenured and less tenured employees.
Another piece of this is if organizations have to offer higher salaries to attract new talent, salaries of tenured employees stagnate to compensate for rising costs. This leads to pay compression and can cause low morale and higher turnover.
How to avoid this: Measure pay gaps and review pay more frequently and proactively increase pay for employees with every hire, promotion, or market study that reveals a pay gap.
Salary range deflation
One thing we’ve seen since more pay transparency legislation has passed is that some organizations post broad salary ranges (such as a $100,000 difference from bottom to top), or worse, intentionally post lower salary ranges on job listings. “There are companies intentionally posting salary ranges below their actual salary bands for job seekers,” Jamie Coakley, Senior Vice President of People at Electric, told the LA Times. “It’s a risky choice that is not in good faith of what the salary will be, which is the entire purpose of the law.”
Why would an organization do this? It‘s usually an attempt to limit the demands of candidates seeking top dollar for a role while also preventing current employees from learning they are underpaid. By not posting an accurate range in a job listing, organizations can say they are complying with pay transparency laws while avoiding true transparency.
This strategy will likely backfire on these organizations. Let’s say you hire a candidate and you’ve told them the salary range is $50,000–$64,000. They start work and they discover the actual high end of the range is $70,000–$80,000. They will feel misled and the trust they had will erode. It could also impact performance, as we discussed above.
How to avoid this: Don’t lie to job candidates. If you are confident in your compensation strategy, you shouldn’t have to trick anyone.
As our list shows, the pros of pay transparency (when paired with a solid, comprehensive compensation strategy) far outweigh the cons.
