Pay transparency has some major benefits for both employees and employers. Although there are many companies taking actions today to move their organizations towards higher pay transparency, the practice may not be for everyone.
Transparency is about creating an atmosphere of higher productivity and building trust among employees, as well as working towards pay equity across the organization. Researchers say transparency is important because keeping salaries secret reinforces discrimination. According to a recent report from the Bureau of Labor Statistics for the second quarter 2020, the pay gap is wider for Blacks (79.2%) and Hispanics (77.2%) versus Whites. Additionally, women had median weekly earnings of 84.0% of men.
Companies should be mindful that many approaches to pay transparency exist. Some may choose to disclose pay range by title and experience level, the percentage of employees at different levels, and how bonuses are calculated. Other companies might opt to disclose earnings by name. Regardless of the approach, the key to making pay transparency work is to clearly identify how pay is determined and have verified salary market data to back up your policies.
Just like other business decisions at your company, the level of pay transparency will be determined by the pros and cons of your unique situation.
What are the benefits of pay transparency?
Transparency builds trust
When employees feel valued, and aren’t spending time thinking about whether they might be underpaid, they’re more likely to be more fully engaged in their work. Boosting morale through performance recognition can have a lasting effect on your workforce.
Employees will be happier and more productive
When employees are able to compare, they realize they’re being paid market rate and spend a lot less time being dissatisfied. Employees who know colleagues’ pay perform better than those who do not, according to a study published in the Academy of Management Journal1.
Companies can close pay gaps
Businesses undermine discrimination with transparent pay policies, which promote equal opportunity. By making wages visible to employees, businesses cannot hide structural inequalities that result from gender discrimination.
Companies can control the narrative
Companies can benefit by getting ahead of the narrative and position themselves in a positive way. Companies are facing increasing pressure to adopt salary transparency as websites like Glassdoor make it easier for employees to share salary information publicly with little risk of social repercussions or professional censure.
What are the downsides to pay transparency?
Companies may hire or retain fewer people
Companies may be reluctant to make their pay transparent because they can no longer hire talented staffers at lower rates. If it costs more for a company to retain skilled labor, they may not be able to staff certain jobs properly, hence overworking some staff.
Employees tension with transparency
While some have argued pay transparency can increase employee performance, others say full transparency could cause tension between employees. When you are able to see everyone’s performance, some employees might be demotivated because they feel jealous or they are frustrated because they are not capable of achieving what other employees are able to achieve.
Pay differences out of context
Many companies base pay on subjective determinations. Not clearly communicating the reasons why certain employees are paid more or less may exacerbate employee frustration.
There is mounting anecdotal evidence from companies in the private sector touting the positive effects of pay transparency. However, at government agencies which are required to publicly release pay information, in 2016 women still only made 81.4% of men, but it was better than the private sector ratio of 79.3%2.
Companies that are truly committed to retaining and supporting their best employees are going to move in the direction of more transparency. Maybe not full transparency, but the standard best practice is going to shift from where it is today.
2 Institute for Women’s Policy Research – December 20, 2017. https://iwpr.org/publications/private-sector-pay-secrecy/