The Benefits of Pay Transparency

What is salary (or pay) transparency, and why is it important? Salary transparency is one of the hottest topics in business today. Employers view it as an effective way to build trust and boost the morale and productivity of employees. It’s also one of the most effective ways to bridge the gender wage gap.

The gender wage gap refers to the difference in the median hourly earning between men and women (both full- and part-time). According to the Pew Research Center, the wage gap hasn’t changed much in the last two decades. In 2022, women earned an average of 82% of what men made, similar to 2002 when women made 80%. The gap also varies significantly by race and ethnicity.

Many factors contribute to this difference in wages. One of the factors is parenthood. Most mothers, ages between 25 and 44 years, are less likely to be in labor. Those in employment, tend to work fewer hours each week to be present for their kids. 

In contrast, fathers are more likely to be in the labor force and work more hours each week. As a result, while the earnings for women decrease, men’s earnings increases, widening the gender pay gap. 

Other contributing factors include differential treatment such as gender stereotypes, discrimination, and sex segregation channeling women to low value-added sectors and occupations. 

Consequences of the gender pay gap include increased poverty rates, low education levels in women, and less money saved for retirement. In the workplace, it can lead to decreased morale and productivity. It can also prevent companies from attracting and hiring the best talent.

One of the solutions to bridge the pay gap is salary transparency.

What is salary transparency?

There is no single level or degree definition of pay transparency. Instead, you can describe it as a spectrum on which employers choose varying degrees of transparency on pay based on state or local mandate or their compensation strategy.

For example, for some employers, pay transparency may mean communicating pay practices and explaining how employee compensation is determined. For others, it may mean full transparency around salary or salary ranges for every role.

According to federal law, salary transparency is the degree to which employers are willing to be open about salary and pay information. It’s the ease at which employees can find out the compensation of other employees in their workplace.

Pay transparency laws are taking the Equal Pay Act of 1963 further on state and local levels in the US. For example, the California amended labor code requires employers with 15+ employees to list salary ranges on job postings. Also, upon request, businesses must provide employees with their current pay scale.

Washington’s Equal Pay and Opportunities Act states that employers with 15+ employees must share the pay range for jobs posted on any digital or print ad. Or those posted on the company’s hiring board or listed on a third-party site.

The benefits of transparency

Some of the benefits of pay transparency include the following:

• It can help bridge the gender pay gap: How can you negotiate better pay if you don’t know what your peers earn? By sharing pay information openly, organizations are far more likely to correct salary inequality and explore its reasons.
• Creates a culture of openness: When a company embraces pay transparency, it is more likely to compensate its people competitively. And, since it clearly shows it has nothing to hide, it builds trust. It also encourages communication on other matters, which helps establish a culture of openness.  
• It helps avoid bias: Keeping salaries a secret will more likely enforce discrimination. Whether conscious or unconscious, salary transparency reduces gender, ethnicity, background, and many other demographic and characteristic-based biases that fuel wage gaps. A precise formula for determining pay and complete transparency gives less room for bias and more accountability for equal pay. 
• Increases job satisfaction: There is no comprehensive research on how salary transparency affects employees. However, evidence from a few companies, such as Whole Foods, SumAll, and Buffer, suggests that it makes employees more productive and satisfied. Logically, you will be more motivated and effective if you know you are fairly compensated for the work.

The downsides of transparency

If a company on a tight budget offers lower rates, attracting and hiring talent may be challenging. Also, competitors can offer higher salaries to poach employees, which may lead to unfair business practices.

Transparency can also breed jealousy which can have a detrimental effect on employees. Comparing salaries can trigger a process of social comparison. This pits employees against each other, eventually affecting team cohesion and overall company productivity.

Some companies tend to base pay on subjective determinants. Failure to communicate why other employees make more can lead to controversies that can damage an organization’s reputation. 

How to introduce pay transparency at work

Posting what each employee makes may not be ideal for most companies. For example, while Whole Foods and SumAll gained public goodwill for pay transparency, Uber and Google faced controversies over alleged gender pay gaps. So what is the best way to go about introducing gender transparency?

Every company is unique, and the best way will depend on the individual company. However, steps you can take to implement pay transparency include the following:

• Begin with the basics: such as giving employees a pay or salary slip detailing how much they earned plus the deductions made.
• Determine your ideal level of pay transparency: Is it partial or complete openness? It may make sense for companies with significant disparities to start by ensuring employees understand the duties, responsibilities, and successes determining each pay level. Otherwise, employees can lose motivation and engagement if they believe their performance equals or exceeds a colleague who earns more.
• Benchmark best practices: and align your compensation philosophy to match
• Update pay ranges:  Using a formula that factors in job title, experience, and cost of living can help you determine competitive salary ranges. Don’t forget to also compare pay at your organization to typical salaries in your industry and location to ensure they are competitive.
• Prepare your manager and other team leaders to answer any questions. Share the data, formula, or rationale used to calculate pay levels and any other factors the company uses to determine pay. Also, provide relevant training on answering expected questions and handling any other issues that may arise once you roll out the policy.
• Roll out your transparency policy
• Monitor and make adjustments as needed.

Conclusion

Ultimately, transparency can improve employee trust and cultivate a culture of openness. It can also close pay gaps and eliminate unconscious or conscious bias in salary decisions. However, complete transparency may not be for every business. So, carefully weigh the pros and cons to decide on the degree of openness right for your company.