Published: Apr 3, 2019Time to read: 6mins Category: Compensation
Understanding and Achieving Greater Pay Transparency: 4 Best Practices for Bold Organizations
How much money do you make?
A rude question in social settings, this traditionally taboo subject is becoming more acceptable for open discussion in the workplace.
Within government agencies, salary information is publicly accessible. But even despite the fact that the 1935 National Labor Relations Act protects workers’ right to discuss their pay for purposes of collective bargaining, most private-sector companies operate on the premise that each individual’s salary is—and should be—confidential.
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What’s Driving the Move toward Pay Transparency?
A number of developments in recent years are turning the table on salary conversations, and employers have little choice but to pivot. Efforts to close the gender gap have led several cities and states—from New York City to San Francisco and in between—to enact laws preventing employers from asking applicants about their salary histories. By short-circuiting the negotiating power inherent in an environment of secrecy, these laws are nudging companies toward greater transparency in pay.
And while federal rules that would have required companies to share salary data by race and gender are on hold, shareholders are pushing companies to disclose information about equal pay practices.
Perhaps most important, HR and business leaders have taken note of research showing that pay transparency boosts employee motivation, collaboration, and performance. While other studies raise questions that merit further study, the trend is clearly toward greater—if not radical—salary transparency.
In the last five years, more businesses have embraced greater pay transparency and some are even implementing open salaries—the practice of sharing every employee’s compensation information. Once a trend limited to start-ups or other small companies, it’s now reaching larger companies like Whole Foods.
And now, the advent of websites like Glassdoor and Payscale has made it easy for any non-HR employee or prospective applicant to access compensation information—albeit self-reported or otherwise flawed—for nearly any large or mid-sized company.
The Benefits of Sharing Compensation Data
Advocates for pay transparency cite its ability to help employees understand how their role fits into the company's priorities and its power to help organizations address pay inequality.
In his 2016 TED Talk, David Burkus, a professor at Oral Roberts University, noted, "When people do not know how their pay compares to their peers', they are more likely to feel underpaid and maybe even discriminated against."
And companies like Buffer, a software company with open salaries, believe that giving employees access to compensation information can spur conversations led by employees who feel they are underpaid. The company values this strategy, because it helps them actively engage employees in pay decisions and eliminate any misperceptions about equal pay.
But simply sharing compensation data across your organization is not enough. In fact, it may be a recipe for disaster.
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The Downsides of Radical Transparency
When the University of California began making its employee salaries public, researchers from Princeton and the University of California–Berkeley conducted an experiment to understand whether the strategy increased employee satisfaction. They sent letters to a random sample of employees in the UC system, informing them of a newspaper website where they could find out the salaries of their peers.
Then they surveyed all employees, asking about their use of the website, their job satisfaction, and their job search intentions. The researchers compared the responses of those who were informed about the website and those who were not.
Most employees who received the letters did access the site and examine the pay of colleagues in their department. Those who discovered their pay fell below the median were much less satisfied with their jobs and more likely to express an intent to depart than those paid below the median but who did not receive the prompt to compare their pay.
In another instance, former Google engineer Erica Baker, created a spreadsheet and asked coworkers to enter their compensation information. The spreadsheet was quickly circulated, and Baker noted some “not great trends” appearing in the spreadsheet. Many of her peers thanked her for creating the spreadsheet and many asked for raises citing her data, but Google management reprimanded her, causing an additional rift among employees. Baker ultimately left the company.
These examples illustrate how pay transparency—no matter how well intended—can have unintended downsides and decrease employee satisfaction and retention.
Much like data published by Glassdoor and Payscale, aggregated salary information does not tell the whole story. Sharing compensation data alone can create unfortunate misperceptions and misunderstandings, which can lead to disengaged employees and increased turnover.
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4 Best Practices for Achieving Greater Pay Transparency
Like any other change, the advantages and disadvantages of increasing transparency vary in nature and magnitude based on industry, culture, maturity, and other factors.
But using these 4 best practices can help your organization prepare for and successfully transition to greater transparency around compensation.
1. Enable Access to Data
Most companies use some form of market data to develop pay levels. Providing managers with benchmarks to inform compensation decisions will empower them with perspective to see how their recommendations compare and give them a foundation for conversations with their employees.
2. Guide Managers through Structured Conversations
Because they are not compensation professionals, managers need training and guidance to speak clearly and authoritatively on the subject. Provide training, tools, and other resources to bolster their confidence and ensure that your company’s well-thought-out compensation strategy is effectively communicated.
3. Enhance Pay Statements
Data in context leads to better comprehension. Consider fortifying written compensation communication with quantitative data—market benchmarks, business results, plan calculation logic, and more—to help employees better understand and recognize the fairness of their compensation package.
4. Deliver Compensation Education
Companies spend a considerable amount of time, talent, and money to develop a compensation philosophy to best position them for success. Educating employees in the rationale behind your approach can help set expectations, eliminate potentially negative surprises, and help create a sense of openness and sharing.
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Making Salary Transparency Work for Your Organization
While talking about pay is increasingly socially acceptable, remember that it is still a sensitive and emotional topic with a profound impact on lives and livelihoods. As companies adopt new strategies to meet the desire for more transparency in the workplace, thoughtful communications around pay transparency must be a priority.
By providing substantive context around compensation data, your organization can build employee trust and improve engagement and motivation—ultimately leading to better business performance.