Does a Transparent Compensation Policy Benefit Business?

September 3, 2019
Author: Tyran Saffold Jr

Pay gaps based on gender and ethnicity are prevalent throughout the U.S. economy. According to data from the U.S. Census Bureau, the average gender pay gap in the United States is near 19.3 percent, meaning that a woman with a full-time job earns 80.7 percent as much as her male counterpart. The gap can be larger, or smaller, depending on the state.

Transparent Pay

Many factors contribute to the pay gaps, including educational attainment and availability. However, the most unfortunate factor is that of discrimination. Today, employers like Whole Foods, Buffer and SumAll have adopted salary transparency policies in an attempt to become more forthcoming about pay and help eliminate gaps.

Transparent Pay

Government entities and larger educational institutions have incorporated public salary ranges into their compensation policies, and non-profits are required to do so on their annual IRS form 990. But, does that cause more harm than good?

“When people don’t know each other’s pay, they assume they are underpaid,” said Elena Belogolovsky, former assistant professor of human resource studies at Cornell University. If employees assume they are underpaid, they will be tempted to lessen their production, which damages the bottom line—or, they could be tempted to search for employment at another company, affecting retention rates in a tight labor market.

Nearly half of all organizations provide employees with some type of pay-related information, but it is minimal at best. Additionally, employers are giving workers less information than in the past, according to findings from the 2019 Compensation Programs and Practices Survey.

Employers are reluctant to give the following information:
• The company’s salary structure
• Base salary range for employees’ pay grade
• Base salary ranges for all pay grades or jobs

“At a time when employers are engaged in a hyper-competitive environment for talent and open platforms are increasing the level of pay information available to current employees and recruits, the need to build a solid pay communication strategy has never been greater,” said Catherine Hartmann, North America Rewards practice leader at Willis Towers Watson.

She added, “we believe employers who have yet to expand and become more transparent in their pay communication with employees will need to do so as top talent will demand it.”

Implementing Transparent Pay

There are positives and potential negatives behind implementing transparent pay policies. It could drive tension between employees and pit them against each other. Once workers know how much their colleagues are being paid, they may bicker or constantly compare each other’s salaries or bonuses, affecting overall company morale.

Additionally, employees often do not understand the nuances of roles in different teams and the experience and qualifications of their colleagues that led to their salary level. Employees may be more engaged by knowing how salaries are determined rather than knowing what everyone is earning. If they believe the process is fair, this approach may satisfy the need for pay transparency.

However, if an employer releases pay information about their employees, it shows that they have nothing to hide. In a competitive labor market, that could become a healthy advantage over the competition.

In fact, it has been noted that when pay is transparent in an organization, employees tend to show better performance and increased motivation. A study by Gowri Ramachandran in the Penn State Law Review suggested that women and minorities prefer organizations where information about wages is transparent because it enables fair pay negotiations.

Moment of Truth

Executives should recognize the strategic nature of compensation policies and consider becoming more involved rather than delegating tasks exclusively to the HR department.

The economy is shifting, increasing the urgency of employers to fully consider embracing transparent pay. Companies like Uber and Starbucks are taking steps to eliminate the gender pay gap and while most employers are not taking that route, implementing a transparent pay policy is a realistic way to reduce the wage imbalances within an organization.