In the wake of growing awareness of wage disparities, today’s workers are clamoring for more pay transparency. The professional services firm, Mercer defines pay transparency as “establishing and communicating pay practices that help employees understand how their pay is set.” Workers can then use that information to assess whether their compensation is fair given their skill set, experience, and overall marketability.
Employers have been reluctant to proactively implement these measures, leading legislatures around the US to enact laws mandating pay transparency. California is the most recent, joining Colorado, Maryland, Connecticut, Nevada, Rhode Island, and New York City in requiring some measure of salary disclosure and/or corporate reporting. The goal is to root out the pay gaps so prevalent in American workplaces.
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The wage gap is real
Research has repeatedly shown that women and under-represented workers earn less for equal work, a figure which drops still further for those with intersectional identities. For instance, white women earn 82 cents for every dollar earned by a white men. Black women earn 79 cents and Hispanic women take home 78 cents on the dollar. Data is better for Black and Hispanic men, though they too earn 90 cents and 91 cents respectively. These wage gaps hold true across countless studies. While older workers lament the biased reality, the lack of pay transparency will prompt younger generations, specifically Gen Z, to leave within six months without clear and equitable pay standards. While organizations may decry the need to implement change, a revolving door of workers creates costly turnover costs most businesses want to avoid.
Proven benefits of pay transparency
Wage equity
When employers engage in pay transparency, linking pay to observable measures of productivity, studies show pay gaps shrink, and in some cases, disappear entirely. This comes from the practice of using objective rather than subjective measures to set employee wages. Pay equity is a tangible example of a company’s culture and employee commitment, positioning an organization as an employer of choice. And, improving the ability to recruit and retain top talent of all backgrounds will serve most businesses well in the long term.
Need help putting together an equitable compensation plan? We have a handy employer’s guide to compensation here.
Better financial performance
A wide array of research shows that more diverse talent leads to more dynamic and creative decision-making, more profitability, and stronger competitive advantage. So it follows that if you pay your diverse talent more competitively, they’ll be more likely to stay. Being transparent about wages is a big step toward proving your organization is committed to paying all workers fairly. Equitably-compensated workers will be more invested in the organization’s success and more motivated to recruit top talent to join the company as well. Fair and transparent pay for all workers then becomes a smart choice if driving higher revenue is a company goal.
Worker productivity
In the absence of clear pay standards, and with societal norms well known, workers often presume they’re underpaid when they don’t know their colleague’s salaries. This leads to employee dissatisfaction and dampens their productivity. However, when salary standards are made freely available, this reverses. It has even been found to boost motivation and improve employee performance once the fog of doubt is removed.
Culture of openness
Having a transparent approach to compensation can be a part of an overall business philosophy that embraces open communication and decision-making, in general. Gaining employee trust can greatly benefit worker satisfaction and can lead to higher retention rates if companies can recruit talent with similar values.
Managing the message
Companies at the beginning of their pay transparency journeys often find their salaries out of balance once they peel back the covers and take a look. While employees are the true injured parties, it’s likewise embarrassing for organizations unaware of their own discriminatory practices. Being transparent about the discovery is the best approach, sharing the steps being taken to rectify the situation going forward. A side benefit of this honest strategy is that organizations have the opportunity to control the narrative. Owning up to mistakes and pledging to do better is a far preferable approach to getting an influx of nasty complaints in the press or on social media, where scrambled efforts to address gain no goodwill.
Pay transparency: Red flags and barriers to watch for
Turnover and retention risks
One harsh reality borne by those offering below-market wages is the inevitable turnover that follows disclosure. While suspicion of being underpaid can be easily dispelled with pay transparency, workers who learn they have, in fact, been underpaid require proactive steps to retain. If not, that eye-opening information can prompt many underpaid staff members to seek better compensation elsewhere. While most organizations would love to keep their talent, some simply can’t afford the increased labor costs associated with upleveling their compensation structures. Low pay at some organizations is a conscious business model, potentially because their workplace holds prestige or offers value beyond compensation that is leveraged to attract and retain workers. Others may find wages haven’t kept pace with market rates, increased worker experience, or role expansion. Whether intentional or not, once transparency arrives, these pay-scale strategies may need to be right-sized to fit a more competitive job market.
Wage disparities
Leaders who unpack the sticky recesses of organizational salary practices could be in for a rude awakening. The trouble may not come not from fixing antiquated and discriminatory practices, but rather from the shock of learning they exist in the first place. Many companies have never initiated a wide-scale examination of their labor wages, and discovering them will undoubtedly lead to uncomfortable employee conversations. One study found that 46% of employers had put off pay transparency measures, fearing friction with their current staff. While some pay differences might be valid when considering job scope, experience, or institutional knowledge, other salaries will need adjusting. Therefore, internal, private assessment and action planning are crucial to complete before a public rollout of transparency practices. No worker should be broadsided by this information in a mass communication. Instead, do the hard work, make the necessary changes, make your public announcement, and roll out the final stage of successful soul searching. Taking a phased approach can help mitigate the negative outcomes of a once difficult situation.
Pay compression and cost savings from pay transparency
An unexpected outcome of pay transparency is the overall lowering of wages for all workers. This may result for a few reasons. First, if workers are more satisfied with their pay, they’ll be less inclined to enter negotiations for higher pay. Open disclosure about pay makes “gotcha” conversations about discovered inequity unnecessary. Another cause for lower wages could stem from employers being less open to bargain over salary given their published standards. Finally, leaders who pay fairly across the board for all workers, and also pay in line with marketplace rates, may feel more confident in letting workers go than setting a new, and higher, salary standard they’ll be forced to honor across their entire employee base.
Transparency in recruitment leads to further cost savings. A study found that the cost-per-click for employment ads promoting education and healthcare roles were roughly 53% less when they included the salary being offered. Applicants who applied were also deemed to be more qualified. This is because they both had the requisite skills and were amenable to the proposed wages employers offered. Expensive candidates had self-selected not to apply, clearing the way for more suitable applicants to step forward and get noticed.
Where’s the data?
Low adoption of pay transparency practices by employers makes larger trends and outcome measures largely absent. New legislation rolling out across the country will make equitable pay the de facto standard for workers. With the advent of remote work and flexible scheduling, employees have significant leverage to take their talents elsewhere if they believe themselves to be underpaid. Companies with largely remote workforces must now compete with similar jobs posted nationwide. Conversely, this dynamic means organizations will likely have a wider talent pool to draw from. Ironically, pay transparency becomes a smart strategic tool to help screen the larger influx of applicants.
Conclusion
Wage disparities for women and under-represented workers are well established. Women earn 82 cents for every dollar made by a white man, while Black men (90 cents) and Black women (79 cents), Hispanic men (91 cents) and Hispanic women (78 cents) fare far worse. Workers understandably demand that this discriminatory gap be closed, and legislatures around the country are heeding that call. Pay transparency has clear benefits, from improved wage equity and worker productivity to better organizational financial performance. Proactively pursuing fair wages lets companies manage the messaging around their program rollout.
Risks for launching pay transparency are higher for companies that routinely pay sub-market-rate salaries. In these cases, turnover is a likely outcome. At a broader level, pay transparency can lead to overall lower wages across all workers, as pay satisfaction removes the need for upward wage negotiation. Companies with clearly posted salary scales may be less likely to entertain worker requests for higher pay.
As more organizations adopt pay transparency, more data will become available about the outcomes of the practice. But since it benefits both workers and companies, the time has likely come to let the sun set on these outdated wage practices.
