Episode 5
Episode summary
Eight states and six metro areas have enacted pay transparency laws in the last few years. The benefits of these policies to workers are well known and much celebrated, but the drawbacks less so. Liz explains both sides and what your position on the debate might say about you.
Shownotes
Equilibrium Effects of Pay Transparency [HBS]
Pay Transparency and the Gender Gap [AEA]
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Transcript
Liz Wilke (00:00:00) – Hi everyone, I’m Liz Wilke, and this is the Gustonomics Podcast. Each week, I bring you about 10 minutes of economics knowledge so you can educate yourself, use the information in your business, or maybe just show the world that you are more than just a pretty face. Whatever brings you here, thanks for checking out the podcast. This week, I’m talking transparently about pay transparency. Pay transparency has gotten a lot of attention. Now, at least 8 states and 6 metro areas have rolled out pay transparency laws in the last few years.
Liz Wilke (00:00:38) – And you’ve probably seen a lot specifically about New York and Colorado, which go the furthest by requiring employers to include quote-unquote good-faith pay ranges in their job postings. Including pay ranges in job postings is the most visible form of pay transparency. We can all see it. And we’ll talk about this a little bit. But there are also other measures that can increase workers’ knowledge about pay within a company, which all fall into that bucket of pay transparency.
Liz Wilke (00:01:07) – There’s self-reported pay on public websites like Glassdoor, Levels.fyi, or Indeed, for instance. There are laws that protect workers’ rights to talk to each other about how much they’re paid compared to one another. Believe it or not, many companies used to be able to ban their employees from discussing their salaries with other workers, and those laws protect against that. There are also laws that require employers to tell candidates what the pay range is for a role if they ask or as soon as they apply.
Liz Wilke (00:01:39) – Companies can also choose to make their own pay data available to workers or to the public. They can do this at the pay level, like so for instance, the US government does this with the GS pay scale, so you can look up any government employee’s salary. Or it can make every single worker’s pay available, either internally, to just people who work at the company, or externally. That’s a very unusual circumstance, but there are a few companies trying it out.
Liz Wilke (00:02:07) – Pay transparency is thought to give workers more power in the bargaining process over pay by giving them more visibility into what an employer is willing and able to pay for a specific role. It’s also thought to reduce pay inequality and increase pay equity by bringing to light instances where people are being paid much less than their peers. And this is supposed to disproportionately benefit women or members of minority groups who tend to be paid less than their peers in similar roles at similar levels.
Liz Wilke (00:02:38) – Those are the two big reasons that policy makers like pay transparency measures, and those are the effects we talk most about. But there are some other possible benefits. So for example, if all workers can see the pay range of all jobs in their company, pay transparency might make workers more productive by letting them see the opportunities for advancement and higher pay in the future at the next level. Or pay transparency can help workers to feel fairly paid, which increases their engagement and their motivation, and thus their performance.
Liz Wilke (00:03:14) – Pay transparency might push companies to more concretely tie pay to performance in order to justify any pay differences among employees, which could sort of by extension result in better business performance overall. And pay transparency in job postings or early on in the application process might allow job seekers to really quickly assess whether or not it’s worth applying for a specific job and then leave them to apply only to jobs that pay what they’re willing to accept.
Liz Wilke (00:03:45) – And this could reduce time applicants and employers spend in the job seeking process. What’s less talked about are the possible drawbacks of pay transparency. For example, workers, especially high performers, might start to apply only to jobs that have very high posted salaries, creating what economists call a queuing effect. Essentially, people quote unquote line up for a small set of jobs and they’re unwilling to take or look for another job, which raises unemployment and creates a mismatch or a friction in the labor market.
Liz Wilke (00:04:25) – It could also mean that smaller companies never even see high quality candidates in their candidate pool, even if they would be willing to pay above their posted pay band for an outstanding candidate, or if they have lots of benefits and good culture to make up for what they can’t necessarily pay. Also, there are many parts of compensation beyond base pay for many people. Lots of workers receive health insurance packages, retirement savings programs, flexible work hours, bonuses, perks, or company equity as part of their total compensation.
Liz Wilke (00:05:02) – Because these laws only require employers to post what they’re willing to pay in base salary, this could encourage employers to focus less on these other important parts of compensation in order to attract workers through job postings. And just as pay transparency might improve culture and performance, it might also damage it too.
Liz Wilke (00:05:25) – There are lots of stories around about nightmare scenarios where companies that move towards greater transparency caused a lot of turmoil and loss of trust by workers who realized they’d been underpaid, sometimes for a long time, or that a low-performing coworker was making significantly more than them. As any practitioner knows in HR, culture is the glue of an organization and it’s built on trust.
Liz Wilke (00:05:52) – Moving to pay transparency risks losing that trust if pay wasn’t set up fairly to begin with, which can reduce worker morale and ultimately affect performance. As a quick side note here, I personally view this as a growing pain, not a reason not to have greater pay transparency. If companies are unfairly paying workers different wages in secret, it’s probably not a bad thing for this to come to light. So far, we don’t know a lot about the net effects of these new pay transparency laws, but here’s what we do know.
Liz Wilke (00:06:23) – One, pay transparency reduces pay inequity for women. When the salaries of university professors were made public in Canada, it reduced the gender pay gap between 20 and 40%. And in the UK, where companies have had to post the gender distribution of each of their roles, this has resulted in a 5% increase in the share of women in roles that pay above median salaries. And two, we know that pay transparency also reduces total pay for workers. A study this year out of Harvard shows that pay transparency laws effectively reduce total worker pay by about 2%.
Liz Wilke (00:07:01) – With most of that coming from people who are very highly paid, they take a pay cut of about 8%. This happens because companies have to put caps on roles and then commit to not paying above that amount for these roles. So workers who could have negotiated for more are not able to, and this reduces pay on average.
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Liz Wilke (00:07:57) – Welcome back. We’re talking about pay transparency. Reiterating what we already know, which isn’t a lot yet, is that pay transparency reduces the gender pay gap, but it also reduces overall pay by restricting the possible pay of workers who make the most money. As I said before the break, there are a lot of possible effects, both good and bad. And we’re gonna learn a lot in the coming years about the size of those effects and whether or not they’re really there.
Liz Wilke (00:08:23) – Whether or not you today view this as a good thing or a bad thing probably depends on who you are. Job seekers tend to view pay and job postings as a very useful tool in their job search. It helps them to avoid applying for jobs that can’t or won’t pay what they want to earn so they save time. And also most job seekers really dislike the salary negotiation part of the candidate process.
Liz Wilke (00:08:48) – And that transparency seems to help them feel more confident about what they can ask for and reduce some of the natural discomfort that it comes with talking brass tacks about what your time and labor is worth to a business. If you’re a worker at a business that is moving towards greater pay transparency, this could be a mixed experience.
Liz Wilke (00:09:10) – If you’re paid significantly more than your co-workers, you might feel additional pressure to justify that salary, but by and large, you’ll probably be happy to know you’re on top of the pile. If you are paid significantly less than your co-workers, and there’s no good justification for that beyond, well, that guy is a better negotiator than you, or that woman is the boss’s friend, then you are probably going to experience some hard feelings, a loss of engagement, and maybe it will prompt you to search for another job.
Liz Wilke (00:09:44) – If you are an HR professional or employer, the net effect probably depends on how much you can afford to pay for a role, and how your workers will judge the fairness of what you’re already paying people. If you hire a lot of roles that don’t tend to have large pay ranges, like a server at a restaurant, or a call center worker, pay transparency doesn’t seem to affect you much at all, because there’s not a lot that will change what any individual worker gets paid, and the spread’s not that large. It’s more of a take it or leave it scenario for them.
Liz Wilke (00:10:15) – If you hire a lot of roles with potentially big differences in pay between one worker or another, because of performance, because of personal attributes, whether more pay transparency helps or hurts you most likely depends on how your workers judge how fairly you determine those differences. If they can’t understand why Ashley makes more than Damien in the same role, they’re much more likely to think it’s unfair than if they understand that Ashley exceeds her revenue target by at least 25% every year, and Damien only does this sometimes.
Liz Wilke (00:10:51) – Regardless of which situation you’re in as an employer, the transition is gonna be tricky. People have a lot of feelings about pay, because it’s tied to how we value ourselves, what our value is relative to others, and whether or not we think we’re being treated fairly. These are deep, people-y issues, not financial ones, and having frank conversations with employees about accounting for their value to the company is gonna scrape up against their feelings about themselves and their value in society. It’s not easy stuff.
Liz Wilke (00:11:25) – Wherever you sit in the discussion, job seeker, worker, employer, pay transparency is a complex topic, and there are goods and bads on both sides. Do I think pay transparency is a good thing? To be honest, as an economist, I feel mixed. It’s hard for me to argue convincingly that a policy that improves equity primarily by reducing pay for workers’ ability to bargain for themselves is definitely and unambiguously a good thing. But I also care a lot about pay inequity and fairness, and pay transparency has some pretty big and important benefits here.
Liz Wilke (00:12:02) – One thing I do know is this. Pay negotiations are squishy, sensitive, and tough, but we have to have them in order for an economy to work. The question of what am I worth to you is never an easy one to engage in any kind of relationship, and pay transparency is definitely changing how employers and workers answer that question for themselves. For anyone who’s been through an experience with pay transparency at their company or in a negotiation, I would love to hear about your experience, so please get in touch. That’s it for this week’s episode.
Liz Wilke (00:12:41) – I hope you learned something new and useful for yourself and your business. Please let us know what you think of the podcast by leaving a review, or share it with a friend or colleague who might enjoy it. I’m Liz Wilke, and thanks for listening. See you next week.
Caleb (ad) (00:12:56) – The Gustonomics Podcast is made possible by Gusto, the people platform for over 300,000 businesses across America. If you’ve started a business and are ready to hire your first employee, or just looking for an easier way to run payroll, visit gusto.com slash podcast to learn more. That’s gusto.com slash podcast.