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The Tides of Pay Transparency

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How much money do you make? Although this question still may qualify as rude in social settings, the notoriously taboo subject of salary is becoming more acceptable for open discussion in the workplace.

Historically, both the public and private sectors have held notably different positions on the concepts and practices of pay secrecy and pay transparency. Within government agencies, salary information is publicly accessible and, therefore, inherently transparent. In contrast, most private sector companies act as if every individual’s salary is and should be confidential. The private sector operates under this pay secrecy premise, despite the 1935 National Labor Relations Act, which provides workers the right to discuss their pay for purposes of collective bargaining.

As the tide shifts and employees turn the tables on salary conversations, employers have little choice but to pivot with them.

The Case for Pay Transparency

Efforts to close the gender pay 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 organizations toward greater pay transparency.

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 importantly, HR and business leaders have taken note of scholarly 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 past 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 startups or other small companies, it’s now in motion at larger companies (first introduced by Whole Foods in 1986). And 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.

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 isn’t enough. In fact, it may be a recipe for disaster.

The Downside of Radical Transparency

When the University of California (UC) 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.

The researchers then surveyed all employees and asked about their use of the website as well as their job satisfaction and job search intentions. The researchers compared the responses of those informed about the website and those who were not.

Most employees who received the letters accessed the site and examined the pay of colleagues in their department. Those who discovered their pay fell below the median were much less satisfied with their jobs and likelier 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 co-workers to enter their compensation information. The spreadsheet 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. Compensation data alone can create unfortunate misperceptions and misunderstandings, which can lead to disengaged employees and increased turnover.

The Upside of Data Context

If your organization is looking to increase pay transparency, how can you safeguard against disaster and ensure your strategy is successful?

First, take time to review your compensation strategy and methodology. Dated approaches may leave you exposed to either real or perceived inequity. If you find anything you aren’t prepared to explain or defend — to your employees or before a judge — launch an initiative to bring your compensation practices up to modern standards.

Then, when you’re ready to communicate with employees, don’t just give them data. Add context.

Context for the compensation information you provide employees is critical. Additional commentary around pay information helps employees understand the rationale behind their compensation and their colleagues’, and it enables your organization to fully own the messaging around pay decisions.

Even if you’re not ready to jump into an open salary strategy, context is key to communicating other levels of pay transparency that can benefit your organization and your employees.

Unmasking Your Compensation Process

Compensation data alone can create unfortunate misperceptions and misunderstandings.

By explaining pay and pay practices — such as the relationship between pay and experience, performance, qualifications and other data, you can build trust between employees and the organization, thereby increasing employee loyalty and engagement. Steps that help you educate your workforce on your company’s compensation practices are:

Explain the underlying strategy. At the most basic level, the organization can educate employees on its compensation strategy. Understanding the strategy gives employees some perspective on how compensation ties into organizational values, and it empowers them to find ways to further contribute to the organization and increase their compensation.

Share market information and explain your process. The next level is to provide employees with market studies and information on your compensation process. By publishing market studies, you can raise employee understanding of compensation ranges and market impacts on those ranges. In this way, you can demonstrate to employees that compensation is thoughtfully and carefully planned.

Train managers to talk about compensation. In addition to providing valuable context, compensation teams can influence interactions between managers and employees. As the first-line resource for employees, managers often field questions and hold discussions around compensation. However, more than 70% of organizations in a recent PayScale study reported that their managers are not trained properly to discuss compensation.

Just as organizations can — and should — train managers to make better compensation decisions, they also should support better conversations with employees. For example, information on performance, experience, market data and other key metrics can help managers make better and more objective compensation decisions. Managers can leverage this information in conversations with employees to explain their compensation level and coach them on how to earn an increase. The return can be twofold: the employee gets a greater understanding of his or her compensation and the path to a pay increase; and his or her motivation to pursue a pay increase can drive improvements in business performance.

When Buffer implemented transparent pay in 2012, all employees were educated on the process and the various factors that determine compensation level. Employees at Buffer value this knowledge, and their managers reported having more meaningful and effective compensation conversations. As a result, employee trust, engagement and retention remain above average.

Like any other change, the advantages and disadvantages of increasing transparency vary.

Balancing Transparency and Confidentiality

As a provider of talent management software, we have seen organizations use many different strategies to address the need to increase pay transparency while maintaining confidentiality. One utility company had a unique strategy for raising visibility and transparency into their compensation process — focusing on managers and improving awareness around their compensation recommendations.

As part of the planning process, the company developed a series of reports and made them accessible to all decision makers. These reports provided a visual representation of how the decision maker’s recommendations aligned with peer groups, other business units and the company as a whole. This organically produced data enabled managers to ensure that any material outliers made sense or were addressed — increasing the level of pay transparency among decision makers and improving the alignment of their pay decisions to performance, experience and other data.

For example, if one business unit reported middle-of-the-road performance but skewed high on compensation recommendations, management had the opportunity to adjust those recommendations before finalizing their decisions. The approach not only helped prevent situations like material pay disparity, but also gave managers better context, data and confidence going into individual compensation discussions.

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. Best practices that can help evolve a pay transparency initiative in your own organization are:

Enable access to data. Most companies use some form of market data to develop pay levels. Providing managers with benchmarks to inform compensation decisions empowers them with perspective to see how their recommendations compare and provides a foundation for conversations with their employees.

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 compensation strategy is effectively communicated.

Enhance pay statements. Data in context leads to better comprehension. Consider fortifying written compensation communications with quantitative data — market benchmarks, business results and plan calculation logic — to help employees better understand and recognize the fairness of their compensation package.

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 on the rationale behind your approach can help set expectations, eliminate potentially negative surprises and help create a sense of openness and sharing.

While talking about pay is becoming socially acceptable, remember that it still is a sensitive and emotional topic with a profound effect 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 following best practices and providing substantive context around compensation data, you can plan for success in a transparency initiative. Your organization will build employee trust and improve engagement and motivation, ultimately leading to better business performance.

Tom Sykes Bio Image

Tom Sykes is director of production management with PeopleFluent. Follow him on Twitter or connect with him on LinkedIn.

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