Dan Schawbel* outlines the pros and cons of pay transparency, being adopted by an increasing number of organisations and jurisdictions around the world.
A few weeks ago I was attending an event and had the opportunity to chat with a young lawyer about her job.
“One of the best things about working at my firm is that they’re completely transparent about everyone’s salaries,” she told me.
“You know exactly what you’ll be paid before you even interview, you know that you’re being compensated fairly compared to your colleagues, and you know what your potential is for growth.”
She believed this had been the reason why her company was experiencing very little turnover.
“People who are a good fit with the culture stick around, since they know exactly what else is out there in the market,” the young lawyer said.
After I got home I dug into this a bit more, and realised that the law firm where she works is in California, the first State in the United States to pass a mandatory pay transparency statute.
Since then, many other States and even some cities have followed suit with their own requirements.
The US isn’t the only place where this is happening: Europe is about to decide whether to make everyone’s salaries public and Australia, the United Kingdom and Ontario, Canada have already passed legislation.
The exact requirements of these laws vary; some require disclosure in job postings, while others require disclosure only upon request.
However, they all have one goal in common: Promoting more equitable pay.
One of the main arguments in favour of pay transparency is that this practice could have a significant impact on gender and racial pay gaps.
When organisations are required to disclose salaries, they’re less likely to offer different pay rates to people based on gender or race/ethnicity.
Furthermore, job applicants who know what the salary range is for a position are more willing to negotiate and more successful in negotiating, which can help narrow these gaps.
Research from Payscale finds that 57 per cent of employees who are paid at market rates (and 42 per cent of those who are paid above market) believe they are paid below market.
In fact, the research discovered that among people who believe they are paid below market, 66 per cent are seeking a new job, compared to just 34 per cent of those who believe they are paid at or above market.
This is certainly something for employers to keep in mind, especially in today’s employee-drive job market.
However, most organisations are putting retention of their workers at risk by not being open about pay.
Employees who have access to their co-workers’ pay information perform better than those who don’t.
One study identified that the exact increase in performance might be around 10 per cent — and a 10 per cent boost in productivity in nothing to scoff at.
Probably the main drawback is that pay transparency is bound to end up costing more.
Organisations have also voiced other concerns about how transparency requirements could affect their retention efforts in a time when workforce loyalty is at an all-time low.
“Competitors would just need to offer an employee another $20,000, and soon they could have our whole engineering team,” one business leader said.
Another business leader noted an unintended outcome of his organisation’s transparent pay practices was the added pressure on new employees to prove they ‘deserved’ the salary level they were on.
He emphasised this was counterproductive, since it was already a stressful period for new employees.
If your organisation is not located in a country where there are requirements around pay transparency, you’ll have to consider whether being more transparent is the right choice.
In many cases, providing people with pay ranges could have a slew of positive outcomes — from moving the needle on wage gaps to boosting productivity and retention.
However, there’s also a chance that it could cost you more and put too much pressure on people to perform.
Pay transparency makes sense, even with these potential downsides, and with more countries proposing and passing laws around this, I think we’ll see transparency become a core part of how businesses operate.
*Dan Schawbel is a bestselling author and Managing Partner of Workplace Intelligence, a research and advisory firm helping HR adapt to trends, drive performance and prepare for the future.
This article is part of his Workplace Intelligence Weekly series.
