The Double-Edged Sword of Pay Transparency

Although not all companies have embraced the move to pay transparency, there’s one unalterable fact that they’re going to have deal with regardless: Employees are probably talking to one another about their pay anyway.

Talking about one’s pay was once considered taboo in the workplace and, at some organizations, still is.

Yet a combination of the rise of websites such as PayScale and Glassdoor, which include salary information about jobs, and the focus on the pay gap that exists between men and women has made the topic both more urgent and more acceptable to discuss.

“We live in an environment where information is generally more transparent,” says Sandra McLellan, Willis Towers Watson’s North America rewards practice leader. The move to pay transparency has a lot to do with simply adjusting to the realities of today’s world, she says.

Some companies are embracing the concept. More than half (53 percent) of the respondents to Willis Towers Watson’s 2018 Getting Compensation Right survey are either planning to or considering increasing the level of transparency around their pay decisions.

Employees at Verve, a marketing company, have access to an internal document showing what everyone at the company makes. CareHere, a healthcare company, plans to share the pay ranges for all positions at the organization with its 1,100 employees by next year. Employees at Hired, an online jobs marketplace, also have access to pay ranges for positions at the company.

At Hired, whose website lets users find out the potential starting salaries for a range of jobs in various industries, the move to pay transparency was simply in keeping with the nature of its business, says Senior VP of People Kelli Dragovich.

“By the nature of our product, this topic is out in the open,” says Dragovich, who joined the company in 2016. It’s important for Hired’s internal practices to reflect its brand, she says.

The company began implementing a pay-transparency process several months after her arrival, she says. First, Hired spent about seven months creating a “career-leveling framework,” working with a third-party vendor to get all levels of market-pay data for each role in the company (the firm had approximately 200 employees at the time; it expects to employ about 270 by the end of this year).

“A lot of companies start by getting external market data and trying to apply that internally, but that can actually worsen pay inequality,” says Dragovich.

During the process, the management team took care to explain to employees what it was doing and why, which was important, she adds.

“That transparency of process, ensuring employees understand why something is being done, makes the ‘trust meter’ go up a bunch,” she says.

Pay transparency has its share of critics, including Todd Zenger, a strategy and strategic leadership professor at the David Eccles School of Business at the University of Utah. He labeled pay transparency a “double-edged sword” that can do as much damage as it can good when employees find out their colleagues are making more than they are.

“Broadcasting pay is as likely to demoralize as it is to motivate,” Zenger wrote in the Harvard Business Review in 2016. “While pay transparency may accelerate attention being paid to remedying pay discrimination, managers should consider moves toward pay transparency with their eyes wide open.”

A recent study from the National Bureau of Economic Research finds that transparency can backfire, causing employees who make less than their peers to decrease their productivity.

However, employees who understand the reasoning behind their pay tend to feel better about their company, says Lydia Frank, vice president of PayScale, which recently highlighted its “Hero Award” recipients, the top 100 companies that openly share their compensation practices and approaches.

“There’s some pretty great evidence showing that if people believe your compensation process is transparent and if they understand what’s happening, there’s a huge impact on your ability to attract and retain talent,” says Frank.

Without adequate information, people tend to be poor judges of whether they’re being fairly paid, she says, citing a recent PayScale survey that asked people how they thought their pay compared to what employees in similar jobs were paid.

“Only 30 percent of the people surveyed could place themselves in the right bucket, and of the people who guessed wrong, most guessed low,” she says. “The moral is, if you’re not being transparent around how decisions are made, then people are going to assume they’re underpaid.”

“You could be doing all the right things around pay, but if your employees don’t know about it then it’s a huge missed opportunity,” says Frank.

At Hired, as at most companies that practice it, pay transparency does not take the form of making everyone’s salary available to everyone else. Instead, employees who want to know are told about the company’s process for collecting market data, where they fall in the salary ranges for their position and why, says Dragovich.

Research has shown that when employees understand the “whys” of how their pay was determined, they’re less likely to leave the organization, says McLellan.

Pay transparency is getting more attention in corporate boardrooms these days, says McLellan, as concerns about pay inequality (and how it can affect company reputations) mount.

“There’s a lot of interest in ensuring that pay programs are fair and equitable,” she says.

The road to transparency isn’t always easy, especially at companies with complex salary structures or with legacy programs that may no longer make sense, says McLellan. In such cases, a move toward pay transparency can be an opportunity to restructure those programs and make pay more equal, she says. It can also be an opportunity to reevaluate performance-based pay programs for fairness, she adds.

Pay transparency makes sense for employees and organizations, says Dragovich.

“As an HR person, you should welcome these conversations about pay, because if you can’t explain to someone the reasons why they’re paid what they are in a way that makes sense, then something’s wrong with the system,” says Dragovich.

Andrew R. McIlvaine
Andrew R. McIlvaine is former senior editor with Human Resource Executive®.