The payoff of meeting the pay-transparency challenge
In the not-too-distant past, an employer that allowed its workforce see everyone else’s pay, whether partially or in full, was about as popular as a 50% turnover rate.
How times have changed. Pay transparency has bounded onto the compensation scene, and it’s not going anywhere soon—other than up.
A survey from WorldatWork, with underwriting support from Mercer, in fact, found that 67% of organizations report pay transparency is increasing in importance at their organizations, with 4% rating pay transparency as having the “highest” importance.
That’s the positive news. The flip side is the Pay Transparency Studyreports that only 14% of organizations have approached pay transparency beyond a “moderate” level. Why the discrepancy? Some experts believe it may be because moving to pay transparency is, in part, both misunderstood and complicated. In any form, it might seem downright scary to seriously move into pay-transparency mode.
Other key survey findings include:
- More than 60% of organizations say managers are not trained to effectively deliver pay communications;
- 42% of employers do not share information about how jobs are valued and compensated within the organization;
- when pay equity adjustments are made, 53% of organizations explicitly communicate to the employees that the increase is the result of a pay-equity adjustment; 30% bundle it with other pay increases without explicit communication on the adjustment; and
- compliance runs the gamut: 22% of organizations are not subject to pay-transparency regulations, 32% are subject to minimal laws that affect practices, 38% have few laws to comply with but they’re manageable, and 9% are subject to several laws that they say are difficult to manage.
For purposes of the survey, WorldatWork, the professional nonprofit association focused on total rewards, defined pay transparency as the degree to which employers are open about what, why, how and how much employees are compensated, and to which they allow employees to share pay‐related information with others. This can extend beyond base pay to include variable pay and other rewards components, as well as other facets and/or means to rewards, such as promotions, recognition, development and performance assessment, according to WaW.
“As organizations address potential areas of unintended bias with pay systems, it’s reassuring to see that pay transparency is becoming more of a priority,” says Scott Cawood, president and CEO of WorldatWork. “Workplace equity is a complex issue, with pay transparency just one facet. This survey, along with other recent research, illuminates how critical it is for compensation and HR professionals to stay current on the evolving conversation in order to effectively build strategies that foster workplace equity at their organizations.”
Cawood says the greatest survey surprises were how few organizations have dealt with pay transparency beyond a moderate level, and how many managers are not trained to deliver pay communications. He also called response variance “interesting,” noting that organizations range along a continuum in how they rate their overall state of pay transparency with employees.
“Compliance runs the gamut as far as the degree to which organizations are subject to pay-transparency regulations,” he says, adding that there is an almost even split between organizations reporting compliance driving their pay transparency efforts versus other factors.
“The survey results certainly reveal the vast landscape of where organizations are regarding pay transparency-related policies and practices,” he says.
Theresa Sieg, director of compensation at Wisconsin-based Froedtert Health—a teaching hospital and a Level I adult trauma center (and WorldatWork member company)—says Froedtert has been on a gradual pay-transparency journey for the past three years and counting.
“Currently, we have a compensation philosophy regarding how jobs are evaluated in the market and placed into grades, and how individual pay is determined within the grades,” she explains. Sieg says leaders are informed regarding the market data and grade placement for jobs, and staff are made aware of how their pay placement within a pay range is determined.
“We also share pay ranges for jobs with staff and candidates,” she says.
Sieg says that, historically, there was a belief among staff and leaders that, because the compensation group wasn’t always transparent about market data, grade assignment or pay-range placement, it meant people were being shortchanged somehow. This led to employees believing their pay was not competitive, she adds, which frequently wasn’t the case.
It only made sense, Sieg says, that, with all of the resources Froedtert Health was investing into being “fully committed” to competitive pay, it would also be open and honest about how pay is determined, educating leaders and staff so they can become more knowledgeable and confident their pay is appropriate and competitive.
“Since [enhancing] transparency, we have seen reductions in turnover, particularly first-year turnover, in areas where market and equity reviews have been completed using our more transparent approaches,” she notes.
Most of all, Sieg says, it’s critical to have “top-down” support for such initiatives. Froedtert Health was fortunate that executive leadership recognized the importance of a more defined, transparent approach and have been very supportive of its rollout, she adds.
“We realize it’s a journey of continuous education and improvement—we’ve come a long way and made great strides, but we’re nowhere near done,” Sieg says, adding that many opportunities still exist for fine-tuning the strategy. “The process of evolving towards transparency takes time, especially since it can be a large cultural adjustment.”
According to Tauseef Rahman, principal at Mercer, pay transparency, along with pay equity and pay strategy, can play an important role in delivering an authentic employee experience, which directly impacts employee engagement.
“As organizations strive to balance business demands with changing workforce expectations around pay, it poses challenges as well as opportunities for both employers and employees to thrive in today’s economy,” he says.
Companies are likely dealing with the fact that there is “cleanup” that needs to be done to move towards greater transparency, he says, and that is likely causing the gap between intention and action. Rahman notes that the time between intention and action will run out for employers, given the expectations of employees and of society.
“The reality is, pay data is no longer something that the compensation function within the company owns or controls,” Rahman says.
Anna Krasniewska, vice president of advisory at Gartner, says her firm believes pay transparency is an issue that total-rewards executives and employees alike have seen grow in importance over the last three years and will continue to do so.
“Nearly all organizations feel that there are employee outcomes to be gained—such as engagement, fairness, differentiation and manager quality—but most organizations struggle [with] where to begin, and they worry about employee reactions to transparency, which slows their ability to get started,” she explains.
Employers on the fence are most certainly not alone, she says, noting that organizations often want pay systems and allocations to be perfect before starting on pay-transparency initiatives, for fear of what employee reactions might be.
“This is true for about 90% of organizations,” Krasniewska says.
“Employees already think pay situations are bad,” she adds. “In fact, employees perceive equity and fairness situations much worse than they are.” Krasniewska recommends a carefully considered transparency strategy, which give organizations the best path to inform and educate employees about pay and pay process, building confidence in the pay system.
“We often work with organizations on a roadmap to get started on pay transparency, so that organizations can keep moving forward on transparency regardless of starting point,” she says.
Regardless of where they launch, Krasniewska says, all organizations can make strides in pay transparency. She explains that when employers pursue the three most impactful areas of pay transparency—how to influence pay through performance; how payouts are determined; and how an organization considers internal and external equity—they can increase employee confidence by up to 15%. That, in turn, is correlated to engagement, performance and retention. She notes that the biggest mistake Gartner sees organizations make is waiting too long to start on pay transparency.
“Organizations need to remember that, just because they themselves are not communicating to their employees about pay doesn’t mean that no one is communicating to employees about pay—there are always external sources filling the void,” she says, noting that those sources don’t spend nearly as much time confirming that their information is correct, which only increases the work organizations will have to do in the long run to build employee confidence.
Gartner finds that that transparency actually serves three major needs for employees:
- Basic understanding: This is the notion that, if organizations share more about pay, employees will better understand pay itself and how to interpret the onslaught of outside data and sources about pay.
- A notion of fairness in employees: Organizations will need employees to move beyond knowing their pay amount to understanding the practice around pay, and a belief that these practices and allocations are fundamentally fair at their organizations.
- Build—but also regain—trust in the organization: With so many external factors—whether it’s outside sources or screaming headlines—most companies want their employees to rebuild institutional trust in the organization, especially when it comes to pay.
“When organizations design and implement their pay-transparency strategies around those three needs, they see significant gains in employee performance, retention and confidence in the organization,” Krasniewska says.
Mercer’s Rahman expects employee expectations for pay transparency to continue to grow in the years ahead, and that employers’ transparency will follow suit—both to meet employee demands and to address the public information about what and how companies pay.
To Rahman, the reality is that how and what a company pays is already in the public domain.
“Arguing whether self-reported data are accurate or not misses the point that people—and not the company—are telling the story of pay,” he says. “So, why wouldn’t a company want to take point a view on what their story actually is?”