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Could Pay Transparency End the Great Resignation?

published9 months ago
6 min read

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.”

“And since the other firms near me are also required to share their salaries, there’s very little turnover at my company,” she added. “People who are a good fit with the culture stick around, since they know exactly what else is out there in the market.”

After I got home I dug into this a bit more, and realized that the law firm where she works is in California, the first state in the U.S. to pass a mandatory pay transparency statue. Since then, many other states and even some cities have followed suit with their own requirements. And of course, the U.S. isn’t the only place where this is happening — Europe is about to decide whether to make everyone's salaries public, and Australia, the UK, Germany, 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. But pay transparency certainly has its downsides, and employers may not recognize some of the other benefits this practice can offer in addition to closing pay gaps — from better employee performance to lower turnover rates.

With this in mind, the aim of today’s article is to examine some of the pros and cons of salary transparency — let’s take a look.

What are the benefits of pay transparency?

It can help close pay gaps: One of the main arguments in favor of pay transparency is that this practice could have a significant impact on gender and racial pay gaps. In the U.S., women are paid just 83 cents for every dollar a man earns. Meanwhile, black men and Hispanic men earn 87 cents and 91 cents, respectively, for every dollar a white man earns.

However, when organizations 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.

Various studies drive this point home. For example, one study of over 100,000 academics (and spanning two decades) found that pay transparency can reduce the gender pay gap by up to 50%. However, research from PayScale discovered that the effects could be even greater, with women who reported transparency at their organization earning between $1 and $1.01 for every $1 earned by a man.

It can increase employee retention: Research from Payscale finds that 57% of employees who are paid at market (and 42% of those who are paid above market) believe they are paid below market. The report notes that companies shouldn’t take this matter lightly, because “high engagement with everything except compensation doesn’t necessarily mean that employees won’t seek other opportunities.”

In fact, the research discovered that among people who believe they are paid below market, 66% are seeking a new job, compared to just 34% of those who believe they are paid at or above market. That means that employees who think they’re paid below market — even if they aren’t! — are nearly 50% more likely to seek a new job in the next six months.

This is certainly something for employers to keep in mind, especially in today’s employee-drive job market. Yet 78% of workers say their organization’s transparency as suboptimal, which means that most businesses are putting retention of their workers at risk by not being open about pay.

It can boost employee performance: Employees who have access to their co-workers’ pay information perform better than those who don’t. This makes sense — if you feel that you aren’t being paid enough, you’ll likely underperform at work. Whereas if you know you’re being compensated fairly, you might be willing to put in extra effort.

One study identified that the exact increase in performance might be around 10%. The study’s author discussed why this might be the case, noting that “We may work harder even if we don’t see a raise if we know that we’re doing well [compensation-wise] compared to our peers.”

A 10% boost in productivity in nothing to scoff at, especially when you consider that the only input required to unlock this increase is communicating about pay. However, it’s important to note that some research finds that pay transparency can also decrease performance — I’ll talk more about that in the next section.

What are the drawbacks of pay transparency?

It can wind up costing companies more: There’s no getting around the fact that companies have something to lose here — the ability to pay people lower salaries, and in doing so, boost their profit margins. By being more transparent about wages, employer may end up having paying more in order to remain competitive in the job market, and that could mean they won’t be able to hire as many staff.

Just this month, New York City’s proposed salary transparency law stalled due to pushback from a business group composed of the city’s largest companies. “During a labor shortage, or in the context of achieving diversity goals, the posted maximum [salaries] may be significantly higher than the historical salary ranges, creating dissatisfaction in the workforce and demands to adjust existing pay scales that the employer may be unable to afford,” the group said.

Companies have also voiced other concerns about how transparency requirements could affect their retention efforts in a time when workforce loyalty may be at an all-time low. “Competitors would just need to offer an employee another $20,000, and soon they can take our whole engineering team,” one business leader told TIME.

It can weaken performance and create jealousy issues: Todd Zenger, a professor at the University of Utah’s School of Business, offered some explanation around this in an article for TIME: “In environments where performance is difficult to precisely measure and isn’t observable to everyone, everyone believes they’re above average […] Broadcasting everyone’s individual pay triggers a process of social comparison.”

He's right — there are many subjective factors which can affect an individual’s pay, but employees may not always understand the bigger picture. And without that context, workers at the lower end of the pay spectrum (or those who feel they’re being underpaid) may do only the bare minimum required keep their job.

With these concerns in mind, it’s no surprise that one of Payscale’s main takeaways for employers focuses on communication: “Pay communications are woefully underemphasized in many businesses […] and these are essential for competitive pay strategies to be effective at attracting and retaining employees.”

It can put too much pressure on employees: In a recent Wired article, one business leader noted an unintended outcome of his company’s transparent pay practices: “One interesting thing we've learned with having transparent salaries is it can add undue pressure on new employees to prove they ‘deserve’ the salary level they negotiated.”

He emphasizes that this is counterproductive, since it's already a stressful period for new employees. It can even create a toxic environment for new staff, if established team members judge them for any missteps they make or refuse to mentor them because the newbies are being paid much more than they are.

This is a good point, and I’d argue that pay transparency can also put pressure on employees who aren’t new to their company. There’s a fine line between “boosting performance” and making workers feel they have to constantly prove their worth to their colleagues. This could be especially true for staff who’ve earned a high salary via tenure, but feel the need to justify this to jealous co-workers.

Do the pros of pay transparency outweigh the cons?

If your business isn’t located in a state or country where there are requirements around pay transparency, you’ll have to consider whether being more transparent is the right choice for your organization. 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, worsen the interpersonal dynamics at your company, and put too much pressure on people to perform.

My take? Pay transparency makes sense, even with these potential downsides. And with more and more countries, states, and cities proposing and passing laws around this, I think in the long-run we’ll see transparency become a core part of how businesses operate.

Thanks for reading — be sure to join the conversation on LinkedIn and let me know your thoughts on this topic!