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Practice Management > Compensation and Fees

Is pay transparency killing off the last workplace taboo?

By Alan Goforth

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Hang around the break room, and there’s likely to be a conversation about whether Peyton Manning is overpaid, what Warren Buffett’s latest mega-deal is worth or how much Angelina Jolie will earn from her next movie. People enjoy gossiping about what other people earn.

In most businesses, however, sharing employee salary information has long been taboo.

This attitude may be changing, as a growing number of workplaces are making pay transparent, according to several industry and university experts on employee compensation.

“Salary transparency has become a hot issue, because it’s a departure from the secrecy that has traditionally been associated with compensation,” says Tim Low, vice president of marketing for PayScale Human Capital in Seattle. “Employees and candidates are more informed about their value to employers than ever before because they have access to websites that provide real-time market data about specific jobs.”

Christine Ko, general manager of salaryBOOST in nearby Bellevue, Washington, sees the same trend.

“The number of companies who [provide salary transparency] are small,” she says, “but I’m sure many companies have at least entertained the idea. Companies that have implemented salary transparency include Buffer, SumAll and Whole Foods.”

Although businesses of all types are moving toward transparency, it may be easier in industries with a homogenous workforce, Low says.

“Think about a company with many entry-level sales reps or customer service reps, all having approximately the same skills,” Low says. “These employees will be compensated in a similar fashion. However, a company that requires very specific skills — seasoned software architects, for example — may have a huge salary range for the same position. When there is a wide variation in wages across an industry, it makes disclosure more challenging for the company.”

Any discussion of salary transparency must begin with a good working definition, says Stephanie Thomas, a research assistant at the Institute for Compensation Studies at Cornell University and a lecturer in the school’s department of economics.

“There has been a lot of buzz lately, and we need to be clear about what we mean by pay transparency,” she says. “We can think of pay transparency in terms of transparency of pay policies and practices, where there are clearly established guidelines for pay decisions; those guidelines are communicated to employees; and employees understand what they need to achieve in order to earn the next merit raise, incentive bonus, or promotional increase.

“This is very different from thinking of pay transparency as posting a spreadsheet in the company break room detailing everyone’s hourly rate, annual salary or total compensation.”

Because salary usually accounts for only about 70 percent of an employee’s total income, it may be more helpful to think in terms of compensation transparency.

“While salary is the component that most people think about, other benefits also have a big impact on the overall value of the compensation package,” Ko says. “Company equity, vacation days and flexible work options can add value to a compensation package that the salary doesn’t show.”

Changing landscape

Several workplace, technology and demographic trends are fueling the conversation. Low points out that workers now are far more mobile; union representation has declined; and most pension plans are now defined-contribution plans.

“One of the pros of salary transparency in this modern environment is that it can be an opportunity to cultivate deeper trust with employees,” he says. “When employers lift the veil of secrecy and offer salary information, it can be a powerful element in cultivating a shared understanding and openness. When this happens, employees feel more aligned with the organization overall.”

More compensation information is available than ever, thanks in part to third-party websites such as Glassdoor.com, PayScale.com and Salary.com, which release salary information. Millennials, who grew up in an age of instant information, appear to be open to the concept of greater transparency.

“Typically, younger employees are far more familiar with social media,” Thomas says. “It’s something many of them have grown up with, and I think they are comfortable sharing information, whether it’s about where they went and who they went with, what they had for dinner or how much they’re getting paid.

“Many people feel uncomfortable talking about how much someone makes or how much they make. There is a tendency for us not to want to talk about money and disclose those details. I think younger employees don’t feel the same constraints — or don’t feel those constraints as strongly — when discussing pay.”

None of this means human resources professionals should immediately print out salary lists and post them on the company bulletin board. There is a continuum from complete secrecy to total transparency, and companies need to be aware of some of the pros and cons before changing policies.

Transparency advantages

  • Improved trust. “Numerous studies have shown that employees care a great deal about the fairness of decision-making procedures within an organization,” Thomas says. “Being transparent about the good compensation decision-making processes you have in place can alleviate perceptions of unfairness and strengthen employees’ commitment to the organization. Of course, if you don’t have good compensation decision-making processes in place, pay transparency will shine a spotlight on this deficiency.”
  • More job satisfaction. “Without transparency, employees don’t know if they’re getting paid fairly,” Ko says. “You can only fix your salary to a fair-market value if you think that it’s too low. Once people know that they’re being paid fairly, they will have more job satisfaction. People become happier if they don’t constantly worry about what their coworker makes.”
  • Increased motivation. “Because salaries are openly discussed,” Ko says, “employees can ask questions about how they can earn certain salary levels. You can see what positions make the salary you want and learn how to improve your skills to move up the ranks.”

Transparency disadvantages

  • Unexpected reactions. “Switching from a confidential system to a transparent system might embarrass people,” Ko says. “If companies don’t adjust their salaries to be fair before the shift, employees who made less money than their peers might be embarrassed or angry.”
  • Time commitment. “Once salary discussions are no longer taboo,” she says, “the company will need to take more time to talk to their employees about their compensation.”
  • Loss of talent. Employees who feel undercompensated or underappreciated may be tempted to leave for greener pastures.

However, most negatives have more to do with how policies are implemented than with compensation transparency itself.

“I don’t see a strong argument against transparency with respect to pay policies and practices,” Thomas says. “I do think, however, that there is an argument to be made against sharing employee-level compensation information. I think that privacy concerns, potential morale issues and unhealthy competition among employees outweigh any benefits of disclosing employee-level compensation information.”

Making it work

So what’s the best way to move toward greater transparency without unnecessarily rocking the boat? In three words, communicate, communicate, communicate.

“Be very open to talking about individual compensation packages with your employees,” Ko said. “It’s important and personal to your employees, so make sure to take the time to discuss their salaries if they want to. If they can’t get a clear answer from the company why they make less than someone else, the employees might begin to resent each other and the company. Let them ask questions and be willing to internalize and put into action their concerns.”

Managers must clearly understand the company’s compensation policy before trying to explain it to employees, Low says. “If you are going to be transparent, data is your friend,” he says. “Employees will feel reassured if they have access to the relevant market information showing how their boss arrived at each salary.”

No matter how well prepared an employer is, however, pushback is likely.

“All companies have some salaries that will raise eyebrows,” he says. “In the real world, things happen. Think for example about an administrative employee who has been with the company for 35 years and is indispensable. This person may earn a lot more than a highly trained professional who just joined, and also more than you would ever want to pay someone else in the same job. Identify these outliers and use data to show their intrinsic value.”

Companies need to determine what level of transparency is most comfortable for them, and then implement a policy that is helpful and non-threatening to employees. Simply going through this process can lead to unexpected benefits.

“If an organization is considering implementing a policy of pay practice transparency, use it as an opportunity to thoroughly review your compensation practices,” Thomas says. “Take time to really think about how you’re rewarding employees, what you are rewarding them for, and make sure the pay policies and practices you have in place are supporting your strategy and compensation philosophy.”

See also:

40% of employees would quit for comparable insurance

Obscenity rules: Swear to resist

Rethinking wellness incentives

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