Retirement and Financial

The Case for Pay Transparency

Why is pay secrecy ingrained in the American work culture? Can a new wave of laws challenge this practice and narrow the wage gap?
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The fact that external stakeholders demand transparency from organizations is old news. Openly sharing information about a company’s operations and practices often attracts new investors and builds trust in existing ones.   

However, sharing information within a company is a different story. Internal transparency, especially around salary ranges and compensation, is not common and is considered taboo.  

There are a few reasons behind this.  

For starters, many believe that salary transparency may lead to conflict and jealousy. Also, sharing this information may violate HR policies and personal privacy. Despite all these concerns, many compelling reasons make pay transparency a worthwhile practice, especially in the current business landscape. 

This article explores why pay secrecy is ingrained in the American work culture and how a new wave of laws aims to challenge this practice and narrow the wage gap.

What is Pay Transparency? 

To start off, what is pay transparency 

Pay transparency is a communications policy for employee salaries or wages within the company.  

A company can voluntarily provide pay-related information to employees, like information about the process of the pay system – process transparency, pay levels or ranges – outcome transparency, or even an open policy for employees to share information about their pay – communications transparency.  

The definition can extend beyond base salary to include other reward systems and components, such as promotion, recognition, and development.  

In other words, pay transparency doesn’t always reveal what each employee is making.  

Instead, it is about establishing and communicating pay practices to help employees understand how their salary is set, identify salary discrepancies, and encourage proactive conversations between managers and employees.  

The end goal is to build employee trust in the fairness of the process.

Pay Equity vs. Pay Equality

Before we discuss the different benefits of pay transparency, it is important to distinguish between pay equity and pay equality.  

Often, employers and stakeholders use equal pay and pay equity interchangeably, but these terms answer different questions about compensation. There is a lot of overlap between the two concepts, but they are not the same. 

So, what is the difference between pay equity and pay equality? 

Well, pay equity means that equal work should be given equal compensation for the comparable work of employees, regardless of their identities. In other words, equal pay for work of equal value.  

In comparison, pay equality is a broader concept encapsulating the systematic issues and culture that lead to the wage gap, conscious or unconscious biases, equal opportunities, social norms, and other motivating factors. Equality calls for freedom from employment discrimination on many grounds beyond gender.

The Importance of Pay Transparency in the Workplace

There are many reasons why pay transparency is essential.  

One reason is that it can help to close the gender pay gap. When women know what their male counterparts earn, they can negotiate for higher pay themselves.  

Pay transparency can also help to prevent discrimination in the workplace.  

If employers know that their pay practices will be made public, they may be less likely to discriminate against employees based on race, ethnicity, or gender.

Pay Transparency & Employees

From employees’ perspectives, pay transparency may provide workers with relevant information and documentation to negotiate pay rates and potentially challenge pay discrimination. Pay transparency is crucial because it can help employees understand what they are worth to their employer, how their pay compares to others in their field, and whether they are being paid a fair wage. 

A 2022 report by Beqom showed that 60% of U.S. employees would switch companies to one with more pay transparency. And over a third (37%) of workers said their companies do not share gender pay gap data internally or externally, with an additional 11% reporting they believe pay gaps have increased over the last year.  

Clearly, pay secrecy and ambiguity only fuel suspicions and distrust among employees.

Pay Transparency & Leadership

Leadership has a big role to play when it comes to pay transparency.  

Leaders can start by educating themselves and their employees about the benefits of pay transparency. They can also create policies and processes that support pay transparency. 

Lastly, leaders can model pay transparency by being open about their own pay.  

C-level executives should address any pay disparities between the top and bottom salaries in the company. Currently, the average U.S. wage ratio, which is the pay difference between the top and bottom salary in an organization, is 300:1. Since 1978, CEO compensation has grown by 1007.5%, while typical worker compensation has increased by only 12%.   

Between 2019 and 2020, CEOs’ pay decreased by 1.6% due to pandemic cuts, averaging $15.5 million. However, in 2021, CEO compensation had a whopping 31% increase from the year prior, reaching $20 million.  

For comparison, the median worker compensation only saw a 4% increase in 2021, averaging $71,869. Typical workers’ wages have not increased as fast as those of the C-suite, so if companies want to keep an engaged and motivated workforce, they need to improve their labor standards.  

According to the 2020 Pay Transparency Study, 67% of organizations consider pay transparency increasingly important. However, the report also showed that only 14% of organizations give pay transparency a “moderate” level of attention. Business leaders must acknowledge the disconnect between recognition and action on pay secrecy.

Pay Transparency & HR

HR plays an instrumental role in coordinating pay equality initiatives with leadership, training managers to convey the correct information in the best way possible, and answering employees’ questions on the fairness of their compensations.  

When successful, the human resource department can effectively bridge the communication divide between the boardroom and breakroom conversations, align everyone’s expectations, and maintain a positive company culture.

The Culture of Transparency & Its Impact on the HR Strategy

Today’s new generation of workers values transparency and demands greater data disclosure for gender pay gap reporting and tracking environmental, social, and governance (ESG) targets.  

The recent upsurge in public awareness and demand for transparency around organizational pay practices has led to a new focus on the role of HR in promoting and embedding such practices. In particular, there is an expectation that HR strategy and pay practices should be aligned to create a culture of transparency around pay. 

For HR professionals, this increased focus on transparency presents both challenges and opportunities.

On the one hand, there is a need to rethink traditional approaches to pay and benefits, which may no longer be fit for purpose in a more open world. On the other, there is an opportunity to use data and analytics to build a more strategic approach to workforce management, which can help to attract and retain the best talent. 

A key challenge for HR is to develop a pay strategy that: 

  • Is fit for purpose in a more transparent world. 
  • Takes into account the need to attract and retain the best talent. 
  • It is aligned with the organization’s broader business strategy. 

To do this, HR professionals need to properly understand the organization’s overall business strategy and the latest pay and benefits trends.

Pay Transparency Laws

Many employees face a great dilemma on whether discussing salaries at work is allowed, especially if the company has a pay secrecy policy. Is discussing wages allowed? 

The answer is –yes.  

In fact, policies that forbid employees from disclosing their salary are unlawful and violate federal labor law. The National Labor Relations Act, also known as Wagner Act, protects employees’ rights to discuss wages and the conditions of employment, even for non-union workers.  

Equity, transparency, and ethics in the workplace have grown into a robust movement in recent years, urging state lawmakers to focus on introducing new pay transparency laws 

On November 1stbusinesses based in New York City with at least four workers must include a minimum and maximum salary or hourly wage on their job ads. A salary range must be included, whether it’s a listing for a job, transfer, or promotion opportunities, or they advertise online, at a job fair, or on an internal bulletin board.  

Currently, 17 states in the U.S. have laws around pay transparency, but not all of these states require employers to publish a salary range.   

As of 2022, the states that require employers to provide a salary range are the following: 

  • California 
  • Colorado 
  • Connecticut 
  • Maryland  
  • Nevada 
  • Rhode Island  
  • Washington 

According to the National Women’s Law Center, since 2019, four other states have adopted similar laws requiring companies to disclose a salary range to job candidates at some point in the interview or negotiation process.  

It’s clear that pay transparency is becoming a trend in the U.S.

Pay Transparency Examples

Pay transparency is not a new concept – it’s a reality around the globe. Today, multiple countries around the world, including France, Lithuania, Norway, and Iceland, have transparency legislation or policies in place. 

Pay transparency measures can incorporate a diverse set of tools, like periodic pay disclosures, periodic gender pay gap reports or audits, and workers’ rights to access pay data or discuss it. 

The European Union (EU) is currently implementing a groundbreaking Pay Transparency Directive, which will come fully into force by 2024. Other international organizations, such as UN Women, Eurofound, and the Organization for Economic Co-operation and Development (OECD), have also put the topic of pay transparency on their agendas.  

The latest reports show that more than half of the 38 OECD countries mandate regular gender wage gap reporting by companies in the private sector. Moreover, a recent Eurobarometer survey showed that almost two-thirds of Europeans support publishing average wages earned in a company by gender and job type. An employer will not be obliged to disclose the individual salaries of their employees.  

While these pay communications policies are still in their infancy, certain countries have practiced transparency for decades.  

For example, in Norway, anyone can look up a person’s earnings online.  

Taxes and gross wages, derived from payroll records, have been publicly available since 2001. Interestingly, greater transparency also resulted in a narrower gender pay gap. According to the World Economic Forum, Norway ranks third out of 144 countries in terms of wage equality for similar work.

Pay Transparency Nondiscrimination Provision

All companies doing business with the United States government are federal “contractors.” As a condition of doing business as a federal contractor, companies must post the “Pay Transparency Nondiscrimination Provision” notice and include it in employee handbooks and manuals. 

This policy was implemented to protect employees working under federal contracts from discrimination when inquiring about or discussing compensation.

Pay Transparency & Gender Pay Gap

Women faced numerous challenges in their labor market participation even before the pandemic. Symptomatic of these challenges is the gender pay gap, which stands at 20% worldwide. This means that, on average, a woman earns $0.80 for every $1 a man makes. Women are overrepresented in low-wage jobs with shorter hours and underrepresented leadership positions 

Not only do women hold desirable work positions, but pay negotiations are also unfavorable to women. Research shows that women are perceived negatively and as greedy and aggressive when they negotiate for better salaries.  

Unsurprisingly, women ask for 6% less on average – and this gap increases for male-dominated fields and with the job level. Even in the same job, women earn less. For example, on average, female managers make 23% less than male managers. Another survey of U.S. doctors in residency found that women’s ideal starting salary averaged 92% of men’s ideal pay.  

This inequality in earnings has long-lasting consequences and can build up to millions of dollars over a lifetime. In fact, the average income lost over a 40-year career due to the pay gap is $406,280.  

Studies show that when job applicants are informed about the types of compensation, benefits, and conditions that are negotiable or typical for the position, the gender wage gap narrows. To reiterate, an abundance of research shows that gender gaps close when employers are transparent, highlighting the effectiveness of transparency laws.

Pay Transparency & Racial Pay Gap

Once we break down income inequality data by race and ethnicity, we find that the pay gap is even wider for people of color. Racial wage discrimination in the labor market is a long-standing issue that many minority groups face in the United States.  

However, historical data reveals that little to no progress has been made in reducing racial wealth gaps and inequalities between Black and White households over the last 70 years. The earnings of Black men, as a percentage of the earnings of white men, are at the same place they were in the 1960s and 1970s 

Currently, Asian Americans have the highest median income, followed by White Americans, Hispanic Americans, African Americans, and Native Americans.  

A recent PayScale study of over 160,000 workers found that people of color are less likely to receive a raise when they ask when compared to white men. This implies that conscious or unconscious biases are still present in performance evaluations and salary negotiations.  

Workers’ ability to demand higher wages rests mainly on salary disclosure and transparency factors.

Benefits of Pay Transparency

As shown above, transparency can help reduce the gender and racial pay gap. By making salaries and compensation public, pay transparency can help to ensure that women and minority groups are paid fairly.  

In addition, pay transparency can help employers identify and close pay gaps within their own workforce. By conducting a pay gap analysis, employers can make informed decisions about where to invest in order to create a more equitable and inclusive workplace.  

Furthermore, pay transparency is a legal requirement in many states, and failing to meet relevant compliance standards may bring legal implications for companies.   

Compensation is an integral part of the employee experience, and pay transparency positively impacts employees’ perception of fairness, trust, and job satisfaction, thus, driving better workforce outcomes.  

Pay transparency generally leads to more engaged, productive, and committed employees. When employees feel they are being treated fairly, they are more likely to be engaged and motivated at work. There are a number of pay transparency benefits, both for individuals and organizations.

Disadvantages and Risks of Pay Transparency

Removing the veil of secrecy around compensation can cause a lot of trouble for employers. Once salary information becomes publicly available, everyone will know how much that role is paid. This includes job seekers, current employees of the company, and workers at competing companies within the same sector.  

While pay transparency can help companies achieve goals, it can also cause unintended consequences for employee performance and engagement. Employers that release compensation information without context may find that employees are less engaged and that their performance suffers. In some cases, workers may feel that their salaries are unfair or that their employers favor some employees over others. 

And without addressing pay inequalities, salary transparency only reveals these gaps but doesn’t solve them. As a result, employees may become less productive, less likely to stay with the company, and more likely to seek other employment. 

In addition, one of the most significant disadvantages of pay transparency is the added cost for employers. Raising salaries to market rates and closing internal wage discrepancies during the adjustment period could cause temporary financial damage. With tight budgets, companies may have to reduce their workforce or hire fewer people to ensure they are paying everyone a fair wage.  

Finally, pay information may inadvertently give some employees the information they need to raise a discrimination claim. 

Before implementing any policies, employers should weigh the benefits and disadvantages of pay transparency.

Pay Transparency & The Future of Hiring

There is no one-size-fits-all answer to how financial transparency will affect the future of hiring, as the effect will vary depending on the specific organization and industry in question.  

However, some potential impacts of pay transparency on the recruiting process include increased competition for jobs and a need for employers to justify any pay disparities within their organizations.   

Additionally, pay transparency may also lead to a greater focus on skills and experience when hiring, as opposed to factors such as an applicant’s salary history or negotiating ability.

Pay Transparency in Job Postings

Almost one-third of U.S. jobseekers say the biggest frustration in their job search is the lack of salary clarity or no compensation info at all, according to a survey by AdzunaAs much as 67% of job seekers consider compensation the most important element of a job description, but only 12.6% of companies make that information public.   

However, the days when salary ranges in job postings are something vague as “competitive” or “dependent on experience” may soon be history.  

In the future, employers may choose to be transparent about pay right from the start by including salary information in job postings. This practice can help level the playing field for job seekers, as all candidates will have the same information and salary expectations about the position before they apply. 

For employers, including salary information in job postings can help to save time and money during the hiring process, as they will not need to spend as much time negotiating salaries with candidates.  

In fact, 81% of job seekers are more likely to apply for a job that lists the salary range, according to beqom’s Compensation and Culture Report. As a result of recently passed legislation, several states are already seeing benefits.  

For example, in Colorado, job openings were filled 8.2% faster than neighboring state Utah, which doesn’t have pay transparency laws.

Pay Transparency & DEI Recruiting Goals

Another advantage of including salary ranges in job postings is that it may help attract a wider pool of qualified candidates. Some individuals may be discouraged from applying for a role if they do not know the salary in advance.

Data shows that companies get 13% more applications from Black students when annual salary information is included in the role description. A broader pool of applicants can help achieve the company’s DEI recruiting goals. 

Furthermore, undisclosed salary ranges make it more difficult to reveal practices that contribute to inequality. To help reduce bias in the job market, companies need to be transparent about their salary ranges.

Pay Transparency & DEI Recruiting Goals

Another advantage of including salary ranges in job postings is that it may help attract a wider pool of qualified candidates. Some individuals may be discouraged from applying for a role if they do not know the salary in advance.

Data shows that companies get 13% more applications from Black students when annual salary information is included in the role description. A broader pool of applicants can help achieve the company’s DEI recruiting goals. 

Furthermore, undisclosed salary ranges make it more difficult to reveal practices that contribute to inequality. To help reduce bias in the job market, companies need to be transparent about their salary ranges.

Pay Transparency & Employee Performance

In addition to promoting equity in the talent market, pay transparency can positively impact employee performance.  

When employees know their coworkers’ salaries, they can be more motivated to develop new skills and upgrade their knowledge to grow within the organization. With established pay structures available for everyone to see, employees will know exactly what is needed to get promotions or pay increases and will be more likely to put in the work to get there.   

Pay transparency can also help to foster a sense of team spirit and collaboration, as employees are more likely to work together towards common goals when they feel that they are being treated fairly.  

A study published in the Journal of Business and Psychology found that employees are much more likely to seek help from the right individuals when they know how much their coworkers make.  

In other words, pay comparisons can influence inter-relating behaviors, make it easier for employees to identify the experts, and promote help-seeking behaviors.

Pay Transparency Trends

The COVID-19 pandemic had a devastating impact on the world of work, and its effect is still felt today. It exposed and deepened many chronic inequalities, gender, racial, and income disparities.  

As a result, workers are demanding better working conditions and benefits, flexibility, and the final hurdle for equitable working – pay transparency. Workers want to know what their counterparts are earning and what factors influence how much they are paid. Employers are starting to catch on to this demand and the business benefits of pay transparency. 

With consumer prices rising 7.7% in the last year in the U.S., HR leaders must be prepared to answer employees’ calls for higher pay. Companies need to find a way to address pay fairness and employees’ concerns about economic uncertainty – regardless of whether they are adjusting wages to keep pace with the rising cost of living.  

Undeniably, the pay transparency trend is gaining momentum and could become increasingly commonplace in the years to come. At least 62% of companies are considering or planning to disclose pay rate information in the future.  

As public pressure continues to mount, companies can benefit by getting ahead of the narrative and increasing their transparency surrounding compensation.

Conclusion

The growing trend of salary transparency is becoming more and more prominent as organizations face employee engagement and satisfaction issues. While this may seem daunting to some employers, the benefits of pay transparency far outweigh any potential negatives. 

Pay transparency fosters equity and inclusion in the workplace, can be used to achieve DEI recruiting goals, and has many benefits for employees and organizations, such as enabling a wider pool of qualified candidates, helping to correct pay disparities, fostering team spirit, and increasing motivation.

Written by shortlister editorial team

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