Pay Transparency, Explained

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Pay transparency is a major trend in HR these days. Read our FAQs to decide if pay transparency is right for you.

Pay transparency is having a moment, as I noted in my article on 2019 payroll trends.

Notable names such as Whole Foods and Stack Overflow have adopted the practice, and average businesses are starting to take notice, too: 53% of employers in a 2018 poll said they are “planning on or considering increasing the level of transparency around pay decisions” in the future. For a process that’s been shrouded in secrecy for so long, that’s huge.

Given all the fuss, you might be considering pay transparency for your own business. To help with your decision, let’s take a closer look at pay transparency and answer some common questions about it.

What is pay transparency?

A: Pay transparency is revealing a little—or a lot—about how much you pay your workers.

Pay transparency is the practice of allowing your company’s employee compensation figures to be visible to other people, either internally, externally, or both. It comes in two forms: partial pay transparency and full pay transparency.

Partial pay transparency is when you allow pay ranges to be divulged for roles in your organization without going so far as to reveal individual figures. This is typically used for recruiting purposes. If you’ve ever seen a job listing with information about the salary range for that position, that’s an example of partial pay transparency.

An example of partial pay transparency (Source)

Full pay transparency is when you reveal specific compensation numbers for every employee in the organization, from the CEO to the newly hired intern. Most companies choose to keep this visibility in-house, while more ambitious organizations, such as Buffer, choose to make all of their employee compensation data publicly available.

Buffer lists the salaries of every employee on their website (Source)

What are the benefits of pay transparency?

A: Benefits include reduced pay gaps, higher engagement, and greater organizational trust.

Being transparent about employee pay can accomplish a few things.

First, it can force you to put your money where your mouth is when it comes to pay equality. Women still make 81% of what a man makes, on average, and the gap for minority women is even wider. Fixing this gap in your organization, and making that visible to everyone, can go a long way in recruiting and retaining a diverse team of top talent.

Pay transparency can also arm managers and department heads with data-driven rationale for pay decisions. Instead of being confused and angry about why they didn’t get a raise they asked for, your employees may be more understanding of the decision if they can view organizational pay data that supports it.

There’s still more research to be done, but initial studies show pay transparency has positive effects on worker motivation and performance.

Are there downsides to pay transparency?

A: Yes, especially if your pay isn’t up to people’s expectations.

There’s an important distinction to note here: Being transparent about how much people are paid isn’t the same thing as paying people what they’re worth. There’s a very real risk of backlash if workers feel like their pay, in relation to their coworkers’, is less than they deserve, especially in more competitive environments such as sales.

These risks carry over to recruiting, as well. Though job seekers want to know salary details about roles before they apply, they may balk at a lower-than-expected range (even if it’s negotiable) and apply elsewhere.

Finally, even if everyone’s happy with the numbers, there could be consequences. Reducing pay gaps and offering pure pay equality can put such a strain on compensation budgets that you may have to lower growth hiring goals, or worse, let some employees go. There’s also a risk that competitors will be better able to poach your best workers with a pay bump.

What does pay transparency law say?

A: You can’t prevent your workers from discussing their pay.

Whether you decide to formally practice pay transparency as an organization or not is your decision, but the law does one make thing clear: You cannot get in the way of your workers discussing their pay on their own.

According to the National Labor Relations Act (NLRA), even non-union employees have the right to discuss conditions of employment with one another, including pay. The NLRA classifies these discussions as “protected concerted activity.” Punish an employee for discussing their wages, like one St. Louis company did, and the National Labor Relations Board (NLRB) will take you to court. Executive Order 13665 offers similar protections to federal contractors.

Despite these laws, many companies continue to illegally prohibit pay discussions at work. Among private employers, for example, 41% discourage wage and salary discussions, and 25% outright forbid it.

What should I do if I want to implement pay transparency?

A: Evaluate past pay and performance data and coach your managers.

Pay transparency is far from mainstream today—only 17% of private employers practice it.

Given that only 19% of U.S. employees give their company an “A” grade for equity in pay and promotion, though, that’s about to change. If you’re considering pay transparency for your own business, here are some important next steps:

  • Go through your pay data with a fine-toothed comb. Look at the going market rates in your city, your performance reviews, and even those negative Glassdoor reviews to determine if you’re really paying everyone at your company fairly before making that information transparent. A compensation management system is great for helping with this analysis.
  • Establish clear criteria for evaluating performance. You know what doesn’t mesh well? Transparent salary data and opaque performance review decisions. Work with leadership to develop clear reasoning for different performance ratings in order to help managers and build more organizational trust in the process.
  • Coach your managers on how to have effective pay discussions. If you go transparent, employees are going to have questions about their compensation compared to their peers, and managers need to be ready to give good answers. One option here is to do what Stack Overflow did and create a pay calculator to determine everyone’s salary. Managers need only point to the calculator to explain pay decisions.

If you want more payroll help, check out these additional Capterra resources:

Looking for Human Resource software? Check out Capterra's list of the best Human Resource software solutions.

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About the Author

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Brian Westfall

Brian Westfall is a Senior HR and Talent Management Analyst for Capterra. His research has been cited in various publications, including TIME, Entrepreneur, Fast Company, and Undercover Recruiter.

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