Pay transparency is a growing trend stemming from an increased demand for fair compensation for all. Advocates for pay transparency see it as a means to lower gender/racial pay gaps. They argue that pay transparency will hold companies accountable for compensating employees based on clear, objective criteria as opposed to potentially biased measures. That said, employers and researchers point out the unintended negative consequences of pay transparency. Employers argue that pay transparency leads to larger and more successful companies “poaching” talented employees by offering higher pay. Research has also shown that pay transparency compresses pay, meaning that employee compensation is more equal and that pay incentives for superior performance is limited. In the following article, we will discuss research on pay inequity, the pros and cons of pay transparency, and how to maximize the benefits of pay transparency while reducing negative consequences.
What the Pay Gap Looks Like
Before discussing the benefits and shortcomings of pay transparency, it is important to review current research on pay differences across demographic categories. The SHRM article, “Is Pay Transparency Good for Business?” by Theresa Agovino cites the following statistics:
When comparing men and women of all occupations, women, on average, earn 82% of that earned by men. The pay gap is the largest between white men and women of color. On average, Native American and Alaska Native women earn 71% of that earned by white men. Hispanic/Latina women earn 78% and Black women earn 79% of that earned by white men. The gap is smaller but still present between men of different racial and ethnic groups. Across all occupations, Black men earn 90%, Hispanic/Latino men earn 91%, and Native American and Alaskan Native men earn 88% of that earned by white men.
The pay gap is much smaller but not nonexistent when comparing individuals with the same occupation. Comparing individuals with the same job responsibilities, education, and experience, women and Hispanic/Latino men earn 99% of that earned by white men, Black women earn 98% of that earned by white men, and Black men earn the same as white men. Research shows that pay differences across demographic categories have more to do with the percentage of individuals of different backgrounds in higher and lower paying occupations than individuals with the same occupation being compensated differently. Agovino writes, “Pay equity advocates say the overall pay gap is a better barometer of salary equity because it illustrates how women and people of color are overrepresented in relatively low-paying jobs such as teacher and home health care worker.” For this reason, advocates argue that it is also important to analyze the demographic representation at all levels of a company.
Pros and Cons of Pay Transparency
Pay transparency is a growing trend aimed at combating inequitable pay. According to the SHRM article, “Trend Toward Pay Transparency Continues,” by Leah Shepherd, new state and local laws are pushing employers to adopt more pay transparency. California, Colorado, Connecticut, and Nevada have laws that require employers to include salary ranges in job postings. Washington state will require employers to include salary ranges in job postings starting January 1, 2023. Shepherd writes, “The state laws promoting pay transparency are meant to reduce the gender and racial pay gaps that persist today.” Experts have differing opinions on whether pay transparency will effectively close these gaps and promote equitable pay.
While research is limited at this time, there are a few studies that provide valuable insight. In the aforementioned article, “Is Pay Transparency Good for Business,” Agovino cites a 10-year study by business professors Tomasz Obloj and Todd Zenger, which demonstrated that greater pay transparency led to a 20% decline in gender pay inequity among academics. While these are promising results, a study by Zoe B. Cullen and Bobak Pakzad-Hurson found that overall salaries decreased by about 2 percent in states that passed laws protecting employees’ rights to discuss pay. Furthermore the Harvard Business Review article, “Research: The Unintended Consequences of Pay Transparency,” by Leon Lam, Bonnie Hayden Cheng, Peter Bamberger, and Man-Nok Wong, reports that pay transparency leads to employers reducing performance-based incentives so that pay is more comparable across the board. This can lead to lower salaries for everyone.
Pay equity isn’t the only factor to consider when weighing the pros and cons of pay transparency. The TIME article, “Should You Share Your Salary With Co-Workers? Here’s What Experts Say,” by Samantha Cooney points out other important considerations. According to the article, pay transparency can lead to more productivity and job satisfaction among employees who know they are being compensated fairly compared to their coworkers. Furthermore, pay transparency can help companies maintain a positive reputation. Employers that clearly define an objective process for determining pay are less likely to deal with claims of inequitable pay. If wages are competitive, pay transparency can also help companies hire talented employees.
Despite the pros listed above, Cooney notes that pay transparency can also lead to jealously and tension between coworkers. Employees are likely to compare their performance to that of their coworkers and are likely to think of themselves as being a top performer. If an employee sees that they are making the same salary or less than someone they consider to be a poor performer, conflict and pay negotiations are likely to occur. Pay transparency can also create further hardship for companies that cannot afford to pay higher salaries. Many employers fear that publicizing employee salaries will lead to more successful companies poaching talented employees by offering higher pay. In order to keep up with the pay offered by competitors, some companies will have to higher fewer employees.
Making Pay Transparency Beneficial for Everyone
Given the pros and cons of pay transparency, we return to the Harvard Business Review article, “Research: The Unintended Consequences of Pay Transparency,” for advice on how to maximize the benefits of pay transparency. The article recommends the following three steps:
Clearly and objectively link performance to rewards: Salary and other benefits should be determined using objective measures. This is difficult to do if there is no agreed upon criteria for evaluating performance. Companies must implement clear pay policies that are linked to objective, measurable criteria.
Provide training to promote clear and accurate pay-related communication: The article states, “One challenge in adopting pay transparency is managers’ limited understanding of their company’s compensation policy, even though they’re the ones managing employee inquiries.” The best way to combat misinformation about compensation policies is to provide training and learning resources on the topic.
Restructure reward systems: The authors’ research revealed that with pay transparency compressing pay, employees are negotiating non-monetary rewards for high performance. These rewards, known as idiosyncratic deals or i-deals, include benefits such as career development training, supplementary health benefits, and choices in work tasks or location. In order to prevent i-deals from being unfairly rewarded, it is recommended that companies formalize i-deals into their reward structures. In other words, i-deals should be rewarded objectively rather than being granted solely to employees who attempt to secure them through negotiation.
Pay transparency is a complicated practice that can lead to a variety of positive and negative consequences. While some emerging research demonstrates that pay transparency decreases the pay gap, critics are quick to point out that pay transparency leads to companies reducing performance-based pay incentives to avoid criticism of what some perceive to be inequitable pay. With increased societal and legal pressure to adopt pay-transparency policies, companies can take steps to maximize the benefits of transparency for employers and employees.
Want to learn more about preventing bias in your workplace? See our article here.