Pay transparency is becoming a more visible management topic as a number of pressures force companies to consider how open to be about their pay structures, pay levels and pay gaps. As well as legal pressures, the sharing of information via social media and expectations of new generations are also encouraging change.
Some companies are leading the way. They are publishing their remuneration levels, policies and practices while others are more resistant. As well as potential risks, are there perhaps benefits of being more transparent?
A transparency momentum
Pressures on companies for greater pay transparency come from both a regulatory push in the EU and US and a broader debate in society about unfairness of pay secrecy. Taboos around sharing pay information are being eroded, particularly among Millennials. Individuals can access pay information on various websites such as Glassdoor and share on social media. In fact almost two-thirds of Europeans would support more transparency of remuneration.
Perhaps unexpectedly companies are also leading the change. Surveys confirm growing openness of employers towards pay transparency – both big and small. Meanwhile Human Resource professionals, required to consider ethical issues related to fair treatment of employees, are interested. A number of high-profile cases also demonstrate the costs of unexpected disclosure of pay disparities.
Some hidden benefits of being transparent
Recent studies show that a range of companies across countries increasingly support pay transparency measures for a variety of reasons. They hope for potential economic, ethical and reputational benefits. Such measures may allow employers to differentiate themselves from competitors and to strengthen their “employer brand” – resulting in increased job applications from candidates who value fairness and transparency.
They vary in size and activities but examples exist across the world, including – Buffer, SumAll and Whole Foods (USA); SAP, Thermador and Lucca (France); Rocketwerkz (New Zealand); and CareerFoundry (Germany).
Some potential benefits can be linked to perceptions of fairness and organizational justice which improve the employee-employer relationships and influence employee engagement. Studies show that pay transparency can boost employee job satisfaction, motivation, performance, productivity, decision-making, morale, and overall atmosphere, whilst and turnover intentions decrease.
There is also the possibility of reducing gender pay gaps. Pay transparency addresses the ‘negotiation gap’ between men and women which disappears when pay information is available, and explicitly stated as negotiable. It could also allow for more accurate comparisons taking into account specific criteria in compensation decisions.
Unwarranted gender pay gaps not only pose reputational threats but also legal ones. Action to address pay gaps via pay transparency measures can help prevent litigation and reputational damage. In knowing that salary decisions will be visible, managers and employers have incentives to engage in preventive action to correct flaws in pay structures.
Managers may also implement clearer policies and make better decisions. Improved decision making can avoid costly and burdensome court proceedings. Also, clarity of pay determination criteria and outcomes, and the management’s readiness to provide explanations and procedures enhance perceptions of fairness among employees.
A number of high-profile cases illustrate the legal and reputational risks of unjustifiable pay gaps. These include BBC in the UK is now facing around 300 equal pay claims. Other companies facing lawsuits for gender pay disparities include supermarket chains while in the public sector a UK City Council faces legal action.
Also some risks in transparency…
There are of course some risks related to pay transparency. Although some research suggests that when people knew why they earn what they earn they were less likely to quit there is mixed evidence on turnover. Pay transparency may lead to pay inflation and ‘poaching’ of talented employees by competitors who might not be so transparent. Also some employees who still believe they are underpaid may be more likely to leave following pay disclosure.
Other concerns related to pay transparency include upward pressure on wages, potential tensions and conflicts, and breach of employees’ privacy. Furthermore, while transparency may be a way to promote gender equality, it may highlight the rewards to men’s more continuous and linear career paths and underline disadvantage women’s access to higher pay and hierarchical levels.
Not a miracle but a step in the right direction
What is clear is that transparency needs to be supported by a certain level of equity in the existing pay structure to avoid the negative consequences of perceptions of injustice. Overall pay transparency may have benefits for both individuals and employers and despite the risks the benefits for organisations seem to outweigh the potential downsides.
There are also potential societal benefits in addressing the gender pay gap, albeit within rather than between firms. Since women are often concentrated in sectors with low pay, low status, and poor career prospects such measures can help. Yet informal working arrangements and limited scope for collective bargaining still hamper the potential to leverage the information resulting from greater pay transparency.
Given the growing momentum it seems that turning back the clock is not possible. This is supported by regulations and greater public acceptance of the principles of pay transparency. Reputational concerns and pressure from various stakeholders – via social media – are likely to contribute to further adoption of pay transparency measures. Thus maintaining pay confidentiality may prove costly for organisations in terms of reputation, exposure to litigation, and employee performance. The future seems a little clearer.