Ask Addi P.: Should We Adopt Salary Transparency?
Dear Addi P.,
We've been hearing more and more about salary transparency — to the point that we're thinking of completely revamping our approach in order to provide compensation information to our employees. Do you think this is the right way to go to show that our organization takes pay equity seriously?
— Uncertain in Utica
From the sounds of it, your organization is like many others who are only used to providing salary transparency for senior executives whose compensation must be reported in SEC or IRS filings. But as you suggest, the push for equal pay in recent years has seen more organizations disclosing salary information at other, if not all, levels. If your company is committed to a culture of fairness, this level of transparency can be a boon. On the other hand, it can also lead to some unintended issues.
Know your options
The Harvard Business Review (HBR) and the Wall Street Journal (WSJ) offer different perspectives for and against salary transparency (respectively). Salary transparency doesn't necessarily mean posting everyone's salary for all to see.
According to WSJ, full pay disclosure appears to work well when compensation is based on rank and position tenure, as is often the case with government jobs, or when performance measurement is transparent, as with brokerage firms or other sales organizations.
HBR suggests that if you want to achieve full disclosure, it's best to phase it in.
But keep in mind that you can reap benefits without full disclosure. Instead, some organizations disclose what specific positions pay or even their standardized formulas for determining pay, if they have them.
Weigh the pros and cons
Now that you know your basic options, how do you weigh the advantages and disadvantages? One major benefit of wage transparency is a renewed sense of commitment among employees. Stemming from an increased sense of control over their careers, this commitment might mean that employees try harder to perform and deliver, leading to greater productivity for the company.
Another pro is that implementing pay transparency can eliminate or significantly reduce bias in pay. According to HBR, American women make an average of 77 cents for every dollar their male counterparts make. In the federal government with its policies around wage transparency, that average is 89 cents. By standardizing pay based on position and performance level, you take the wind out of certain types of bias. This in turn helps supports equal pay.
One potential drawback is the loss of your ability to negotiate salary with new employees. Since you'll essentially be paying a standard rate for any given role, you can face the choice of losing a great employee or having to justify the higher salary to everyone.
Another con and one that's hardly surprising is discontent. If people in a particular position know that their peers are being paid more than they are, they will want to know why they aren't being paid the same, especially if they're denied a raise or other salary increase. This kind of resentment can spoil your team's morale and your employees' interpersonal relationships, resulting in reduced productivity, lower creativity and even increased turnover. Organizations that keep pay secret may believe that this lack of transparency actually prevents resentment, since employees can't confirm their suspicions. But even if the organization is not providing the information, employees can obtain it from online compensation sites, job listings and each other. It comes down to a perceived trade-off between resentment over imagined or suspected pay disparities versus resentment over known pay disparities. Since suspicions are usually enough to form a resentment, your position on pay transparency may actually have little to do with employee resentments about pay.
Prepare for the shift
If you decide the pros of pay transparency outweigh the cons, be as clear as possible about why and ensure that you have the systems in place to truly support this change. Are you hoping to increase feelings of fairness and equal treatment throughout your ranks? Or are you hoping to increase engagement, commitment and productivity? In order to effectively use your pay system as a motivational tool, according to WSJ, that system must "lay out a clear path for employees to earn more by improving their performance." That's why it's crucial to have accurate job descriptions, an understanding of how each position relates to the company's goals and an evaluation system that's supported by clear standards and expectations. This information can then serve an aspirational purpose for employees, who will better be able to make decisions about their career goals and how to achieve them.
Moving to greater transparency will likely require a certain level of discomfort. You may need to have some difficult management conversations as you seek to make the internal changes needed to reap the full benefits. If your salary transparency initiative is tied to an effort to establish a system of equal pay, you'll need to review the salaries of all your personnel, providing raises to those below the standard and possibly even reducing the pay of those above it. You'll also need to communicate these changes to your staff and try to get everybody on board. For this, it may be a good idea to solicit feedback on the process, as well as on the pay scale and the performance parameters and measurements. While these preparatory conversations can be awkward and uncomfortable, the hope is that they will result in a more satisfied workforce.
Doing the in-depth preliminary work of reviewing your pay structures and creating a more equitable system sets you up to decide what level of salary transparency best supports your organizational goals. Involving employees in the process and phasing the system in should minimize any disadvantages and, eventually, maximize the benefits.
Get up-to-date pay transparency resources and best practices at ADP.com/PayTransparency.
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