Pay Transparency, What You Need to Know

The sharing of salary or benefit information amongst employees can be tricky. Sometimes the company sees potential in a new hire that may not be obvious to others, resulting in a better than expected pay rate or salary package. Other employees might see this as an insult or a challenge to their own value. This has been such a concern in the past that many companies have made it policy that salaries are not discussed. This practice is now illegal due to the National Labor Relations Act (NLRA), and this demonstrates a movement toward pay transparency. Surprisingly, studies are revealing that pay transparency is actually preferred and beneficial.

Explain Your Pay Structure

Often it’s helpful to explain to employees why you have set your pay structure the way you have. It’s not just a matter of knowing what everyone makes; it also involves being open about underlying formulas and philosophies of how compensation is determined. This makes all parties accountable, both the managers and executives and the lower level employees. When the boss’s buddy gets a much larger Christmas bonus than everyone else, it’s a recipe for resentment and low morale. But a structured and well-explained pay structure prevents abuse and disgruntled employees.

Generational Differences

Baby boomers were trained in an era of secrecy when it came to employee salaries and benefits. Generation X-ers tend to be a little more open minded to transparency, though they can be uncomfortable with total exposure. Millennials, now the largest sector of the work force, value authenticity and free exchange of information. They prefer pay transparency. Since the millennial generation is the future, this trend will continue to grow.

The Benefits of Pay Transparency

There are many benefits to transparency. Here are some of the positive results companies see when they create an open environment:

Increased trust between the organization/leadership and employees.

Increased employee engagement. When pay is a secret, employees often overestimate what their coworkers are making, often leading to decreased job satisfaction. This can lead to lower production and higher turnover.

Higher job satisfaction and more loyal and long lasting employees.

Increased employee empowerment due to open communication about their performance in relation to their pay range (they understand the importance of maintaining high performance and how they need to improve).

Improved job matching and shorter periods of unemployment. Increased access to information helps people find suitable jobs more quickly.

Thousands of employees anonymously share their salary data on Glassdoor and similar services. Buffer has the formula they use to calculate employee salaries open to the public on their website. At PayScale, employees “don’t know each other’s specific pay, but we do disclose the median salary for each type of job. So employees can see whether they’re above or below it and have a reasonable discussion about it with their managers,” said Dave Smith, chief product officer. SumAll and Whole Foods have also embraced complete transparency. There are a variety of ways companies become more transparent, and there is not one right way for everyone.

Spectrum of Transparency

Not every company should post their salary formula on their website like Buffer; transparency is a spectrum and there are multiple levels companies can choose to be at. BambooHR‘s spectrum (below) describes levels of transparency from 1 (no transparency) to 7 (complete transparency).

Usually, somewhere in the middle works best, but each organization needs to evaluate and determine what would work best for them and their employees.

A Surging Tide

Your company’s level of transparency is a meaningful part of its culture and employer brand. Therefore, you need to understand exactly what your pay philosophy is and determine how transparent you want to be in your organization.

Glassdoor spokesman Scott Dobroski says there’s a “surging tide calling for employers to come clean on who’s making what.” He predicted, “Employers who embrace salary transparency will have the recruiting edge. This is a wake-up call for employers to be buttoned up, reevaluate their pay practices, and understand that they should be practicing equal pay for equal work.”