Pay Transparency Looks Good on Paper but Proves a Tricky Policy to Implement
Pay transparency — or, a corporation’s practice of making its employees’ salaries public — is a widely contested subject. When talking about the gender or race pay gap, pay transparency is seen as a viable solution. However, the actual implementation of pay transparency has caused intense debate, in which critics of the policy say transparent salaries could make employees disgruntled and demotivated, and ultimately hamper productivity.
The pros of pay transparency
Salaries currently exist in a highly secretive, hush-hush space. For employees within organizations that encourage internal competition among colleagues, salaries are often determined by a person’s negotiation skills, relationship with the boss, or resources to make good on a threat to leave if salary demands are not met. Often, these advantages, through societal conditioning and a patriarchal reward system, rests with the men, which leaves marginalized groups such as people of color, and disadvantaged groups, such as women, out of the loop.
With pay transparency, the more employees know about how much they make in relation to others in the company, the more empowered they feel to ask for equal pay. Since women make considerably less than their male colleagues — 34% less in India, according to an Oxfam report — and people of color are paid even more disparately in countries like the U.S., pay transparency could play an essential role in overcoming bias and holding corporations accountable to fair practices.
In January 2019, LinkedIn released its 2019 Global Talent Trends, which surveyed more than 5,000 professionals in 35 countries, including India, to reveal pay transparency is becoming more common across the board. “Transparency creates fairness, and fairness creates trust,” Josh Bersin, a global industry analyst, wrote for LinkedIn. The research measured a 136% hike in salary data shared on LinkedIn between September 2014 and August 2018, with 27% of professionals reporting their companies were transparent about pay. In India, 57% of Indian professionals surveyed agreed that pay transparency is crucial to a company’s progress.
Arguing from the corporation’s perspective, Bersin says that pay transparency “gives the company an opportunity to get ahead of the rumors and clearly explain ‘why’ we pay what we do. In most companies, up to 35% of all ‘wages’ are paid in the form of benefits, so if you’re transparent, you can explain to your employees the ‘total investment’ you’re making in them.” These benefits could include health and life insurance and retirement benefits. The LinkedIn report also showed employees felt happier and satisfied when their and their colleagues’ pay was transparent; not knowing would have left them “uneasy” and “distrustful” of management.
A reason for this is given in a 2016 Cornell study, published in the Journal of Business and Psychology, which found that employees tend to pick up bits and pieces from conversations about their coworkers’ salaries and make uninformed judgments about how much they are being paid relative to their colleagues. In the absence of pay transparency, “If I don’t know my co-worker’s pay, I assume that I might not be getting paid as much, and I decrease my performance,” Elena Belogolovsky, co-author of the study and assistant professor of human resource studies at Cornell, told Time. “When people don’t know each other’s pay, they assume they are underpaid.”
Pay transparency would remove the possibility of such an assumption and avoid performance drops, just as it would dispel bias both from the employer and employees’ sides.
A model for pay transparency
An example of how pay transparency can be implemented can be inferred from the case study of Verve, a U.K.-based tech firm that made public the salaries of all of its employees — from writers, editors, to the CEO of the company, Forbes reported. “The discussion was overwhelmingly in favor [of pay transparency]. There were very few that didn’t want it, and those that didn’t were open about the fact that it had much more to do with how they were brought up and an emotional feeling they had about money,” Verve CEO Callum Negus-Fancey told Forbes.
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He implemented a set criterion for evaluating job performance: “job scope and market value of the position,” Forbes reported. “As people perform well, they get given more responsibility and bigger projects, which then results in more pay,” Negus-Fancey told Forbes. The other criterion he employed was market value of the position, which was appraised by collecting salary data for comparable job positions in the market and evaluating the company’s own salary data against the average to ensure they remained attractive to employees. Forbes reported, “no employees left the organization after pay became transparent. A handful of employees needed further explanation as to why some employees were paid significantly more than others. But, because Verve was using objective data to determine the salaries, there were rational explanations for all of the pay discrepancies.”
Touting the policy as having attracted a “diverse workforce,” Negus-Fancey reported an almost 50% female workforce at Verve, adding, “people join organizations based on what they do, not what they say. They want to see tangible proof that your company encourages diversity.” Pay transparency at Verve, Negus-Fancey told Forbes, also eliminated the need for what is generally a process disadvantageous to women — salary negotiation. Women disproportionately suffer from imposter syndrome and are often hesitant about negotiating a higher salary; when they aren’t hesitant, they are often seen as aggressive, a perception that, if hired, often proves to be a deterrent for their progress within an organization. Negus-Fancey told Forbes that with pay transparency, employees could only make a case for why they should be promoted to a role with more responsibilities, which would result in higher pay, but it eliminated the need for employees to employ ‘better’ negotiation skills to ask for a higher salary for any particular job description. Everything was already predetermined and had been communicated to all employees beforehand.
Building on Bersin’s point about how pay transparency can help the employer, Negus-Fancey told Forbes, “People have a lot more clarity about how they can move up in the organization, horizontally or vertically, and that is going to help them think more intelligently about their career, and gives them power they haven’t had before. As a result of pay transparency, we’ve all been spending much more time thinking about career development and how we can help people understand the different skills they need to acquire to operate on a different level in the organization.”
Several reports of high-profile women in Hollywood — such as Variety’s feature about Grey’s Anatomy star Ellen Pompeo, and of Julie Delpy of Before trilogy fame, show that when the women found out how much less they were making compared to their male co-stars, they took action to correct the wrong. Pompeo relentlessly campaigned to be paid equal to Patrick Dempsey (and ultimately succeeded, but only when Dempsey left the show), and Delpy threatened to quit the franchise right before the third movie, when she was finally paid the same as Ethan Hawke. Pay transparency, enabled both Pompeo and Delpy to make an airtight case for pay parity, and employ considerable time, effort and mental energy to achieve said parity. It proved to be the first step toward bridging the gender gap.
The cons of pay transparency
But pay transparency can be a double-edged sword, writes Todd Zenger, an industry expert in strategic leadership, for Harvard Business Review. “Broadcasting pay is as likely to demoralize as it is to motivate.”
Zenger says that in most organizations, performance is not an easily measured metric. In a survey of 700 engineers from two Silicon Valley companies that Zenger conducted, he found that most employees considered themselves to be better performers than their peers. “Nearly 40% felt they were in the top 5%. About 92% felt they were in the top quarter. Only one lone individual felt his or her performance was below average. This inflated sense of self-worth makes the organization’s task of linking performance to pay tremendously difficult,” Zenger writes. Pay transparency, considering such “exaggerated self-perceptions,” will only make employees think “their current pay is well below where they think it should be,” Zenger writes.
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The effects of this burst bubble, are dire, according to Zenger. A newspaper in California, the Sacramento Bee, listed a website that contained the salary information of all California state workers, including those of the faculty at the University of California. UC researchers studied those who found out they were paid below the median income, and found they were more likely to be dissatisfied with their job and express an intent to leave their position, than those who were also paid below the median income but didn’t know it.
In another experiment, Zenger and colleague Tomasz Obloj distributed employees at a European bank into four tournament groups and asked them to compete for an awards program — the awards varied in number for each tournament group. The tournament groups that knew they were competing for fewer awards, especially those who were in contact with the groups that were competing for more, deliberately decreased their performance. Zenger conclusively writes for HBR, “The more ‘in your face’ those receiving preferred rewards are, the greater the negative emotions that dampen productivity.”
Pay transparency, while intended to ensure fair wages for employees, can also have the opposite effect. When employees find what their colleagues are making, especially if their colleagues are earning a higher wage than they are, they tend to use the information to ask for a raise — as demonstrated in an instance in 2015, in which a Google employee, Erika Baker, distributed an internal spreadsheet of employees’ salaries, which then-employees used to negotiate 21 higher salaries. Pay transparency, when implemented with anticipation of such an outcome, can pull down salaries company-wide, Quartz reported. “Suppose you’re one of four very long-tenured and highly productive workers, and you discover your three pod-mates all pull down 20% more than you do. You confront your boss. He’s a) angry you found out, and b) embarrassed and brings your pay in line (likely offering a lame excuse). In this discreet setting, transparency = equity.”
This is demonstrated in a working paper by Brown University professor Bobak Pakzad-Hurson and Harvard Business School professor Zoë Cullen. “The results of a model they built are surprising and not encouraging for transparency advocates or for workers: Pay in this model fell 7–8% and employer profits rose 28%. With wages low, employers hired more workers, which accounted for some of the increased profits in the model,” Quartz reported. Basically, employers might be willing to agree to a raise to incentivize one high-performing but comparatively underpaid employee from a pool of employees with the same job description. But with pay transparency, and an expected demand by all employees to be paid the same, the employer wouldn’t want to bring all the others up to the same higher pay scale; rather, the employer would find it economically more feasible to lower the wage of the high-performing employee, thereby bringing down the highest wage a particular position could bring. In such a case, pay transparency works for the employer, but all employees go home with lower pay across the board.
Even for the corporation, there is a way in which pay transparency can prove harmful. One common response that corporations employ to quell the discontent that pay transparency fuels, Zenger writes, is to “flatten pay,” or dissociate performance from pay, instead levelling the pay scale at every hierarchical position within a company — a senior position will warrant higher pay; a junior position will warrant lower. This, according to Zenger, “has predictable outcomes: Motivation declines, and the best, brightest, and most capable depart for firms that reward performance and recognize ability.” This is especially true for a more horizontal operation, wherein employees with the same job description and pay have different strengths and perform at different levels. In such cases, pay transparency may be “fine if you’re trying to foster a culture of cooperation and teamwork. But the consequences of that may be that the better performers are going to leave,” Zenger explains to San Francisco Chronicle.
“The real problem with pay transparency is that it focuses individuals on comparing pay rather than on elevating performance,” Zenger writes.
The solution to ensure effective pay transparency
But keeping in mind all the cons that could come with pay transparency, no one is suggesting it can’t be effective — just that it has to be implemented carefully.
Pay transparency in whatever form increases the need for strong, effective unions, Quartz reports. A union is more capable of handling the “blizzard of data” pay transparency could unleash upon employees. “They have professional staffs that analyze industry wages, understand company profit margins and competition, and know how to negotiate. That’s closer to a level playing field,” Quartz reports.
The pitfalls of pay transparency can also be solved by determining the factors that measure performance and communicating them to employees clearly. Factors that determine the salary of an employee include job description, an employee’s skill set, and experience, Amit Tandon, founder of Institutional Investor Advisory Services, writes for LiveMint. “Gender, location, profitability of the organization, the company’s compensation policy, and industry standards are considered to be the other important determinants of compensation packages,” he adds. In India, an “absence of adequate disclosure norms means Indian companies are not obliged to clearly state the criteria they use to devise compensation packages. Arbitrariness follows,” Tandon writes, estimating that CEOs make 85 times more than an average employee at a given company. Tandon offers a solution, especially for salaries of CEOs: companies should make transparent a “fixed component” of all job positions, along with being open about which performance metrics will be evaluated for additional monetary benefits.
According to the LinkedIn report, employers can take certain steps to ensure employees are not left disgruntled after finding out how much everyone earns, much like how Verve implemented pay transparency:
Step 1: “See how your pay stacks up. Conduct an internal audit to see how your pay compares to competitors and whether you have any major pay gaps across gender, race, and those in similar roles. If you do find significant inequities, detail a plan to fix them — whether by immediate raises or changes to your promotion policies.”
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Step 2: “Decide how transparent you want to be. There are many types and degrees of pay transparency — you could share salary ranges on job posts, share ranges with employees (for their own role or all roles), or even publish exact salaries.”
Step 3: “Solicit employee input. Get your employees involved in the process. Share your proposed policy details and expected results with them across multiple channels. Give employees several ways to provide feedback and share concerns, from anonymous surveys to live Q&As and one-on-one discussions.”
Step 4: “Develop clear compensation criteria. Before rolling out pay transparency, make sure you can clearly answer what factors determine an employee’s pay, such as years of experience or past performance. Qualify what it takes to be at the minimum, midpoint, and maximum of the pay range.”
Step 5: “Train managers to discuss pay appropriately. Talking about salaries can be uncomfortable. Training managers how to answer questions and explain compensation policies can make it easier for employees to have these conversations and feel good about them.”
Step 6 and 7: Take it one step at a time, in a phased multi-year approach, and “communicate clearly as you roll out the policy. Ensure employees have all the details they need and continue to reinforce the rationale behind transparency.”
Pay transparency is a complex policy to dissect and even trickier to implement successfully, primarily because it involves managing a large group of employees effectively and making sure everyone is on the same page. Sure, when a job description involves A, B and C tasks, with each task associated with a certain monetary compensation, one person’s ability to fulfill the job description, and the employer’s evaluation of the employee’s performance, becomes easier — therefore creating space for pay transparency.
But increasingly in corporations, one employee dons many hats, and a certain job description is fulfilled by two or more people. With work environments becoming increasingly democratized and encouraging of collaborative task management, it becomes difficult to associate set monetary benefits to ill-defined divisions of labor. That doesn’t mean corporations should completely disregard the idea of pay transparency; it means they should attempt to create a work environment wherein measuring performance is a transparent and clear process. This would render a company more equipped to enjoy the benefits of pay transparency, both for themselves and their employees, while also proactively tackling the operational drawbacks that could accompany such a policy.