Is Wage Transparency the Wave of the Future?
February 25, 2022
Pay transparency is big time in the news. The logic of transparent compensation is that employers are less likely to pay employees unfairly when pay is transparent. Under the National Labor Relations Act and National Labor Relations Board, employers cannot tell employees that they cannot discuss pay or conversely that pay is confidential.
These rights were extended to managers of federal contractors by the U.S. Department of Labor Office of Federal Contract Compliance Programs (OFCCP). The U.S. Government’s pay structure is highly transparent. All one needs to know is a person’s locality and GS level, and many state and local agencies pay by employee is published for the public to see.
Some jurisdictions like Colorado and New York City require employers to publish pay ranges for any job openings in their jurisdiction. Other states and municipalities are considering the same, and some require employers to inform applicants of salary ranges when asked such as California.
Is this a good practice for private employers? A recent study by Tomaz Obloj of HEC Paris and Todd Zenger of the University of Utah found that this practice is good for employers. The preliminary findings of the study to be published later this year found that pay transparency impacts both pay equity and pay equality. The study they conducted were of 100,000 U.S. based academics in eight states over a period of 14 years. What they found is that published salary data exerts internal and external pressure to reduce any pay gaps found. In fact, the study found that pay gap was reduced in up to 45% of organizations that had transparency in pay compared to those who did not. Inequality of pay was also reduced by about 20% leading to less variations in pay among comparables.
One issue that did arise in the study was that once transparency was implemented, there was less division of pay due to merit, or in the case of academics, publications, grants, patents, or books. However, the study leaders believed that merit measurables were more prevalent in the transparent than the nontransparent employers. However, the argument goes that there needs to be pay incentives for employees, where employees who are “superstars” might leave because the work they do is not appreciated appropriately.
There is an argument that the measures used for incentives are subjective and not truly objective. For example, the study argues that publication push in pay is greater for males than women because males are more likely editors in academic magazines and such more likely to select male written articles or women written articles. Whether this is a valid argument remains to be seen, but it does drive a possible connection between social equity and discriminatory work practices through “unconscious biases.”
On the other hand, the study has preliminarily found greater collaboration because of lesser disparity and less social comparisons. Competitive pressures would be reduced among employees. Yet, the study does not review the quality of the work in either environment to do a proper comparison to assume the truth of the hypothesis.
External pressures may force employers’ hands with pay transparency. A new pulse survey by Salary.com reveals that employees perceive a pervasive lack of pay transparency and pay equity at their organizations. Only 23% of employees said their employer is transparent about how people are paid in their organization and that it is okay to ask questions about their salary. Meanwhile, almost half (46%) of employees do not think they are paid fairly compared to people in the same role at other companies and over a third (37%) do not think they are paid fairly compared to their internal colleagues. “The pressure is on for organizations to pull back the curtain on pay, educating managers on their prevailing pay philosophy, and how to communicate it,” says Salary.com’s Vice President of Consulting David Turetsky.
In a war for talent, transparency will drive decisions by employees, but it may not mean providing publicly all salary information. There is still a reluctance of employees (and employers) to share what they make with other employees. However, pay philosophy, compensation structure, and openness for discussion as to drivers of pay is a major part of transparency. A cultural shift may have to take place in many organizations. Yearly pay analysis should be conducted. HR still needs to determine reasons for and programs to diminish pay gap, pay disparity, and pay inequality.