What is Pay Transparency? Understanding the Laws, Policies, and Drawbacks
Talking about compensation has historically been frowned upon. Lately, it's become less of a taboo. This change has been driven by the creation of new laws and a cultural shift of employees expecting fair pay. Many states have enacted pay transparency laws and more will follow in 2023Öffnet in einem neuen Tab.
These recent changes have left companies wondering: what is pay transparency and how can HR and finance leaders get up to speed?
We'll answer this question, uncover the benefits and disadvantages, and discuss how your company can implement its own pay transparency policy.
Let's dive in.
What is pay transparency?
Pay transparency is the practice of openly disclosing compensation standards to current and potential employees and stakeholders.
Pay transparency does not follow one single standard for disclosure and it's up to companies to follow the laws of their state or county and decide which pay practices they want to follow.
In the United States, employers must follow what the laws require in their state or county. Some laws prohibit companies from asking about a candidate's salary history while others require that employers must provide a range and description of benefits when posting a job opening.
There are both advantages and disadvantages of publicly sharing pay information. First, let’s walk through the benefits.
Benefits of pay transparency
Pay transparency can certainly be advantageous when it comes to attracting and retaining top employees. Openness regarding salary information can:
Promote pay equity
While pay transparency alone cannot close the gender pay gap, one of the most impactful benefits of transparency is that it helps fight against pay inequality. Pay equity means that equal work deserves equal wages. Pay equity goes beyond just equal pay for equal work no matter who you are – it levels the playing field and gives everyone what they need to be successful.
Build trust and engagement
When companies are transparent about pay, employees will have a deeper level of trust in their organization. In fact, SHRM researchÖffnet in einem neuen Tab has found that 91 percent of employees who feel that their company is transparent about how pay decisions are made also said they trust that their organization pays people fairly.
Employees who feel confident that they are being paid fairly for their output will feel more engaged and connected to the work that they do.
Attract top talent
If top talent can see what you’re willing to pay for them from the beginning stages of the recruitment process, you might be more likely to win a candidate over a company that does not share pay information early on. Salary ranges on job postings also have the potential to catch a candidate's eye.
Beyond that, pay transparency signals to potential employees that you treat people fairly and take DEI initiatives seriously. And with 80% of workersÖffnet in einem neuen Tab saying that they want to work for a company that values DEI, being transparent about compensation will also help with attracting top talent.
Increase employee retention
It's likely that employees who feel they are paid fairly for their work are more likely to stay at their current company. This is because they are more likely to trust their company, as we discussed above, and are confident that they are earning a fair wage for the work that they do.
Your DEI strategy also plays a part in retention when it comes to pay transparency. Being open about how employees are paid shows your current workers that your company takes DEI initiatives like pay equity seriously. Workhuman® research shows that 72% of employees say that DEI is somewhat to very important in terms of staying at their job.
You might like: How to promote diversity, equity, and inclusion in the workplace
Encourage productivity and performance
Another benefit of pay transparency comes in the form of increased productivity and performance. Not knowing if you're paid fairly can be distracting. When employees can see that they are paid fairly for the work that they do they are much more motivated to reach their goals and give 100% to their work.
And when employees can see how their pay can grow as they advance throughout the company, such as if employers share salary ranges for bands above an employee's current level, employees will be motivated to go above and beyond.
Reduce pay secrecy and rumors
When companies disclose salary ranges it's likely there will be a major decrease in pay secrecy and rumors. Pay secrecy and rumors can decrease trust, create negative team dynamics and lead to a toxic culture. By eliminating secrecy and rumors, your company will likely see a positive impact on your workplace culture.
Drawbacks of pay transparency
Most of the backlash caused by transparency boils down to the risk of losing great candidates and employees. But there are also some thorny and awkward scenarios that your company can – and should – prepare for.
Let's take a closer look.
Increase the competition between employees
There's a chance that transparency can increase competition between employees. For example, if two employees can see that an open role one level above them makes more money, and they have both taken on stretch assignments to prepare for that open spot, there could be increased competition to get that role.
Sharing salary details could reveal inequities between roles that are similar but have disparate pay. While we hope that your company will immediately solve for any inequities, your company should be prepared to deal with the competition and negative fall-out while you correct any inequities.
Employee poaching
Another downfall to pay transparency is employee poaching. It’s possible that an employer could see what you are paying an employee at your company and know that it’s likely they could convince them to leave for a higher compensation package.
Less successful hiring
Unfortunately, if your pay transparency policy is not as detailed as others, or you are offering a lower total compensation package, you risk losing employees and candidates to other companies that can workers offer more.
Examples of pay transparency in the workplace
Depending on the laws of the state that an employer is located in, pay transparency will look different at various companies.
For instance, some companies may publish salary ranges in job postings, while others may share information about pay scales during performance reviews. These are just a few examples of transparency in the workplace.
Let’s walk through what pay transparency in the workplace can look like:
- Compensation details are listed on a job posting in the form of a salary range (for example, $100,000 to $140,000 with a bonus of 10% annually)
- Compensation details, such as a salary range and detailed bonus opportunities, are made available to a top candidate during the recruitment process
- A pay scale, such as salary bands or ranges, is shared with employees
- Total compensation details, such as salary and bonus opportunities, is publicly provided and shared for all roles to each employee in the company
- Total compensation details, such as salary and bonus opportunities, are provided for all roles in the company and shared externally to the public
How to implement pay transparency policies
Now that we understand what pay transparency looks like in the workplace, let’s talk through the steps employers can take to implement pay transparency.
Identify the ideal level of pay transparency for the organization
First, your company needs to experiment and identify the ideal level of pay transparency for your organization. This will vary depending on your organization and state and district laws. For some, disclosing pay to the top candidate during the final stages of negotiation will suffice, but for others, you’ll provide the pay opportunities of every role available to all employees.
Conduct a pay analysis to identify discrepancies
This step is very important. Your company can’t fix any inequities until you understand what discrepancies your company is dealing with. Consider hiring an outside firm to pull this data and information together so you can ensure it is accurate and free of bias.
Correct discrepancies and update pay ranges
Once you have data on your pay discrepancies, update pay ranges and implement any other changes to ensure equal pay. Ensure that there are no long discrepancies in bonuses or other non-salary-based compensation as well.
Consider adding in a peer-to-peer recognition program like Workhuman's Social Recognition® to ensure equality among bonuses. Crowdsourced recognition programs that can be shared up and down the ladder offer opportunities to balance equity by tying compensation to effort.
Educate your managers and employees about the policy
Share any relevant data and guidelines with your leaders and managers and ensure they understand the changes so they can be a resource for their teams. Next, communicate policy changes to your employees. Consider sharing a company FAQ sheet and providing employees with the correct HR contact for asking questions or sharing feedback.
Monitor and update policy
Ask current employees and candidates who have taken part in your recruiting process to complete a survey on your pay transparency policy so your company can gauge how your policies are affecting your workforce.
Ensure that you're following and staying up to date with the transparency laws in your state. Continue to adjust your policies as needed.
Understanding pay transparency laws in the US
Not all states in the United States have pay transparency laws and the states that do have pay transparency laws vary in terms of disclosure. There are quite a few states that are expected to pass or enact laws by the end of 2023Öffnet in einem neuen Tab.
The best way to find out the most accurate and up-to-date pay transparency laws by state is to visit the state or government website and keep an eye on your local and national news outlets. The states that currently have pay transparency laws are listed below.
Which states have pay transparency laws?
- California
- Colorado
- Connecticut
- Maryland
- Nevada
- New York
- Rhode Island
- Washington
FAQs
What is the pay transparency law in Washington, DC?
There is a pending proposalÖffnet in einem neuen Tab that would require employers to disclose a salary range in job listings and restrict usage of past pay in deciding a new employee's wages.
What is the pay transparency law in New Jersey?
New Jersey has not yet enacted a statewide pay transparency law. However, in 2022, Jersey City enacted an ordinanceÖffnet in einem neuen Tab that requires all employers with over 5 employees to include a minimum and maximum salary and/or hourly wage plus benefits details in job postings.
Does MA have salary transparency laws?
Massachusetts is expected to pass a salary transparency law in 2023. If the law is passed, combined with The Massachusetts Equal Pay Act (MEPA)Öffnet in einem neuen Tab, Massachusetts will have the most progressive pay laws in the country.
Conclusion
Now that you can answer the question "what is pay transparency?" we encourage you to educate your leaders on the benefits, drawbacks, and pending laws in your state.
Although compensation has been stigmatized in the past enacting your own policies can help you attract and retain top talent. Most importantly, implementing a policy will help you find and solve for the pay inequities in your organization.
Remember that your company will have to be mindful of new legislation and keep an eye on pay competition in and outside of your workplace. Finding the right balance of pay disclosure in your company will lead to increased engagement, trust, and equity.
About the author
Alicyn Zall
Alicyn Zall is a writer dedicated to creating a more equitable and fulfilling workplace. With a focus on actionable, data-driven insights, her work empowers individuals and organizations to foster positive change. In addition to her contribution at Workhuman, Alicyn has served as an editor at Harvard Business Review where she developed books and articles about mental health and the future of work.