A conundrum for the pay transparency era
Let’s kick off this newsletter with a compensation & benefits case study. This is a hypothetical scenario I shared with my LinkedIn network a while back — and it sparked interest from a number of compensation professionals.
In fact, it’s a real-life puzzle that I once faced as an HR director. Picture this: one of your employees — let’s call her Alice — is being underpaid to the tune of 25%.
(This can happen when the recruitment team does their job ‘too well’, managing to secure a candidate below the budget for a role. After all, if the candidate’s pay expectations are too low, it’s not exactly standard practice to correct them…).
When salary review time roles around, comp & ben teams are left facing a dilemma.
In this situation, we have two options:
- The fairer choice: Close the gap straight away by giving Alice a 25% raise. In subsequent years, return to a normal rhythm with increases of 3–4%.
- The more effective choice: Reduce the gap more gradually by awarding Alice three consecutive increases of 10% over the next three years.
Which is the right choice?
Spoiler alert: the majority of the professionals who responded to my puzzle on LinkedIn voted for the fairer option.
That was also the choice I made when I was confronted with this situation for real. I was lucky enough to be working for a great company that allowed me to act quickly to resolve the issue and correct the injustice ‘Alice’ had experienced.
But the reality is that things don’t always play out like that, for two main reasons.
The first — and the most obvious — is budgetary. During salary review season, we often simply don’t have the means to deal out significant raises, even if we want to. After all, any increase we give Alice needs to fit within the budget allocated to her team.
The second is something more subtle: it’s about how Alice perceives the raises she receives. Because here’s the thing: the human brain doesn’t treat good news in a totally rational way. We’re not twice as happy with a 20% raise as we would be with 10%, for example.
Alice might see a 25% increase as amazing news... but three 10% increases as three separate pieces of great news. And three pieces of great news are better than one amazing one followed by two underwhelming ones.
The second solution would increase Alice’s overall satisfaction over the next three years. The impact of a one-off increase of 25% isn’t likely to last very long. And she’ll probably feel disappointed to see her increases dwindle to 3 or 4% in the following years.
This phenomenon is known as hedonic adaptation — the idea that we quickly return to a ‘baseline’ level of happiness after receiving good news. The emotional impact of a big change, whether positive or negative, tends to fade over time. This principle has been well studied in positive psychology — and it explains why a substantial raise might not have a lasting impact on our overall happiness.
In short, solution #2 is more effective in terms of both budget and employee engagement… as long as Alice doesn’t realise she’s been underpaid all this time!
Pay transparency shifts the playing field
Just a few years ago, we might not have asked this question at all.
We would likely have seen option #2 as a win-win, allowing us to correct the disparity while increasing Alice’s engagement and loyalty by offering her three significant raises.
Of course, this only works if Alice doesn’t realise she’s being underpaid — but that wouldn’t have been much of a gamble. After all, talking about pay has long been taboo among colleagues. If anything, a sudden increase of 25% might have been the thing to tip Alice off that something was amiss.
Today, things are different.
For one, employee expectations have changed. Younger generations (and older ones too) now expect their employers to be transparent and ethical in their decisions, including those related to pay.
Employee loyalty is built on reciprocity. And, as these societal norms evolve, employees are also becoming much more willing to discuss their salary with others.
Today, Alice’s dissatisfaction could easily ripple out to her peers. Even if they’re not directly impacted, they'll have a harder time trusting their employer after seeing a colleague mistreated.
And that’s without even factoring in the new legal requirements introduced by the EU Pay Transparency Directive. Soon, this type of situation could have serious consequences for employers who fail to play by the rules. Any difference in treatment between two colleagues will need to be justified by objective criteria.
In the pay transparency era, option #1 is not only the fairest decision, but probably the most effective one too. What once seemed like a dilemma… no longer is.
The ‘leaky bucket’ of pay equity: recruitment
The truth is, the right answer is neither option #1 or option #2.
Because by the time we reach this point, it’s usually too late. Even if the company takes the honourable route and raises Alice’s salary in line with her colleagues, there’s a big risk of losing her trust and engagement once she realises she’s been misled.
Plus, despite the best intentions of HR teams, there often just isn’t the budget to offer the kind of raise Alice deserves.
The real solution, then, is to tackle the problem at its source by adopting fairer recruitment practices. After all, it’s often at the hiring stage that pay disparities first emerge. And they can be significant: we could be talking about gaps of tens of thousands of euros depending on each candidate’s negotiation skills.
Such pay disparities only widen over time — and it’s usually not possible to correct them with small, regular raises.
After all, how can you close a 10–20% gap with a budget of 2–3%? Trying to manage things this way becomes a constant uphill battle, which ends up hurting everyone involved.
Until now, in the Compversation, I’ve focused on performance evaluations, pay increases and salary reviews. In the coming issues, I’ll turn to the ‘leaky bucket’ of pay equity: recruitment.
I look forward to diving into it with you!
Let’s keep the conversation going
Here’s a selection of content to give you food for thought. Feel free to send me articles that you’ve found interesting on this subject!
Equal Pay Day spotlights the stalled progress on closing the pay gap: ‘Women are never, ever going to catch up,’ researcher says — Jessica Dickler, CNBC
In the United States, Equal Pay Day was marked on 25 March — representing how far into 2025 women had to work to earn what men did in 2024. This article from CNBC uses the occasion to dive into the reasons behind pay inequity and why it persists.
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