Demystifying Pay Transparency: The Complete HR Professionals' Guide

December 8, 2023
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Pay transparency is a hotly debated topic — with the EU Pay Transparency Directive changing how we talk about pay. 

It used to be pretty common for two employees with the same skills and qualifications, working in the same role, to be paid different salaries. A decade ago, no one but HR would have known, because for a long time, discussing salaries was considered off-limits. 

But — today’s employees don’t follow the same rules. 

The combination of employees openly talking about their pay, plus new transparency laws, means it’s time to rethink our approach to pay transparency. 

What is pay transparency? 

You likely already have a good idea of what pay transparency is, but for the avoidance of doubt, at Figures, we define it as:

The practice of openly sharing some or all of a company’s compensation structure.

Pay transparency doesn’t have to be all or nothing — there are various approaches a company can take, including:

  1. Full transparency: The gold standard, this approach includes making all details open knowledge. That includes your compensation policy, salary grids, plus details about individual salaries and how they’re calculated. 
  2. Transparent compensation policy and salary grid: At this level, a company has a clear compensation policy outlining the criteria that guide compensation decisions. Salary grids for each position are also published, showing the range for each role. Individual salaries are not typically published. 
  3. Transparent compensation policy: At this level, a company shares their compensation policy, but doesn’t publish details of salary ranges or individual salaries. 

Of course, the final option is no transparency, when a company provides no information about their compensation policies and salaries. While a hidden salary grid may be in place to frame and define wages, employees don’t have access to this. 

In this kind of company, employees in the same roles with the same skills are often paid different wages, because no one knows what anyone else is earning. 

Thankfully complete non-transparency is becoming less common, as more companies discover the importance of pay transparency. 

Why is pay transparency important?

From resolving pay discrepancies to reducing pay gaps and boosting employee performance — pay transparency can help drive powerful business results.

Reducing pay gaps

By openly publishing salary data, any gaps and disparities can quickly be identified and resolved. Fostering a culture of full pay transparency is shown to be one of the most efficient ways to reduce pay gaps due to gender, ethnicity, or any other demographics that shouldn’t have an impact on someone’s pay.  

Driving pay equity 

Equitable pay is a key priority for employees — and it’s not hard to understand why. Employees finding out that they all get paid differently despite having the same roles and qualifications can lead to resentment and disengagement.

On the other hand, when employees know their salaries are all determined objectively and without bias, they’re more likely to trust the results of any pay reviews because they know the results are fair. 

Building a company culture of trust and transparency 

pay transparency helps improve trust between employees and their leadership teams. When employees know their salaries are determined fairly, their morale improves. Often, this leads to increased motivation to succeed, which in turn drives company performance and growth. 

Being open about how compensation decisions are made helps employees feel valued and appreciated, which can help build a culture of trust and mutual respect. 

Boosting employee morale and productivity 

When employees know they’re being paid fairly, 88% say they’re more productive. That’s because knowing your worth is recognised by your employer is a powerful motivator. 

Employees also tend to be more satisfied when they can see a clear path for career development. By publishing the salary ranges for each position, it’s easy for employees to see what they need to do to progress to the next level. 

Implications of the New European Directive 

The new EU Pay Transparency Directive is already having a huge impact on how companies approach their compensation policies. 

The directive includes measures designed to ensure pay transparency. It’s specifically aimed at companies with over 100 employees (although it’s still best business practice for companies with fewer employees to make sure they also meet the criteria). It’s also designed to offer remedies for anyone experiencing pay discrimination. 

To meet the directive’s requirements employers:  

  • Must provide salary information — either in job descriptions or before an interview takes place.
  • Cannot ask candidates about their pay history. 
  • Employers with 100 or more employees are required to publish information on the gender pay gap at their company. 
  • If a gender pay gap of over 5% (without limited justifications) is identified, the pay of affected employees must be revised. 

Employees can also ask for information about the pay levels of other employees.

Where pay gaps or disparities are highlighted, the directive outlines some specific remedies, including:

  • Compensation for any employees who have been affected by the gender pay gap. This may include back pay, bonuses, and other benefits. 
  • EU Member States may impose penalties, fines, or sanctions for any infringements. 

The burden of proof for establishing whether pay discrimination did or did not take place is on the employer. And that means HR teams must develop robust compensation policies — right now. 

We recommend:

  • Reviewing pay structures to identify any pay gaps or discrepancies.
  • Using salary benchmarking to set clear pay ranges for each role. 
  • Developing a transparent recruitment process, with openly advertised salary ranges.
  • Training HR teams, managers, and leaders on how to comply with the directive.
  • Updating your compensation policies to outline how you’ll meet the reporting requirements of the directive.

Read our comprehensive checklist for more information on how to prepare for the EU Pay Transparency Directive. 

One to watch: Sweden’s approach to pay transparency

Tackling pay transparency and working to close pay gaps needs a proactive approach — and that’s exactly what happened in Sweden. 

The Swedish Discrimination Act was passed in 2008 and requires all companies with over 25 employees to publish annual pay surveys. If wage discrepancies are uncovered, the company faces a large fine. 

The country’s commitment to open salary policies and equality has helped cultivate trust between employees and the companies they work for. By law, Swedes are also allowed to request the tax return of any Swedish citizen. It doesn’t get more transparent than that. 

Benefits and challenges of pay transparency

More and more HR teams are starting to follow the lead of forward-thinking companies like Buffer, which have a fully transparent compensation philosophy. And as the benefits of pay transparency become clear, it’s not hard to see why transparency is trending.

Done right, pay transparency brings some pretty impressive benefits, including:

  • Attracting and retaining top talent: Employees want to know they’re working for companies that don’t play favourites. Making transparency and fairness a priority helps attract top talent. Showing them you live by your values helps retain them. 
  • Closing the gender pay gap: Our research shows that companies with fully transparent pay policies (including compensation policies, salary grids, and individual salaries) have a gender pay gap of 0%. That’s compared to a gender pay gap of 3.5% for non-transparent companies. 
  • Meeting the EU Pay Transparency Directive: Fail to adhere to these regulations, and your company could be subjected to sanctions or fines. Getting ahead of the curve with solid transparency policies is a priority for many HR teams. 
  • Building a positive company culture: Fostering a culture of open communication around pay policies helps increase trust, loyalty, and engagement. 

Of course, it’s not all rainbows and unicorns (sorry). As with anything, pay transparency does have some challenges, including: 

  • Employee discomfort and dissatisfaction: Most employees are usually in favour of pay transparency — but some may feel uncomfortable knowing their salary might be disclosed. Others may feel disappointed or upset to discover their salary is lower than colleagues in similar roles. Employees who feel they’ve been undervalued may be more likely to leave if their concerns aren’t handled sensitively. 
  • Privacy concerns: Any pay transparency policies still need to adhere to data protection regulations. Some employees may be concerned about their salary information being disclosed, so it’s crucial to consider how to protect their privacy while also ensuring transparency. 
  • Additional administrative burden: Creating and implementing pay transparency policies can take a significant amount of time. It’s also something that needs to be regularly reviewed and updated. 

Pay transparency implementation challenges and solutions

While the challenges outlined above might seem overwhelming — we’ve rounded up some solutions for successful implementation. 

Challenge: Employee discomfort and dissatisfaction

Solution: Create a compensation communication plan, outlining how the company will approach pay transparency. Make sure all employees know they can come to their manager or HR team with any concerns. 

Use our compensation communication plan outline and templates to get started. 

Challenge: Privacy concerns

Solution: Within your communication plan, reassure employees that their data will be handled sensitively, and be open about how their information will be protected. If using a compensation management tool, it’s crucial to choose one with a robust privacy policy.  

Challenge: Additional administrative burden:

Solution: While there’s no denying creating and implementing a new policy can take time and resources — it’s far less labour-intensive to approach this proactively. Doing nothing isn’t an option, especially considering the potential fines and sanctions for non-compliance. Working with a compensation management platform is one way to make the whole process far easier and quicker. 

How to effectively implement a successful pay transparency policy

Now you know the importance of pay transparency and the benefits it can bring — it’s time for business. 

#1 Assess your current compensation practices 

Are they on the right track, or do they need serious improvement? 

#2 Create a clear compensation policy

This should include details on how pay decisions are made and reviewed. 

#3 Complete salary benchmarking and establish salary bands 

Establish industry and location-specific benchmarks, then create salary ranges for each role and level. 

#4 Address any pay gaps and disparities 

Use the same objective approach for each employee, and keep them involved throughout.

#5 Communicate changes 

Inform all employees about any changes resulting from the pay transparency process. Publish gender pay gap details, if required by the EU Pay Transparency Directive. 

#6 Complete regular reviews

To keep up with market adjustments, we recommend reviewing and adjusting salary benchmarks and ranges at least annually. 

Communicating pay transparency changes  

One key aspect of pay transparency is establishing open and effective communication with employees. Here’s how to make that happen:

  • Make sure your leadership team are all on board with pay transparency processes.
  • Use a communication plan to ensure a consistent message. 
  • Use a blend of communication channels like emails, Slack, face-to-face meetings, and town hall meetings. 
  • Develop an FAQ document for employees to refer to. 
  • Provide training for managers so they know how to approach pay discussions. 
  • Encourage two-way communication so employees feel involved. 
  • Offer anonymous messaging channels or surveys so employees can submit any questions or concerns confidentially. 
  • Offer each employee a total compensation statement that outlines their pay and benefits in one place.
  • Inform all employees about any changes, the benefits these will bring, and how they might be impacted.
  • Where an employee’s pay is impacted by pay transparency reviews, discuss this in face-to-face meetings. 
  • Keep records of pay adjustments, and document any communication during this process. 

How pay transparency can boost your business

From improved engagement and retention to better performance, pay transparency can help drive business success

Being open about how employee compensation decisions are reached, and using benchmarking to set fair wages, can help employees feel valued. Openly communicating how their pay decisions are reached can boost engagement, which typically improves performance as well! 

As employees begin to place more value on the culture of the companies they work for — your pay policies come under scrutiny. Being open and transparent about these policies can help your company stand out in a crowded market — and attract top talent. 

Developing and implementing pay transparency can seem complicated, but it doesn’t have to be. 

If you’re ready to get compliant with the new pay transparency directive? Get in touch, and we’ll show you how it’s done.

Further resources on pay transparency

FAQ on Pay Transparency

What is salary transparency in the EU or UK?

Salary transparency in the European Union (EU) or UK refers to the practice of disclosing information about employee compensation, including salary ranges, pay scales, and other related benefits. It aims to provide employees with a clearer understanding of how their compensation compares to their peers within the organization and the industry.

Compared to the United States, there are different regulations (like the incoming EU Pay Transparency Directive). Make sure to check and see what policy your specific country has!

Is salary transparency a good thing?

We think so! And so do many studies - transparency has been proven to reduce the pay gap, give employees extra motivation, and overall create a more fair world.

Why is salary transparency important?

Salary transparency is important for several reasons:

a) Promoting fairness: Transparent compensation practices can help eliminate pay disparities, ensuring that employees are fairly compensated for their skills, experience, and contributions.

b) Reducing discrimination: By revealing salary information, organizations can identify and address pay gaps based on gender, race, or other protected characteristics, fostering equality in the workplace.

c) Boosting trust and engagement: When employees have access to information about compensation structures, they are more likely to trust their employers and feel valued. This can contribute to higher employee morale, job satisfaction, and overall engagement.

d) Encouraging pay equity: Salary transparency can motivate organizations to conduct regular pay audits, identify any biases or discrepancies, and take corrective actions to achieve pay equity.

What does compensation transparency really mean? 

Compensation transparency refers to openly sharing information related to employee compensation, including salary ranges, bonuses, benefits, and other components that make up the total compensation package. It involves providing employees with clear insights into how compensation decisions are made and the factors influencing pay levels. Transparent compensation practices ensure that employees understand how their compensation is determined and can make informed decisions regarding their careers and salary negotiations.

Does pay transparency actually work?

Depends on what you are measuring but yes there are many studies that have proven that pay transparency can:

  • Improve retention
  • Increase candidatures
  • Create fairness & reduce the gender pay gap to 0%

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