Pay Transparency Rewards & Risks: How To Do It Right?
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Everything you need to know about pay transparency
Pay transparency is one of the most hotly debated topics. It is because it isn’t rare for two people with the same qualifications to be earning different salaries for the same position. Nobody would have known a decade or two ago since salaries were considered a taboo conversation subject.
However, today’s workforce doesn’t follow the same rules, and salary discussions are more open and more legislation is coming into place. Almost 40% of the responders to a Blind survey said that they had discussed their salary with at least one other co-worker.
It is becoming more common for companies to be transparent about this. Glitch, for instance, decided to share salary ranges for each of the roles. This move toward transparency has been beneficial, according to their CEO. It created trust between employees and the company. Including a salary range in the job description also increased the application rate and earned the company praise on social media.
Now, the question is, are you ready to be transparent about salaries and decisions associated with your organization, and how transparent should you be?
Who is this article for?
Before you keep reading: this article is designed for companies who are NOT currently under any legal obligation for transparency. If you have legal obligations, please follow the guidelines stated.
If you are...
- NOT in a region where pay transparency is mandatory,
- Looking to boost retention & create a more fair compensation structure,
- Wanting to get ready for incoming pay transparency legislation.
then this article is for you!
Do You Need to Bare It All – Levels of Pay Transparency
Choosing to be more open about salary discussions doesn’t necessarily mean you need to publish all the numbers out in the open.
There are multiple levels of transparency, ranging from telling a person only what’s owed to them to having an open salary structure. The level of transparency ideal for your company depends on multiple factors, including the type of workforce, company culture, practical possibilities, etc.
Level 1: Knowing only your salary
At this level, salaries are not published inside the company. Everyone can negotiate their salary according to their negotiating skills, even if a hidden salary grid may be in place to frame and define wages. There's a minimal discussion about it, so companies don’t know whether employees are satisfied or not. And employees have no idea of their potential increase if they move up within the company, which can be a source of demotivation.
Level 2: Knowing Your Salary and How It Is Calculated
A step ahead of Level 1, in this case, someone compiled guidelines for the different roles and levels of each and assigned an appropriate salary range to each group. Now, employees know how much they are being paid and can compare it to the market standards. For example, someone can know that he is being paid X amount based on a market study of salaries earned by people with similar qualifications and experience.
At this level, it becomes crucial to have a reliable benchmarking tool that provides data from companies in similar stages of growth. It will allow companies to have trustworthy and unbiased information, but this will also reassure employees on the validity and seriousness of the approach.
Level 3: Knowing the rationale for salary decisions
This step is another significant one toward pay transparency. One-on-one discussions about the policies and the reasoning for different salaries can be held open. Employers must be available to discuss why they can or can’t match salaries being paid by another company.
Contrary to what you may believe, clearly stating that the company cannot match the market standards will not make all your employees leave.
Transparency inspires trust and makes employees feel in control of their salaries – they know that they might not be getting the best salary right now, but they can see the growth potential.
While some companies cannot match the salary, they can offer other benefits such as a remote location, or working for a positive impact project such as the French start-up EcoTree, labeled B-corp.
Level 4: Knowing Your Salary in Comparison to the Minimum and Maximum Range
To reach this stage of transparency, companies need to have a defined salary structure. An employee knows the salary range earned by people in similar positions across the company and knows what they need to do to make more.
For example, Whereby achieved this level of transparency by using a simple process to build their salary grid:
- They decided on their philosophy, i.e., which company they wanted to become (flexible, inclusive)
- And then, they decided to translate this into a set of rules
- Which translated into a salary scale accessible to all
As Jessica Zwaan, COO of Whereby, explains, “this means we lead with the philosophy first, rather than looking at our team’s salaries and then coming up with rules based on our current pay rates.”
It is important to remember because it enables companies to be as fair and objective as possible and create a philosophy that is not driven by past decisions.
Level 5: Knowing It All
The final step of the pay transparency spectrum is about putting all your calculations out for public viewing. Employees know how much they make in comparison to others. Everyone else does too. An online search for “position at company X salary” may give you the exact amount paid. This is not an easy level of transparency to maintain.
Buffer decided to make all salaries public in 2013, and even though employees were initially a little wary following this decision, they wouldn't go back! The team is openly talking about money and asking for fewer raises because everything is more apparent with a base salary based on average wages in the field and the cost of living.
The Rewards and Risks of Pay Transparency
There are a lot of advocates for pay transparency, but while some believe that clarity brings about equality and trust, others wonder whether it can divide the workforce. There are both advantages and disadvantages to starting a discussion about salaries.
Let’s Talk About The Rewards First
The ‘How’ and ‘Why’ of salary structures make employees more satisfied with their current position while showing them the steps they need to step up to the next salary bracket. Happy employees can focus better on their responsibilities and are more productive.
Pay transparency instills an essential level of trust in your organization. When people know why they earn what they do, they’re more likely to trust that your compensation decisions are made strategically and not on an ad-hoc basis. As a result, 81% of workers say they are more productive when paid fairly.
Our 2022 adjusted gender pay gap analysis showed that transparency drives equal pay:
It also facilitates the annual salary review. When it’s time to ask for a raise, the employees will be in a more informed position, and employers will have to see fewer rounds of negotiations.
Overall, being transparent about salaries builds a more positive company culture. Pay transparency can be a powerful tool to increase trust and employees’ loyalty.
Sweden’s Example and Approach to Pay Transparency
Taking a proactive approach to pay transparency can also help with compliance in light of how governments push new legislation about pay transparency. The Swedish Discrimination Act was passed long ago in 2008. This law requires all companies in Sweden with over 25 employees to issue annual surveys on salaries paid. If wage discrepancies are discovered, the firm faces a high fine.
Sweden’s commitment to an open salary policy and equality has been influential in cultivating trust at every level amongst co-workers and between employers and employees. Swedes are also permitted by law to request the tax returns of any other Swedish citizen. It cannot get more transparent than this.
Other countries like the UK and Norway also have similar transparency laws. European measures are also being discussed on pay transparency, and a draft directive on gender pay transparency was published last spring.
The Flip Side Of Pay Transparency
No matter how rationalized, employees may feel bitter about their colleagues' earnings. Some employees may feel uncomfortable knowing their salary is public knowledge. 27% of the respondents to a survey said they would not like to discuss their compensation publicly.
Employees who suddenly discover they are “underpaid” become more dissatisfied with their employer and more likely to depart. They may be uncomfortable collaborating with colleagues who earn more, and projects could slow down. Ultimately, good employees may leave your company if they feel undervalued.
One problem raised with pay transparency is that it causes individuals to focus on comparing salaries rather than improving performance.
However this is one drawback to a practice that your employees and candidates otherwise benefit from.
How To Do Pay Transparency Right
There are pros and cons of pay transparency. It doesn’t have to be all or nothing. Your approach is what matters.
Until your company has legislative obligations from a directive or law, preparing for transparency doesn’t follow a specific path, but there are a few basics you need to get done.
#1 Define company culture towards transparency
Firstly, as an organization, you need to assess what company you want to be and, thus, which level of transparency you hope to achieve. Radical transparency can be just as extreme as keeping silent. Next, you need to define salary policies clearly. You need trustworthy benchmarks as market research. You also need a clear strategy, well-structured pay ranges, and a plan for its execution.
#2 Ask employees about it
Pay policies are primarily about employees, so ask them what they think about your compensation philosophy and desires in this regard! Are they comfortable sharing their salary? What are their fears? What are their suggestions? This will help you finalize (and reconsider maybe) your approach to transparency.
#3 Communication is the key
Finally, you need to train people in communicating your compensation plans. When employees want to talk about salaries, they usually turn to their managers. Hence, your managers need to understand the basics of your company’s compensation structure. Guide them on connecting the dots between the compensation offered and the company’s cultural values.
Get our best practice guide on communicating compensation decisions to employees
The communication across the company needs to be consistent. People may get different salaries based on their roles and qualifications, but equal opportunities must be available to everyone. For example, if stock options are available to one employee of a specific pay grade, they should be available to everyone in that segment.
Key Takeaways on Pay Transparency
Following a policy of transparency for salaries has many advantages, but you need to think carefully about how you plan to go about it.
Without a transparent company culture backing it and a clear compensation communication strategy, transparency can be troublesome. After all, people are emotional about salaries, and part of their self-worth links to the perception of where they stand compared to others.
Further resources on pay transparency
- What the EU can learn from US Pay Transparency Laws
- The EU Pay Transparency Directive Series: What do you need to know now?
- Gender Pay Gap: How Pay Transparency Will Help To Reduce Gap?
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