Pay transparency: what employers should know

Pay transparency is a heavily discussed topic. Not so long ago, talking about money was a strict taboo. Now, there are many job postings that openly state the salary applicants can expect. Some companies even go as far as to publicly share salary information on their website for everyone to see.

Demands for greater pay transparency come from within the workforce. An increasing number of countries are responding to these demands by enacting pay transparency laws to close gender pay gaps and increase fairness in employee compensation.

But what exactly is pay transparency? Why is it important? Which countries have introduced laws to promote pay transparency?

Pay transparency is when businesses and organizations openly provide information on their salary structures and pay practices. It includes promoting an open communication about wages and salaries and taking action to increase the visibility of all aspects of employee pay.

In an attempt to put an end to pay secrecy and unfair compensation strategies, regional and national governments are enacting pay transparency laws. Salary transparency laws impose legal requirements organizations need to fulfill regarding wage transparency.

Which pay-related insights organizations are required to disclose depends on the specific provisions of the respective pay transparency law. While some legal frameworks only demand consolidated statistics on pay differences based on gender, others go as far as to obligate employers to share pay information for each individual employee.

Pay transparency has turned into a popular buzzword in recent years. The main reason why salary transparency is gaining importance is that it helps uncover unfair pay practices and reduce pay inequities. It is a key tactic used to help close gender pay gaps and put an end to other discriminatory pay practices.

Increasing pay transparency further allows organizations and employees to leverage several benefits, including:

• Simplified gender gap reporting: Pay transparency and the gender gap are closely linked. Businesses that adhere to the principle of salary transparency are less likely to uncover hidden gender pay gaps when they create and submit statutory reports on pay structures and gender-specific compensation.

• Enhanced company culture: Whether it’s with regard to compensation or leadership decisions, transparency is an important factor when it comes to establishing a culture of trust and recognition within an organization. 

• Improved employee engagement and productivity: Pay transparency means that employees know that everyone is paid according to the same standards. This knowledge creates a sense of fairness which, in turn, drives employee engagement. Engaged employees deliver better results and show higher productivity rates.

• Increased employee motivation: Transparency about wages and salaries helps employees better understand why they are paid their wages. Knowing how salaries and wages are set within the company gives employees the necessary insights to understand what they need to do in order to get a pay raise.

• Lower employee turnover: Employees who know that they are treated and paid fairly are less likely to leave the company they work for. Feeling appreciated fosters loyalty towards the company which can help reduce turnover rates.

• Great employer branding: Aspects like transparency, employee recognition, and fairness are important factors job seekers take into consideration when deciding between several job offers. Especially for younger candidates, pay transparency can be a decisive factor when deciding whether to join a company or not. 

Some might argue that being transparent about employee wages and salaries is simply the right thing to do, but pay transparency is becoming a legal requirement in a growing list of countries, including within the EU and the US.

In March of this year, the European Parliament adopted the so-called EU Pay Transparency Directive. The directive aims at strengthening the principle of equal pay for equal work. Key measures include:

• Pay transparency for job applicants: Employers must inform potential candidates about the initial pay level of an advertised position or at least indicate a pay range that shows applicants what to expect in terms of compensation. 

• Pay transparency for employees: Employees are given the right to request information regarding internal pay structures. This not only refers to their individual pay, but also to the pay levels of other employees in the organization who have a similar position.

• Gender pay gap reporting: Under the new EU directive, organizations with 100 employees or more are required to report on internal pay differences. The frequency with which gender pay gap reporting needs to be provided depends on the size of the organization.

• Pay assessments: If noticeable salary differences are found within the organization, the business is required to carry out a pay assessment to identify and resolve these  differences.

• Enforcement measures: The EU Pay Transparency Directive also includes different sanctions for employers that fail to comply with the regulations. Sanctions include fines and compensation for employees whose right to equal pay for equal work has been violated.

EU member states now have three years to transpose the provisions of the Pay Transparency Directive into national legislation.

It’s not only in Europe that the legal landscape regarding pay transparency is changing. In the US, state governments are also taking action. Here is an overview of the different pay transparency laws by state for 2023:

• California: After the latest revision of California’s Equal Pay Act, local employers are now required to provide a pay scale in every job posting they advertise. The act further provides a legal basis for employees to ask their employer how much other employees in the company are paid.

• Colorado: The 2021 Equal Pay for Equal Work Act has made it mandatory for employers to disclose information on salary ranges and employer-provided benefits in each job description.

• Connecticut: Similar to California and Colorado, Connecticut requires employers to provide a job applicant with the salary range for the position he or she is interested in. In addition, the law mandates that employees must receive information on wage ranges when they change to a different position.

• Maryland: Since October 2020, businesses located in Maryland are required to share information on the salary range for the position a candidate applies for—only upon request. 

• Nevada: Legal provisions for pay transparency in Nevada are similar to the ones that apply in Connecticut, i. e. disclosure of salary ranges to job applicants and employees applying for a promotion or job transfer.

• New Jersey: Employers in New Jersey are legally obligated to include salary ranges and a list of the benefits they provide in every job description and posting that advertises a promotion or transfer opportunity.

• New York: The state of New York has enacted a salary transparency law that requires employers to indicate salary ranges every time they publish a posting for a new position, a promotion, or a transfer. Slightly different rules have been enacted by the cities of New York and Ithaca and Westchester county.

• Rhode Island: Since January 2022, employers must provide information on salary ranges to employees who are newly hired, change to a different position, or simply put forward a request for information.

• Washington: Employers based in Washington must indicate the salary range and a list of employer-provided benefits in each job posting they advertise.

The list of states that legally enforce pay transparency is likely to get longer in the future. In fact, several states, including Massachusetts, South Carolina, and Tennessee, are already considering making compensation transparency a legal requirement.

There is no doubt that businesses benefit from breaking with pay secrecy and unfair pay practices. But unfortunately, being transparent about pay structures also has its drawbacks. Here are a few examples of how pay transparency can actually do more harm than good:

• Competition among employees: Pay transparency can lead to unhealthy competition among colleagues. Having a clear idea of what is needed to move up on the company’s internal pay scale can strengthen an employee’s motivation to get a pay raise. Depending on how badly employees want to earn more, this may result in two or several employees directly competing against one another.

• Increased risk of employee poaching: Publicly disclosing information on employee wages and salaries makes it easy for businesses to poach employees from their competitors. If an organization knows how much a competitor pays an employee in a certain position, it’s easy to make a more attractive offer.

• Limited possibilities for salary negotiations: Having a firm policy in place on how compensation is determined in the organization and publicly sharing this information means that there is hardly any room left for salary negotiations. This means that applying for a position is less attractive for candidates who are interested in the company, but have higher pay expectations than what the organization is willing to pay.

• Difficult implementation: As formidable as it sounds, pay transparency is anything but easy to implement. For businesses that have previously followed a strict “no talking about money”-policy, opening up about pay structures, compensation strategies, and more requires a complete change of mind.

Pay transparency doesn’t happen overnight. Businesses that are serious about being transparent regarding employee pay should be prepared to put some serious effort into it. Since there is no one-size-fits-all approach to implementing salary transparency, the process will look slightly different for every business. Here is a general outline of the different process steps businesses need to go through:

• Defining a project scope: There are different approaches to salary transparency. Some businesses choose to disclose pay information to their employees only, while others make the insights into their pay structures publicly available so that potential candidates have access too. The first step towards implementing pay transparency hence consists in deciding what the desired transparency level is. Involving both management and employees in the process ensures that the chosen approach suits everyone involved and also helps find out what insights are relevant for employees.

• Setting clear objectives: An important part of defining a project scope is to think about the desired outcome of the planned changes. Businesses need to answer the question of what they want to achieve by making their pay structures more transparent. This includes reflecting on what effect they want the measures to have on existing employees as well as on potential new employees.

• Analyzing pay structures: Before openly disclosing pay information for the entire workforce, businesses should carry out a thorough analysis of all things employee pay. If there are any pay discrepancies, they should be spotted and resolved before going public with salary data. The same goes for pay ranges. Adjusting pay ranges to current market standards will make a huge difference and increase the business’s chances to attract and retain talent.

• Developing a clear, objective compensation strategy: Implementing pay transparency must go hand in hand with adjusting the company’s compensation strategy. Having a clear strategy that is based on objective criteria is the only way to eliminate bias in pay structures and pave the way for complete salary transparency. When developing a global compensation strategy, businesses should think about what incentives they want to provide and what the overall image is they want to display.

• Drafting a pay transparency policy: A pay transparency policy outlines how the organization intends to approach the publication of the pay data they intend to share. The policy should provide answers to questions such as what channels will be used to share pay-related information, who will have access to which insights, and what mechanism will be deployed to keep the information up to date.

• Implementing pay transparency: The final step is to really make the transition towards pay transparency in the organization. This includes presenting the strategy to managers and employees, publishing the selected information online (if the business intends to make its pay information public), and getting feedback on what could still be improved.