Compensation confidential: Exploring the pros and cons of salary transparency

At a glance

• The practice of salary transparency, both within companies and among employees, has gained traction in recent years.
• Proponents hope the practice will help close wage gaps.
• Potential drawbacks include conflict among employees and compressed wages overall.
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The era of oversharing

Considering the number of dinners and vacation photos currently posted on social media, you could be forgiven for thinking oversharing is endemic among the U.S. population. And while some posts are designed to inspire envy (“Look at this tropical beach!” “Look at my dinner!”) others have arguably more noble goals. Case in point: pay transparency for equal salary outcomes.

Pay transparency, sometimes referred to as salary transparency, is essentially the practice of an employee disclosing wage information with co-workers, whether that’s actual salary ranges for a role or the manner in which an employer determines what to pay its employees.

A company can establish pay transparency, but a more recent trend has sprung up among employees who have begun openly sharing what they earn, either on social media or among themselves.

The thinking is that by making salaries known, companies will be compelled to close any wage gaps among employees and that workers will know what a prospective job will pay before they invest in the application process.

But upending the social norm has other consequences besides those intended by its proponents. What happens when colleagues find out they command different salaries? Or when companies want to financially reward an employee for a job well done but are hamstrung by disclosed pay structures? Here, we explore the pros and cons of this emerging trend.

What’s legal (and what’s not)

What’s old is new again, as the saying goes, and sales transparency has a surprisingly historic pedigree. In fact, the right to pay transparency was established in 1935 with the National Labor Relations Act, which determined that employees in the private sector had a right to discuss things like salary, even if they sign a nondisclosure agreement.

Interestingly, this law doesn’t apply to supervisors or government employees. And it was extended in 2014 through a presidential executive order to apply to employees of federal contractors.

Yet, despite these protections, many employees find themselves illegally discouraged or prevented from talking about their salaries. The HR software corporation Paycor, for example, cites a survey from the Institute for Women’s Policy Research, which found that 48% of full-time employees are discouraged or banned from discussing salary.

Even if you haven’t personally experienced a ban, a prospective employer may have at one time or another asked you about your salary history. This relatively common practice has historically helped recruiters and human resources personnel assess what kind of salary a candidate might expect.

University of Phoenix (UOPX) career advisor Heather Livingston, MA, NCC, LPC, says that, while this practice offered obvious benefits for employers, employees had less to gain. More to the point, it didn’t align with the concept of salary as compensation for services.

“You’re not supposed to pay somebody based on what they did make. You’re supposed to pay them for their qualifications and what they’re going to do for you. That’s what matters,” Livingston says.

But change is underway. Not only has inquiring about a candidate’s salary history fallen out of favor, it’s been banned in California and other states. And as of Nov. 1, 2022, employers in New York City are required to list the salary range of every advertised job.

Pros and cons of pay transparency

With laws and culture dovetailing around pay transparency, hopes are high that now is when employers will begin closing the wage gap between men and women, for people of color and even between internal employees and new hires.

But does the data support those hopes?

Pros

The fact is there isn’t a whole lot of data to review yet. As Paycor notes, pay transparency is not yet a widespread practice.   

With that in mind, we’re left with anecdotal benefits and predictions that have varying levels of expertise to back them up.

CNBC, for example, cites economists’ predictions that salary transparency policies will help close those racial and gender pay gaps.

Paycor, meanwhile, suggests such policies will result in more productive and happier employees (who are confident in the value of their work) and an increase in job applications and hiring. Disclosing a role’s salary range up front, after all, eliminates unnecessary interviewing.

Livingston points to increased motivation among employees and improved trust between employers and employees. Transparency may also improve a company’s ability to attract and retain talent, she says.

Cons

Ironically, the biggest strength of pay transparency may also be its Achilles’ heel. Knowing what everyone else is making opens the door to equality, which brings an uninvited guest known as awkwardness. In fact, a poll from Monster.com found one in five workers worried that pay transparency would lead to tension among employees.

Other potential disadvantages include:

• Miscommunication: Unless a company has a carefully developed plan for both pay structure and communicating their approach to compensation to employees, workers might not understand the reason behind salary discrepancies (think education, geography, experience, credentials and other factors).
• Less opportunity to hire top talent: This can work in several ways. For starters, being transparent about compensation may require an employer to allocate more of its resources to shoring up salaries of previously underpaid employees, which means there’s less available for attracting top talent. Organizations might also have a harder time “bargain-hunting” for top talent seeking employment. As Paycor observes: “Employers can’t hire top talent for a lesser price, which could lead to fewer hires if working within a tight budget.”
• Overall salaries can become compressed: “When companies take steps to reduce the differences in salary, there’s less room for growth and pay dispersion,” Livingston says. She points to California, which mandated in 2010 that city managers’ salaries be transparent. By 2012, those salaries had dropped 7%.
• Companies can get sneaky: While two people might be tasked with the same job, they may perform them with differing levels of success. To recognize and retain high-performing employees, companies with transparent compensation structures may get creative (and covert) about offering bonuses, non-cash perks or other forms of undisclosed compensation. “Not everybody contributes the same,” Livingston says. “And that might make people mad, but it’s the truth.” Compensation has and likely will continue to be used to reflect those differences.

Steps for making pay transparency a good thing

How can pay transparency achieve its goals without drifting into the choppy waters of resentment and secrecy? There are a few ways.

For starters, companies may benefit from creating thorough compensation policies that clearly explain how wages are determined. When everyone understands what impacts a salary, from experience to certifications to responsibilities, there’s less room for assumptions and conflict.

Organizations may also choose to offer a process for discussing compensation. Giving employees a pathway to ask for a pay increase and learn what is needed to earn one helps reduce frustration for both parties.

Employees, meanwhile, need to research what constitutes a fair wage. Pay transparency, after all, is still in its nascent stages. It’s up to workers to understand what they can reasonably expect by doing their due diligence, Livingston says. Some recommended websites for this research are:

• bls.gov
• payscale.com
• glassdoor.com
• salary.com

“There might be reasons for salary differences,” Livingston explains, “so you have to take an objective look at that. And if you can’t find any of those differences, then you can be very professional and bring it up to your supervisor or your HR representative and have a conversation. In past years, before these transparency laws, HR would be like, ‘I can’t talk to you about this.’ You would be very much shut down. Now, you’re not going to be shut down. People are going to listen.”