Companies face heat over pay transparency as taboos fall away
Restrictions around sharing pay information are being eroded, particularly among millennials, write Mark Smith and Maria Gribling
Pay transparency is becoming a more visible management topic as a number of pressures force companies to consider how open they should be about pay structures, pay levels and pay gaps. As well as legal pressures, the sharing of information via social media and expectations of new generations are also encouraging change.
Some companies are publishing their remuneration levels, policies and practices while others are more resistant.
As well as potential risks, are there perhaps benefits to being more transparent?
Pressures on companies for greater pay transparency come from a regulatory push in the EU and US and a broader debate in society about unfairness of pay secrecy. Taboos around sharing pay information are being eroded, particularly among millennials. Individuals can access pay information on websites such as Glassdoor and share on social media.
Almost two-thirds of Europeans would support more transparency of remuneration, studies show.
Perhaps unexpectedly, companies are also leading the change. Surveys confirm growing openness of employers towards pay transparency. Human resources professionals, required to consider ethical issues related to fair treatment of employees, are interested. Several high-profile cases demonstrate the costs of unexpected disclosure of pay disparities.
Studies show that a range of companies across countries increasingly support pay transparency measures. They hope for potential economic, ethical and reputational benefits. Such measures may allow employers to differentiate themselves from competitors and to strengthen their "employer brand", resulting in increased job applications.
The companies include Buffer, SumAll and Whole Foods in the US; SAP, Thermador and Lucca in France; Rocketwerkz in New Zealand; and CareerFoundry in Germany.
Some potential benefits can be linked to perceptions of fairness and organisational justice that improve the employee-employer relationships and influence employee engagement. Studies show that pay transparency can boost employee job satisfaction, motivation, performance, productivity, decision-making, morale and overall atmosphere while decreasing staff turnover.
There is also the possibility of reducing gender pay gaps. Pay transparency addresses the "negotiation gap" between men and women that disappears when pay information is available and explicitly stated as negotiable. It could also allow for more accurate comparisons, taking into account specific criteria in compensation decisions.
Employers may also implement clearer policies and make better decisions. Improved decision-making can avoid costly court proceedings.
Unwarranted gender pay gaps not only pose reputational threats but also legal ones. Tackling pay gaps through transparency measures can help prevent litigation and reputational damage. In knowing that salary decisions will be visible, employers have incentives to engage in preventive action to correct flaws in pay structures.
Employers may also implement clearer policies and make better decisions. Improved decision-making can avoid costly court proceedings. Also, clarity of pay-determination criteria and outcomes and the management’s readiness to provide explanations and procedures enhance perceptions of fairness among employees.
Several high-profile cases illustrate the legal and reputational risks of unjustifiable pay gaps. The BBC in the UK is facing about 300 equal-pay claims. Other companies facing lawsuits for gender pay disparities include supermarket chains, while in the public sector a UK city council faces legal action.
There are some risks related to pay transparency. Although some research suggests that when people know why they earn what they earn they are less likely to quit, there is mixed evidence on turnover. Pay transparency may lead to pay inflation and "poaching" of talented employees by competitors who might not be so transparent. And some employees who still believe they are underpaid may be more likely to leave following pay disclosure.
Other concerns include upward pressure on wages, potential tensions and conflicts, and breach of employees’ privacy. While transparency may be a way to promote gender equality, it may highlight the rewards to men’s more continuous and linear career paths and underline the disadvantage of women’s access to higher pay and hierarchical levels.
Transparency should be supported by a certain level of equity in the existing pay structure to avoid the negative consequences of perceptions of injustice. Overall pay transparency may have benefits for individuals and employers and, despite the risks, the benefits for organisations seem to outweigh the potential downsides.
There are also potential societal benefits in tackling the gender pay gap. Since women are often concentrated in sectors with low pay, low status and poor career prospects, such measures can help. Yet informal working arrangements and limited scope for collective bargaining continue to hamper the potential to leverage the information resulting from greater pay transparency.
Turning back the clock seems impossible. This is supported by regulations and greater public acceptance of the principles of pay transparency. Reputational concerns and pressure from various stakeholders are likely to contribute to further adoption of pay transparency measures.
Maintaining pay confidentiality may prove costly for organisations in terms of reputation, exposure to litigation and employee performance.
• Smith is dean of faculty and professor of human resource management, and Gribling is a research associate at Grenoble École de Management.