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Pros and Cons of Pay Transparency

Contributor: Jessica Turner, HR Specialist

January 20th, 2023 | 5 min. read

By Tony Calavitta

Pros and Cons of Pay Transparency

The increasing trend toward government regulation of pay transparency means that you either have to or likely will soon have to follow guidelines on wage disclosure.

With new rules, come new concerns – How will pay transparency affect your business? How will it affect your current employees? How will it affect your recruitment and retention strategies?

If you are here, these are just a few of the questions you are probably asking.

Whether you are currently mandated to provide pay transparency or are trying to keep your policies ahead of pay transparency legislation, our HR experts at Combined have the answers you need.

Having assisted countless employers, just like you, to adapt to new and changing laws, our team wants to make sure your policies are updated and compliant.

In this article, you will learn the pros and cons of pay transparency policy so that you understand how to approach policy implementation.

What is pay transparency?

Pay transparency refers to an employer openly and clearly communicating pay-related information with employees.

Established practices for pay transparency include making this information available to prospective employees on job listings and during interviews as well as to current employees upon request.

In today’s job market, more and more applicants and employees favor, even demand pay transparency.

In response to this, more and more employers are offering it.

How pay transparency mandates affect ALL employers

As the demand for pay transparency continues to grow, so too has state and local legislation regulating it.

These states have passed pay transparency laws:

These cities have passed pay transparency laws:

What do pay transparency laws stipulate?

Pay transparency mandates vary by jurisdiction and govern which employers are required to disclose wages as well as how and when wage disclosure should be done. In some cases, these mandates extend to include requirements for record-keeping and reporting.

Here are a few examples:

  1. California requires employers with 15 or more employees to include either a salary range or an hourly pay scale in external job listings, including third-party listings.

    California pay transparency law also requires all employers to maintain job titles and salary histories for all employees during and 3 years after employment.

    It also requires private employers with 100 or more employees to report pay data information categorized by demographics including job type, sex, race, and ethnicity each year.

  2. Washington requires employers with 15 or more employees to include either a salary range or an hourly pay scale as well as a general description of all benefits and other forms of compensation offered in all internal and external job listings.

  3. New York City requires employers with 4 or more employees, at least 1 of which works within the city, to include either a salary range or an hourly pay scale in all internal and external job advertisements.

    New York City pay transparency law extends this requirement to independent contractor and intern employment.

Business Insider’s list of states and cities with transparency laws details the specific pay transparency regulations for each of the above states and cities.

What do pay transparency mandates mean for employers?

Pay transparency mandates will, directly and indirectly, affect employer policies.

The direct effect of pay transparency mandates

Employers that meet the criteria for pay transparency regulation in their jurisdiction will be required to establish compliant policies. Failure to do so will result in enforcement penalties.

The indirect effect of pay transparency mandates

Regulations forcing a sector of employers to adopt pay transparency policies may encourage wider spread implementation. As more and more employers provide pay transparency regardless of regulation, more and more applicants and employees expect it.

Visier’s 2022 Pay Transparency Pulse Report found that 79% of applicants and employees want pay transparency.

Because applicants and employees value pay transparency, employers not directly affected by mandates may still need to adopt similar employment policies to stay competitive with other employers. If you don’t provide this information, you could lose out on qualified applicants and employees.

What do pay transparency mandates mean for employees?

Pay transparency mandates mean that in order to be competitive in today’s employment environment, employers must offer employees similar wages for similar roles.

3 pros of pay transparency

This can be beneficial to both the employer and the employee - Here are 3 important advantages of pay transparency policy.

1.      Pay transparency protects against wage discrimination

Employees want to know that they are being paid fairly for the work they do.

Pay transparency is an opportunity for employers to freely share this information with employees.

This practice becomes a safeguard, allowing employers to quantitatively prove that allocated wages are not only fair, but also are without sex, racial, or ethnic bias.

Demonstrating this equity promotes a healthy work culture for both employers and employees.

2.      Pay transparency builds trust and boosts performance

I repeat – employees want to know that they are being paid fairly for the work they do.

By providing pay information, employers are able to assure applicants and employees of equal wages for equal work.

Having this assurance strengthens trust between both parties.

In doing so, it also encourages better employee performance – when employees know that they are fairly compensated for their work, productivity increases. And increased productivity translates to increased revenue.

3.      Pay transparency improves recruitment practices and retention rates

What is the first thing a prospective employee considers when looking for a job?

According to Visier’s 2022 Pay Transparency Pulse Report, compensation is the most important factor for job seekers when applying for a job and for employees when deciding to stay in a role.

Providing pay scale information in job listings means that those who apply have already considered and found the expected income acceptable. In this regard, pay transparency filters for serious candidates, limits negotiations, and expedites recruitment.

Disclosing wages to current employees allows them to evaluate their rate of pay against their position and contribution – it shows them that their wages are fair and competitive. In doing so, pay transparency fosters employee retention.

With these two effects in mind, pay transparency is valuable because it helps an employer to hire long-term talent more easily.

2 cons of pay transparency

While there are many advantages to pay transparency policy, navigating implementation can be difficult - Here are two roadblocks that employers may encounter.

1.      Pay transparency can cause employee dissatisfaction

Pay transparency exposes employees to salary distributions and can lead to employee dissatisfaction.

Consider this scenario:

A veteran employee that consistently does great work is satisfied with their salary.

But when pay transparency policy is implemented, they see how much new hires and less experienced colleagues make.

Suddenly, the wage they were previously happy with seems less. This type of salary comparison may cause employee frustration and resentment.

This is why it is important to continually evaluate your pay scales and ensure they are fair and equitable. If you already do this, pay transparency won’t be an issue.

2.      Pay transparency can increase employee turnover rate

Without effective communication, pay transparency can lead to increased employee turnover.

Consider this scenario:

Two employees, each working in the same role and having held the position for the same amount of time, make very different salaries.

When the employer implements pay transparency policy, there is no communication about this difference in salary.

What will happen?

The employee with the higher salary will feel valued and the employee making less will feel underappreciated.

The higher-paid employee could have 10 more years of experience or a unique skill set that qualifies them to perform exceptionally in the role, either of which may justify the salary difference. But, if these reasons are not communicated, the lower-paid employee will only see the salary difference.

The lower-paid employee will likely fixate on the salary difference, finding the lower wage paid for the same role to be unfair.

So, I repeat once more – employees want to know that they are being paid fairly for the work they do.

Feeling otherwise could motivate the lower-paid employee to find other employment.

Employers can prevent this from happening by relating salary determination factors like role requirements, qualifications, and experience to wages earned.

Detailing a fair process for why a specific salary is allocated will help employers avoid the negative effects of employee salary comparison.

Next steps to pay transparency policy implementation

As pay transparency becomes more regulated, it is more important than ever for employers to understand it.

In this article, you learned the ins and outs of pay transparency – what it is, how it can directly and indirectly affect your business, and the pros and cons of policy implementation.

You are now ready to develop an implementation strategy!

Here at Combined, our HR experts are ready to help you create the right plan for your business. Whether to stay compliant with current pay transparency mandates or to stay one step ahead of trending legislation, we want to help you prepare for successful implementation.

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This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.