Pay Transparency: What It Is and How to Prepare

Compensation has historically been considered a taboo subject, but that’s changing. Online job postings and self-reported wage tools have made it easier than ever for your candidates and employees to research pay. Many employees are discussing compensation among themselves at work. And an increasing number of employers are embracing pay transparency.

Pay transparency — also known as salary transparency or wage transparency — is the practice of openly communicating information about compensation with employees and candidates. This can look a little different at each company. While some companies share all salary data publicly, some simply disclose how salaries are determined with each team member. Many employers also share salary ranges so team members understand their earning potential in a given role.

Legislation is driving higher pay transparency

Pay transparency isn’t just a good way to be more open and honest with your employees — it is more and more often the law. 

New pay transparency laws crop up regularly and legislation differs by jurisdiction. It’s important to stay on top of the local laws and regulations where your company operates or has employees. 

Within the United States, for example:

• California’s new pay transparency law became effective on January 1, 2023. It requires covered employers to include pay ranges on every job posting and share pay ranges with employees for their current position.
• New York’s law will go into effect in September 2023, requiring that employers disclose pay or a pay range for all jobs, promotions, and transfer opportunities that can or will be performed in the state.
• Maryland employers must provide the wage range for a given position upon an applicant’s request.
• Cincinnati employers must provide a pay range after a conditional offer of employment has been made.

Similar pay transparency laws, including The European Union’s Pay Transparency Act, are being proposed globally. It will require employers to include a salary range in job posts or before an interview. It also gives employees the right to request information about their individual pay level and the average pay level for colleagues doing similar work.

These laws are driving higher pay transparency. Nearly one in five organizations report being transparent largely due to regulations, though another 42% say their transparency goes beyond what’s required or motivated by regulations alone.

Benefits and drawbacks of pay transparency

There are many worthwhile benefits to pay transparency — though this type of policy is not without its drawbacks. Carefully consider the pros and cons when deciding the level of pay transparency your organization will adopt and how you will implement this change across your organization.

Benefits of pay transparency

Pay equity is one of the most important benefits of increased pay transparency. When companies are more open about how they compensate their employees, they’re more accountable for implementing fair pay practices. This is precisely why more governments around the world are mandating pay transparency — it’s an important step toward closing the wage gap.

Other benefits include:

• Attracting more talent. Job applications and interviews are time-consuming. Candidates want to know their pay expectations are aligned with your pay ranges early on so they don’t waste their time. In fact, most job seekers (85%) are more likely to apply for a job that lists a salary range.
• Increasing recruiter productivity. Compensation is the top reason candidates decline job offers. Being transparent about pay early in the recruitment process can help you screen out the job seekers who would later turn down an offer due to pay. This allows your recruiters to focus on your most viable candidates, increasing your team’s efficiency and productivity.
• Providing a better candidate experience. A candidate’s positive interview perception of fairness increases 30% when they’re told the salary range without requesting it. This can improve the candidate experience, keep job seekers engaged in your recruitment process, and have a positive impact on your employer brand.
• Increasing employee trust, retention, and engagement. Most employees (91%) who believe their organization is transparent about how pay decisions are made also say they trust that their organization pays people equally for equal work regardless of gender, race, and ethnicity. This is important considering that employees who perceive their pay as inequitable have a 15% lower intent to stay with their employer and are 13% less engaged at work than employees who perceive their pay as equitable.

Drawbacks of pay transparency

Despite the many benefits of pay transparency, nearly one-third of North American employers say they’re not ready to make the change. Almost 30% cite administrative complexity, 25% cite lack of clear job architecture, and 46% cite possible employee reactions as reasons they’re holding back. These are all important considerations to take into account when creating a pay transparency policy that will work for your organization. 

Increased transparency can have some drawbacks, including:

• Candidate pool reduction. Companies publishing job postings with less competitive pay ranges may experience less candidate interest, resulting in fewer applications or a lower response rate from sourcing efforts.
• Workforce envy. Providing your team members with increased visibility into how their colleagues are paid can invoke jealousy — or even resentment — among your workforce. 
• Pay negotiation. Two-thirds of job seekers say they would demand a job offer at the top of the pay range if they knew what it was. And two-thirds of workers say they would demand equivalent pay if they learned that a colleague was being paid more for the same job. This can lead to pay compression, in which there is little difference in employee pay despite differences in tenure, experience, or other compensable factors.
• Employee poaching. Pay transparency practices, like sharing salary ranges on job advertisements, can help other companies price competitive job offers to poach your employees.

Getting started with pay transparency

Pay transparency is here to stay, whether you’re ready for it or not. 

Here’s how you can start making progress on pay transparency at your organization:

1. Consider your ideal level of pay transparency. There’s no one-size-fits-all approach to pay transparency. Consider your company culture and any applicable laws to build a pay transparency policy that best suits your organization. For example, will you share market pay data, pay ranges, or exact employee salary information with your team members or externally? How will you approach communication and negotiations? Will you roll your policy out all at once, or slowly introduce pay transparency over a longer time period?
2. Align on a compensation philosophy. Ensure internal stakeholders are aligned on how you’ll target compensation against market rates and which factors will determine employee pay. For example, will you target top of market rates or closer to the 50th percentile? Will performance, experience, or tenure hold more weight when determining employee pay? If you have a distributed workforce, will you use location as a factor? 
3. Update pay ranges. Talent acquisition teams know better than anyone that there’s been significant wage growth in recent years. Update your pay ranges to ensure you can continue to attract and retain talent while making consistent pay decisions. It’s also a good idea to run a pay analysis against updated pay ranges to ensure internal pay equity for each existing employee.
4. Prepare your managers. More pay transparency will likely mean your managers need to address more compensation questions from their team members. Help them understand what drives pay and how to communicate it with their direct reports.
5. Roll out your pay transparency policy. Announce your pay transparency policy to all team members after company leaders have signed off but before it becomes effective. Answer questions and support managers throughout the transition to address employee concerns.
6. Monitor and adjust. Compensation is a complicated practice with a lot of moving parts. Monitor things like employee sentiment, pay equity, and offer acceptance rates so you can fine-tune your pay transparency policy over time. Keep in mind that it’s typically easier to increase transparency than it is to decrease it at a later date. 

Final thoughts: It’s time to embrace pay transparency

Less than half (47%) of HR professionals say their organization is transparent with employees about how pay decisions are made, but 94% think it’s important. It’s time to embrace pay transparency so everyone at your company understands how pay decisions are made and trusts that they’re made equitably.