Salary Transparency: Should You, or Shouldn’t You?

Money. We talk a lot about how salary isn’t everything to employees these days. We know that the right benefits package can be even more valuable for recruiting and retention than the potential paycheck. But salaries still do matter. And, boy, are employees sending conflicting messages about them. What’s an employer to do?

The answer is not at all clear.

The problem is, employees want to have things both ways

They want to know what their peers and higher-ups are making, but they do not want to divulge their own salary. This presents some significant challenges to employers struggling with the concept of pay transparency and the need to attract, develop, and retain top talent.

We’ve seen the recently-released findings of a survey conducted jointly by UCLA and Harvard Business School. The authors were Zoë B. Cullen, who is an assistant professor at HBS, and Ricardo Perez-Truglia, who is an assistant professor at UCLA’s Anderson School of Management. In their study, nearly three-quarters of respondents said pay transparency is a good thing. However:

  • 40% of workers wouldn’t reveal their salary to colleagues even if they were paid to do it.
  • 80% went so far as to say they would pay to prevent their own salary from being revealed. This was especially true for those who suspected their salary was higher than co-workers.
  • Nonetheless, 69% wanted to know how their salary compared to that of their peers.

That puts the elephant squarely in the middle of the room, doesn’t it? Most of us have been taught that it’s rude to ask about someone else’s pay. And, yet, we so want to know. The Harvard/UCLA study confirmed that, while the majority of employees are reluctant to ask outright about salaries, just 6% thought it rude to ask someone about their seniority.

A separate survey conducted last year showed that millennials are much more willing to share their salary with others. But is that because they’re simply more open about these things, or because they are not yet paid enough to feel protective of their salary amount?

Fairness is a continuing concern

Gender and color still exacerbate the problem, because women remain underpaid compared to white men (the top earners overall):

  • White women earn 79%
  • Black women earn 63%
  • Native American women earn 57%
  • Hispanic women earn 54%

But salary transparency doesn’t necessarily guarantee equal pay. According to the Institute for Women’s Policy Research, women working in private enterprises in 2017 made 79% of salaries earned by their male counterparts. And, even in US government jobs, women make just 81% of what their male counterparts are paid.

According to PayScale’s Lydia Frank, “Women face a ‘social cost’ that men do not when they initiate salary negotiations, regardless of the gender of the person with which they’re negotiating. She says that “by not disclosing their salary, [women in a study] may have signaled to a potential employer that they were intent on negotiating — and were punished for it.” The result? Those women were offered a salary 1.8% lower than women who were willing to disclose their salary. Men were offered less, too, but the margin was only 1.2%.

So is transparency a good thing, or not?

When it comes to the subject of pay transparency, there are no research-supported best practices that have been identified. So employers are still working off gut instinct and anecdotal information. We do know that, when employees don’t know how much others make, they guess. Not very accurately, as it turns out. When researchers asked respondents in the Harvard/UCLA study to guess the average salary of their peers, they were off by 16%.

The good:

  • Employees may be held in higher esteem by colleagues if it is revealed that they make more than others.
  • Companies that have instituted transparency policies — Whole Foods and Buffer, for example — believe it has made their employees happier and more productive. In fact, Buffer published a complete list of salaries on their website and saw a significant increase in job applications.
  • Some experts suggest that employees who know where they stand are happier, because most people assume they are underpaid. Finding that is not the case can boost morale and job satisfaction.
  • Employees who know for sure they are being paid less have factual ammunition to negotiate a raise.
  • Workers who can see just how much more their supervisor or higher-up managers make are likely to be more motivated to work toward a promotion for themselves.

The bad:

  • Employees who learn they make less than co-workers could become jealous, demotivated, and actively engaged in looking for another job.
  • Employees who disclose their salary is higher than peers may be shunned to some degree by uncomfortable colleagues.
  • Managers who learn an employee has discussed their salary may punish that person by delaying a raise or promotion.
  • Some employers fear that transparency will require them to raise pay for existing employees, eating up budget that might otherwise have been used to bring on more employees. And a few employers quietly rue the fact that they can no longer get away with hiring good people at lower pay simply because new hires don’t know better.
  • Employers are also concerned that revealing compensation levels would give competitors an edge by showing them what it would take to lure employees away.

The bottom line

Salary disclosure and the perception of inequality can be both good and bad, says Glassdoor Senior Economist Daniel Zhao, depending on whether you’re looking at it horizontally (comparing with peers) or vertically (comparing with managers).

According to the Institute for Women’s Policy Research, only about 17% of private employers have adopted a policy of pay transparency. On the other hand, 41% of discourage employee discussion about salaries, and 25% specifically prohibit salary reveals. However, that will probably change soon. Several states have passed legislation protecting workers who discuss salaries from employer retaliation.

Cullen and Perez-Truglia say the key takeaway from their study is that changing one person’s salary can impact how other employees behave, for better or for worse. Clearly, they note, “These externalities can have important implications for the provision of incentives within the firm and for pay transparency.” How will all this play out within individual organizations? That remains to be seen.

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