Pay Transparency Matters Most As a Means Toward Employee Confidence

Pay Transparency Matters Most As a Means Toward Employee Confidence

There are very few talent-related issues that generate as much attention as compensation—in particular, how compensation compares among all the various employees at an organization. Historically, companies have preferred not to share information about compensation out of fear that those who are on the bottom half of the compensation chart will become disappointed and disengaged when they learn that they are earning less than their colleagues. This fear has been a major factor in the business community’s objection to the CEO-employee pay ratio reporting rule that came into force in the US this year: When you publish the salary of the median employee, half your employees inevitably discover that their pay is “below average.”

This idea of hiding compensation for fear of disengaging employees is a relic of the past, however. The reality today is that employees can get a sense of how their compensation stacks up compared to their peers through a growing number of websites that share this information publicly, such as Glassdoor, PayScale, or Salary.com. In other words, employees can already find out how their compensation compares to others and are already talking about it; the question for senior leaders is whether they want to participate in or shape these discussions.

As technology has forced greater transparency in compensation, some companies have decided to actively manage the conversation by proactively revealing to their employees what their co-workers, managers, and senior leaders earn. The New York-based tech company Fog Creek Software is one such organization; eight months ago, it gave its three dozen employees a chance to see what their peers were making. On Bloomberg’s “The Pay Check” podcast this week, Rebecca Greenfield checks in with Fog Creek to see how it went:

Fog Creek’s chief executive officer, Anil Dash, believed … that salary transparency would shine a light on unfair pay practices and ensure things stayed that way. Dash, an entrepreneur, prominent tech blogger and prolific tweeter, is a rare, pro-union, tech CEO who also believes in the old-guard internet principle that information wants to be free. “Transparency is not a cure-all and it’s not the end goal, it’s a step on the way to the goal, which is to be fair in how we compensate everyone,” Dash said. …

At a meeting an hour [after a Google spreadsheet with titles, levels, and the corresponding salary bands of everyone in the company was circulated last September], Dash explained the rationale behind the ranges. He then opened the floor up for questions and comments. Some people said they were pleasantly surprised by where they fell. Two people thought they made too much. (The company did not reduce their pay.) Others were glad to have proof that they were fairly compensated.

While these sort of moves get an enormous amount of attention because of the level of transparency they introduce, in our ongoing research at CEB, now Gartner, we find that the benefit in terms of a more engaged workforce doesn’t occur because of transparency alone. Rather, transparency works as a means of improving employees’ perceptions of the fairness of their pay, their trust in the organization’s pay practices, and their understanding of how pay decisions are made. As Dash notes, his ultimate objective is not just to be transparent, but also to be fair.

Employees understand that some employees should get paid more than others, and are completely accepting of that. Our research has found that average performers actually don’t mind if their high-achieving colleagues earn greater rewards than they do, as long as their own pay is similarly differentiated from that of low performers. What hurts engagement is when employees don’t understand how pay is determined or perceive that process as unfair.

In this new, more transparent environment, employees are becoming more aware of all the different pay levels within their organization, whether or not their employer wants them to be. This is making employees more curious about not just how much their colleagues earn, but why they earn it and how that decision is made. Executives wondering whether they should become more transparent about pay are already behind the curve; instead, they should be asking whether their pay practices are fair, trustworthy, and comprehensible by their employees. Opening up about your pay scale won’t drive engagement unless you also win employees’ confidence.

CEB Total Rewards Leadership Council members can learn more about how to maximize the impact of pay transparency through more focused communication, as well as how to reward performance accurately and communicate the link between performance and pay.