The Ups and Downs of Pay Transparency

The Ups and Downs of Pay Transparency

The topic of pay transparency remains controversial and even divisive in the business world, with proponents arguing that it forces employers to set compensation more fairly and rationally, and can help close pay gaps for women and other historically underpaid cohorts. Critics of pay transparency, on the other hand, doubt that it is an appropriate tool for closing these gaps and warn that it will tend to backfire when employees find out they’re earning less than their peers, and less than they think they should. In a recent article at Fast Company, Pavithra Mohan hears from leaders at several organizations that have adopted pay transparency practices about how the experience has played out. One such company is Crowdfunder, which introduced salary transparency in an effort to close pay gaps:

Still, not all employees responded favorably when Crowdfunder started publicizing salaries. Employees who were underpaid received raises and were “instantly gracious,” according to [company president Steven] McClurg, but “it was the people that were overpaid that were like, ‘Well, why don’t we get raises too?’” Their argument, he says, was essentially, “We’ve been here just as long as these people have; we perform. Just because we negotiated a higher pay coming in and we constantly negotiate our pay doesn’t mean that we should suffer.”

It may come as little surprise that most of these employees were men, McClurg reports, and that most have since left Crowdfunder. This is a common critique—that salary transparency can lead to a lot of employees “lobbying for change,” including where it isn’t warranted. Employees who think they’re underpaid may feel dissatisfied and leave the company as a result.

On the other hand, Mohan notes, “If the cost of offering a fairer shake to women and people of color is employee attrition elsewhere, some employers still see it as a net gain”:

Social-media management platform Buffer has long been a proponent of “radical transparency” in all aspects of its business, from diversity and revenue data to product roadmaps. (It’s also meant being up front about bad news, like when Buffer was low on cash last year and had to make layoffs.) In keeping with that policy, Buffer opted to publish its compensation formula and employee salaries not only internally but also to the public in late 2013.

It wasn’t an easy decision. Among other things, Buffer worried that the move might open its employees up poaching by competitors. But Buffer PR head Hailley Griffis claims the company actually saw an upswing in applications after making the switch. “When we put all of our salaries online, applications went up by 50% the next month,” she says. For Buffer, this meant attracting employees who were actually a better fit and flocked to the company because of its values, not despite them.

For compensation professionals and corporate leaders, these companies’ experiences with transparency are worth observing, because transparency is coming to the workplace in some form or another, whether the employer likes it or not: That may happen through new regulations mandating pay transparency, or external sources like Glassdoor using predictive tools to tell people what they can expect to earn in a given position based on market data. Either way, employees and candidates are coming to work or to job interviews with more (albeit not necessarily better) information and expectations about what they should be earning.

Employers who want to get ahead of this trend and avoid the negative side-effects of transparency can do so by focusing their transparency initiatives on process, rather than outcomes. They may not enjoy finding out that they earn less than their colleagues, but they’re more likely to accept that difference if they understand how their salary was determined, why they make what they do, and what they can do to boost their earnings and catch up with their higher-paid peers. On the flip-side, revealing apparently arbitrary pay differences will tend to hurt morale more; after all, what really gets employees’ goat is when they perceive pay as unfair.

(CEB Total Rewards Leadership Council members can read more here about how to reward performance accurately and communicate the link between performance and pay.)