Pay Transparency in US Companies
- There is a generational gap in comfort level in discussing pay transparency with either colleagues or employers. 89% of Gen Zers are more open and comfortable with such discussions compared to 53% of baby boomers.
- There is an increasing wage gap between CEOs and median workers, with reports showing that CEOs are making "$670 to every $1 of the median US worker, up from $604-to-$1 in 2020."
- Pay transparency laws are becoming more common in the US with many states enacting them in response to the push for better employee rights. Depending on the jurisdiction, these laws may require employers to provide salary ranges in job postings and during the hiring process and to disclose this information to employees whenever they need it.
- Pay transparency reduces the gender pay gap as women working in transparent organizations reported earning between $1 and $1.01 for every shilling earned by a man in a similar position.
- Some benefits of pay transparency include improved productivity, higher employee attraction and retention, and increased trust between employees and employers.
This research brief provides three benefits and two drawbacks of pay transparency to US employers, focusing on those that can be applied to small businesses. Additionally, we have provided five insights on the current state of pay transparency in the US, including legislation, pay ratios, gender pay gap, and changing attitudes surrounding the issue. Where data specific to small businesses was not available, we provided findings on large companies as a proxy, focusing on the ones that can be relevant to businesses of any size.
#1. Benefits of Pay Transparency for US Employers
Increasing Employee Attraction and Retention
- A survey by Beqom found that 58% of employees are interested in switching to jobs with better pay transparency. Among Gen Z, pay transparency is of greater significance as 70% would consider changing jobs because of it. Therefore, employers who are transparent about compensation are better positioned to attract and retain employees, especially younger ones as it contributes to open relationships with employees.
- Pay transparency helps organizations stand out in the competitive job market. Top talent is more interested in companies with an honest approach to pay, as it assures them of fairness. For example, Buffer recorded more than double the number of applications it had received in the previous month after making its salaries and salary formula public.
- According to Jason Sherman, founder of TapRm, during the pandemic, some employers increased their pay and publicly announced it, earning positive publicity and attracting potential hires. Additionally, these companies were able to retain some of their highly qualified employees due to openly sharing their compensation structures.
- Alix Greenberg, founder of ArtSugar, says that pay transparency gives applicants an idea of when to expect raises. With such information available to the public, the company is likely to be among employers of choice or best companies to work for, further helping to attract and motivate new, top talent employees.
Pay Transparency Creates High-Trust Organizations
- John Mackey, CEO of Whole Foods, says that transparency is the best tool to create a high-trust organization, where employees can openly question their pay and the company can offer answers by explaining to the employees what it rewards the most. He acknowledges the possibility of envy resulting from full transparency but maintains that the benefits outweigh the consequences.
- Hailley Griffis citing Paul J. Zak, Founding Director of the Center for Neuroeconomics Studies, explains that high productivity, a stronger will to work, improved collaboration, and longer tenure among employees are benefits of a high-trust organization. Hailley believes that all these are created through pay equity and transparency.
- According to Forbes, transparency should underpin any organization's culture as it breeds trust. According to a Forbes survey, 60% of employees want their employers to make salary information more visible. To improve trust, organizations should also share the criteria used to calculate bonuses and raises with their employees.
- Employees who know their colleague's pay and the metrics for pay increases are motivated to work harder and able to justify their pay. Once the payment structure is disclosed and employees are satisfied that they are being paid fairly, their productivity increases, while organizations practicing pay secrecy are likely to record low productivity due to unhappy employees.
- Pay transparency paired with fair pay encourages employees to work harder and creates healthy competition, which further improves the company's productivity. Employees know what their seniors do to earn a certain level of pay, which encourages them to work harder in their positions and develop themselves professionally so that they can climb the ladder.
- Research conducted by Tel Aviv University found that sharing information about employees' pay encourages team members to perform better. Individuals with no information about their colleagues' pay performed dismally while people working in groups and paid based on the group's performance performed even worse.
#2. Drawbacks of Pay Transparency for US Employers
Pay Transparency Compresses Pay
- Research published by the Harvard Business Review shows that pay transparency leads to pay compression as managers try to reduce pay dispersion. Differences in pay may cause complaints among employees about pay inequity. Handling those issues is time-consuming and mentally draining, hence the lack of differentiation.
- According to Harvard Business Review, "One study found that, when the government of California made city managers’ pay transparent in 2010, average compensation dropped by about 7% in 2012. The drop occurred mainly at senior levels, which is indicative of pay compression."
- Pay compression can lead to unproductive turnover. Due to less differentiated pay, some new hires, and probably less skilled, may earn about the amount as long-serving employees who are denied deserved pay raises. This leads to low morale and demotivated workforce, which lowers the company's productivity and employee retention.
- Pay compression may negatively affect the recruitment process. When candidates notice that an organization practices pay compression, they may not be interested in the position, as they won't see opportunities for career growth and fair reward for their work. This may lead to the loss of top talent, hampering the organization's growth.
Losing Competitive Advantage
- Employers may lose their competitive advantage by sharing too much about their compensation structure. Leading companies with stronger financial muscle may see it as a competitive differentiator, but small businesses risk their workforce being lured by more lucrative offers from other transparent companies.
- Companies can also lose their reputation through simple attacks based on race or gender. For example, a competitor may be offering higher salaries for a similar position, but since the company has a woman or a member of the minority group in that position, it might be taken as the reason for offering lower compensation, which may have a negative impact on reputation.
- According to a paper published in the Journal of Industrial Psychology, "I imagine something like this would blow up really quickly. You just need a race or gender card for this and it's viral. It's all over social media and that does more reputational damage."
#3. Insights on the Current State of Pay Transparency in the US
Prevalence of Pay Transparency
- According to a survey by Salary, only 35% of HR professionals believe that their company's compensation policy is transparent. Among all employees, just 25% think the same.
- Furthermore, about 50% of employees believe that their salary isn't fair compared to people having comparable positions at other companies, while 33% don't think they are paid justly in relation to their coworkers.
- Some experts believe that the current disappointing state of pay transparency is a consequence of the 2008 financial crisis. Specifically, its aftermath put employers in a position of power, allowing them to introduce convenient pay secrecy policies.
- Still, due to the changing attitudes of employees and legislators (described in detail below), the dynamic is expected to shift again. In the post-pandemic labor market, employees, especially in-demand ones, will likely be the ones to dictate the rules, demanding more equality and inclusion.
- More workers are now open to discussing their pay with their colleagues and professional contacts. This change is evident across different age groups as younger employees (Gen Z) are more open to such discussions than baby boomers. A Bankrate survey found that 42% of Gen Z workers, 40% of millennials, 31% of Gen Xers, and 19% of baby boomers broke the workplace taboo and disclosed their salaries, either to a colleague or professional contact.
- The shift in attitude towards more pay transparency is attributed to the changing social dynamics and technology, as social media has made Gen Zers more open and free to share what older generations considered personal information.
- According to Pay Transparency Pulse Report, 79% of employees prefer companies with some form of pay transparency while 32% prefer working for companies with total pay transparency. Additionally, 68% of employees are willing to shift jobs to companies with a more transparent pay structure, even if the compensation is similar to the less transparent company they are at.
- Andrea Derler, Head of Research at Visier, explains that pay transparency has gained momentum in the past few years among younger generations, advocates, and legislators due to the "ease of access to compensation data" provided by digitalization.
CEO-Worker Pay Gap
- A survey conducted by Just Capital found that 73% of Americans believe that CEOs are being paid too much compared to the 13% who believe they are getting a fair share of compensation.
- The majority of Americans also believe that pay discrepancy between CEOs and median workers is a problem that should be solved. 82% want companies to raise the minimum wage to help reduce the wage gap between CEOs and median workers while 72% want companies to set a limit on CEO compensation relative to that of average employees, irrespective of the company's performance.
- A recent study by the Institute for Policy Studies found that the CEO to median worker pay gap jumped from 604-to-1 in 2020 to 670-to-1 in 2021 while other 49 companies reported ratios above 1,000-to-1. Commenting on this increase, Sarah Anderson, director of the IPS Global Economy Project noted that "CEOs’ pandemic greed grab has sparked outrage among Americans across the political spectrum." The outrage is also evident among median-level employees who have shown resentment as a result of the high CEO compensation compared to their minimum pay.
Pay Transparency Legislation
- Some states have made it mandatory for employers to provide pay ranges during the hiring process, at the applicant's request. They include California, Colorado, Connecticut, Maryland, Nevada, and Rhode Island.
- Other states have laws that require employers to include pay ranges in their job postings. For example, the New York City legislation reads, "At a high level, employers in November 2022 must include “good faith” estimates of salary ranges in job advertisements, as well as for promotions or transfers." Other states with similar laws include Washington and Colorado.
- Among the states with pay transparency laws, the majority have enacted laws that ban employers from asking and relying on applicants' salary history as a way of determining their compensation. Under such laws, employers are allowed to ask for pay expectations, but not the actual compensation history. The following states have enacted this law: Alabama , California (and San Francisco), Colorado, Connecticut, Delaware , Hawaii, Illinois , Maine , Maryland , Massachusetts , Missouri, Nevada, New Jersey , New York State, Ohio (only Toledo and Cincinnati), Oregon, Pennsylvania (Philadelphia only) , Rhode Island , Vermont , and Washington.
- Pay transparency laws in Colorado, which also affect companies that are hiring remotely have led some companies, such as Realogy, Nike, Johnson and Johnson, and IBM, to include statements in their job postings excluding Colorado residents from potential applicants.
Pay Transparency and Gender
- The gender wage gap has been an issue for centuries and still continues to be a hot topic today. However, it is difficult for female employees to know that they are being underpaid when employers keep the salary ranges and compensation secret.
- According to Danielson, pay transparency makes it difficult to hide this type of discrimination, as the employees have access to the salary scale, empowering them to advocate for themselves.
- Colorado's Equal Pay for Equal Work Act goes further to streamline the pay gap as it requires employers to share their job postings and salary ranges with their current employees, prohibits them from asking for applicant's salary history, and "allows women to file wage complaints with the Colorado Department of Labor."
For this research on benefits, drawbacks, and insights on pay transparency, we have leveraged some of the most reputable sources available in the public domain. We used industry reports, surveys, news articles, and quotes from experts. The sources used include Beqom, IncAfrica.com, Forbes, and JustCapital, among others. The articles and reports found in the course of the research did not include information on small businesses specifically. As much as possible, we focused on findings that can be applied to businesses of any size. However, data on the CEO-employee wage gap is based on a sample of large companies. All sources on the topic focus on large companies, likely because, as public companies, they are under more regulatory scrutiny and are required to disclose financial data.