Pay Transparency Pitfalls

Adam Hamel Headshot
Adam M. Hamel
Director, Litigation Department and Vice Chair, Employment Practice Group
Published: New Hampshire Business Review
November 22, 2019

There is no question pay equality is a significant issue. Some studies indicate that, on average, women earn about 78% of what men earn. The disparities are even greater when race and ethnicity are taken into account. One strategy to address the gap has been getting a lot of attention: pay transparency.

Some have suggested that more openness about pay practices can help close the gender pay gap. And while there can be a number of benefits for employers going transparent, there are a number of significant drawbacks that employers should consider before adopting pay transparency.

Transparency can take a number of forms, ranging from eliminating any practices discouraging employees from discussing salaries among themselves, all the way up to publishing information about actual employee salaries and pay practices.

Buffer, a social media publishing company, has taken this extreme approach and publicly posts on its website detailed information about the formulas and policies that it uses to set pay as well as a spreadsheet listing each of its 80 employees by name and their compensation. Buffer’s leadership believes that its transparent pay practices breed trust, and that forms a foundation for teamwork within its company.

But, for all of the buzz, pay transparency is still not very widely used. One study showed that less than half of employers provide even a minimal level of pay information to employees. Only 13% of employers share base salary ranges for all pay grades or jobs within the organization. And only 2% of companies share actual pay levels for all employees.

But employers who have adopted some level of pay transparency do see a number of benefits to the approach:

  • Reduction of pay disparities: When an employer discloses pay practices or actual salaries, employees will demand good reasons for disparities, and if there aren’t any, employers will be pressured to reduce or eliminate them. This is the primary way in which people believe that pay transparency can help alleviate the gender pay gap.
  • Employee motivation: One of the early adopters of pay transparency, Whole Foods, believed that if employees knew how much more they could earn at the next level within the organization, they would be motivated to work hard and gain skills to earn a promotion.
  • Increased retention: The idea here is if employees know and understand how compensation practices work — and if they believe that those practices are fair — employees will be more satisfied with their jobs and will be more likely to stay with the company.
  • Simplified hiring process: A transparent pay system, eliminates, or significantly reduces, the influence of negotiation over pay in the hiring process. Studies indicate that negotiations over starting salaries disadvantage female workers, and so this is seen as a way to combat the gender pay gap. One company that practices pay transparency addresses the compensation negotiation issue by shifting the discussion about whether changes to the job itself, such as adding more responsibility, could justify a higher salary.
  • Control over information flow: Whether employers like it or not, information about pay practices will get out, whether it’s through employees chatting at the water cooler, or posting information on social media or sites like GlassDoor or PayScale. If an employer discloses information about pay practices itself, the employer has some control over what information is shared and how it is communicated.

Still, there are significant drawbacks to adopting pay transparency:

  • Employee resentment: Some lower-paid employees may become resentful toward employees in the company who earn more, especially if the contributions that the higher-paid employees make to the company are not readily observable or objectively measurable.
  • Employees may feel underpaid: Studies have shown that many employees have an inflated sense of their work performance and contributions to the organization. Through pay transparency, some employees will learn that they are lower in the pay range than they think they should be, which can cause dissatisfaction.
  • Loss of employee privacy: To a lot of people, financial matters are very personal. Some employees may not want information about their pay to be disclosed to co-workers.
  • Loss of hiring and compensation flexibility: The loss of flexibility may present a real problem for employers, especially when dealing with “edge cases,” or other unusual situations.

Whether an employer adopts some level of pay transparency, the goal should be to establish pay practices that are fair, equitable and consistently applied.