“How much money did you make last year?” Would you be willing to answer that question? Would you want your co-workers to know your salary? Would you like to know what your co-workers are making? Pay transparency — the practice of disclosing some level of information about pay practices — has been getting a lot of attention as a possible tool in closing the gender pay gap.
While there are many ways to analyze the data and theorize the reasons, there can be no question that there is a gender pay gap in Massachusetts and in the United States generally. In Massachusetts, women earn about 84% of what men earn. Nationally, women earn on average approximately 78% as much as men. When race and ethnicity are taken into account, the differences between men’s and women’s salaries are even more pronounced.
In 2018, Massachusetts enacted a new Equal Pay Act prohibiting employers from paying employees of different genders differently for comparable work. The new law also makes it illegal for employers to ask job candidates about their salary histories, and prevents employers from prohibiting employees from discussing their salaries among themselves. One thing that the Massachusetts Equal Pay Act does not do is require employers to disclose information about pay practices to employees. However, a growing number of employers are choosing to become more transparent about their pay practices.
Pay transparency can take a number of forms along a spectrum from describing the criteria used to set salaries, to disclosing pay ranges by position, all the way up to revealing detailed information about actual employee salaries. A company that has taken pay transparency to the extreme is Buffer, a social media company that posts information on its company website about the formulas and methods it uses to set compensation, along with a spreadsheet listing every employee in the company and his or her salary. Most employers would not be interested in that level of transparency. However, some degree of transparency may be attractive for a variety of reasons.
There are a number of potential benefits to adopting more transparent pay practices. These benefits can include:
- Reduction in Pay Disparities: Disclosure of pay practices or even actual salaries will bring any differences in employee pay into the light of day. Employees will demand that employers explain these disparities. If the employer does not have good — and legally justifiable — reasons for the differences, employers will face pressure, and possibly legal liability, to eliminate the disparities.
- Employee Motivation: Some employers believe that, if the salary ranges for each level within the organization are widely known, employees will be motivated to get the skills and experience necessary to advance within the company and increase their pay. This is one of the reasons that Whole Foods, an early adopter of pay transparency, revealed its pay ranges to employees.
- Increased Employee Retention: Research has suggested that money is not a primary motivator for employees. However, this presumes that employees believe that they are being paid fairly. If employees know and understand how an employer structures its compensation, and if they believe that those practices are fair and reasonable, employees are more likely to be satisfied and stay loyal to the company.
- Simplification of the Hiring Process: If a company’s pay practices are transparent, with clearly defined pay scales and criteria for setting starting salaries and awarding pay increases, the influence of negotiation and subjective managerial discretion is greatly diminished. This can lead to a more equal application of compensation across the company. One company that has transparent pay practices deals with salary negotiations by considering whether adding or changing responsibilities to a job might justify a higher salary.
- Control Over Information Flow: Thanks to websites like GlassDoor and PayScale, and good old-fashioned water cooler gossip, information about an employer’s pay practices will come out. Information revealed in this manner is often incomplete or inaccurate. An employer that adopts transparent pay practices can maintain some control over what information about its compensation is disclosed and how that information is communicated.
There are, however, a number of drawbacks to pay transparency — some of which are the mirror image of the benefits.
- Employee Resentment: There is a risk that lower-paid workers may become resentful of higher-paid workers, especially if the contributions that the higher-paid workers make to the organization are not readily apparent or objectively measurable. This resentment could harm relationships among employees and damage workplace morale.
- Dissatisfaction with Compensation: Studies have shown that many employees have an overinflated sense of their job performance and the value of their contributions to the company. One survey of 700 engineers revealed that 40% of them believed that they were in the top 5% of performers. Disclosure of salary information could be disappointing for employees who find out that they are not paid at the top of the company’s pay scale.
- Loss of Employee Privacy: For many people, financial matters are private. Some employees may prefer that their salary information not be shared with co-workers.
- Loss of Flexibility in Hiring and Compensation: While transparent pay practices can simplify hiring and compensation by reducing the influence of negotiation, rigid pay ranges makes it harder for companies to deal with unique situations and special circumstances, and could lead to problems attracting or retaining employees. Also, if a company’s pay transparency practices include publicly disclosing salary ranges and pay scales, it becomes easier for competitors to “outbid” the company for top talent by offering salaries just above the stated ranges.
Regardless of whether an employer decides to adopt some level of pay transparency (or even “pay translucency”), the objective for all employers should be to have compensation systems that are equal, fairly administered, and compliant with the law.
Adam M. Hamel is the director and vice chair of the Employment Law Practice Group at McLane Middleton. Hamel represents clients in a variety of employment litigation matters, including claims of wrongful termination, discrimination, and violations of restrictive covenants. Hamel also assists employers with a variety of litigated and non-litigated employment law issues, including violation of restrictive covenants, wage and hour issues, and employment policies, among others.