by Lisa Higgins, Contributing Editor
Is pay transparency right for your organization? Many believe in a more-is-better approach to transparency in compensation, and there are some great reasons to explore the idea. But not everyone is on board.
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A recent article in the Harvard Business Review (“The Case Against Pay Transparency,” Todd Zenger, September 30, 2016) argues that there are some sizeable issues to consider before jumping on the transparency bandwagon. Employees who can readily see they are underpaid, for example, are much more likely to be dissatisfied with their job and company.
Zenger cites an experiment at the University of California. In short, the university made employee pay easily accessible online. Researchers took extra steps to inform one group of employees about the website, and did not do so for another group.
Later, all employees were asked about their level of satisfaction with their pay and their job. Employees who went to the website, looked at their colleagues’ earnings, and found they were paid less reported much lower job satisfaction when compared to employees who were also paid less but had not compared themselves against their colleagues. “Transparency encouraged dissatisfaction and turnover,” wrote Zenger.
On the other hand, proponents of pay transparency claim that, done correctly, it can improve business results by increasing employee engagement. In a recent webinar, compensation experts Rita Patterson, CCP, and Mykkah Herner, MA, CCP, of Payscale discussed what they call the Pay Transparency Spectrum.
Job Satisfaction, Employee Engagement Linked to Transparency
There is strong correlation between job satisfaction and transparency, according to Herner. “Transparency drives employee engagement,” he said. “Employees who perceive a fair and transparent pay process have a lower intent to leave and higher satisfaction with their job.”
That’s because pay transparency tends to increase trust between employees and their managers, Herner says. “Trust in those relationships leads to higher employee engagement, and higher engagement is linked to better results in the organization.”
Ultimately, the team asserts, transparency drives business results. Compensation strategy, including transparency, is a component of a talent management strategy. In turn, the talent management strategy is a component of company goals and objectives.
Herner lays out the correlation. “Often when we ask the HR people we’re working with what the business goals are for the company, we hear the talent goals. For this purpose, we’re not talking about the talent goals; we’re talking about the overall goals the company is trying to accomplish. Maybe it’s growth, or product development, or something else.
“We suggest companies identify those goals, then work backwards from that point to figure out a talent strategy to get there. Once you’ve identified your talent strategy, figure out the compensation driver to make that talent strategy successful.”
Implementing processes and strategies that can improve employee engagement is key, especially now, Herner continues. “We’re in a very tight talent market, and employees are always looking for the next opportunity. You have to be the employer of choice. The unemployment rate for college-educated Americans over the age of 25 is just 2.5%.
“Companies have stopped offering things like pensions that encourage loyalty. That leaves us needing to engage people in order to keep our best people performing for us.”
Seek the Right Level for Your Company
Sometimes companies are afraid to openly discuss pay. Maybe your company culture supports very little transparency, or perhaps yours takes a “lay everything on the table” approach. Neither position is completely wrong nor completely right, say Herner and Patterson.
And that’s why they are proponents of a spectrum. “It’s not an on/off switch,” Patterson says. “Every organization has to find the right level of transparency for them.”
Sometimes the company’s fear is that if everyone knows everyone else’s pay – or even how pay is structured for each job – they will want more money. Not necessarily, Patterson says. “More information won’t necessarily result in their wanting more money. There is a myth out there, though, that if you talk about pay you’re going to have to pay everybody more. The opposite is generally true.”
In fact, according to a Payscale study, 82% of employees are okay with low pay if they understand the rationale behind their pay. “For example, you can tell the person ‘You are new in your role, and we’re going to give you development opportunities. Here is the broader range for your job. You are starting at the bottom, and here’s the growth plan.’”
In the same survey, Payscale found that 80% of employees who are paid above market for their role believe they’re paid at or below market. That represents both a significant waste and a significant opportunity.
“If you have 80% of people you’re paying a ton of money and they don’t know it,” says Herner, “that’s a huge waste of money.” At the same time, it provides an opportunity to improve your communication about pay. You can give employees a better understanding of where they fall within their salary range, and how they can climb higher.
At the same time, increased transparency can help those people you’re paying above market to understand and appreciate that, which has the potential to increase engagement.
Five Levels of Transparency
“We encourage companies to think about the choices they make about pay transparency and how they relate to their corporate culture and organizational strategy,” says Patterson. The Pay Transparency Spectrum can help them do that. The duo describe the five levels of the spectrum:
“Level One is simply telling the employees how much they make each pay period,” says Patterson. “We find that some organizations don’t talk at all about pay beyond the recruitment process. This represents a missed opportunity to talk with people about what went into that decision.
“Level Two on the spectrum is discussing how a pay decision was made. What data – market study or benchmark – was it based on?” Patterson continues. If an employee whose company is at this level on the spectrum asks their manager a follow-up question, Herner says it is unlikely the manager will have enough information to be able to answer.
“Level Three is discussing where an individual’s pay falls in the range – “This is what the market will bear for the job, and this is how we made the decision,” for example. An organization at this level on the spectrum is going to have a compensation plan,” Patterson says. “Ideally they should have some communication about how the person can reach the next step in the range, and the reasons the company placed them where they did in the range.”
“In Level Four we get really deep into the notion of culture alignment, and why we pay what we do,” Herner says. “Compensation would be a driver of your talent strategy that is then aligned to achieving business results. It would be a driver for how you’re retaining top employees, for engaging, recruiting and developing people. One of the key things here is manager training, because managers are the ones talking to employees about pay. They need to both understand the plan and be effective communicators.
“Finally, at Level Five, you have published salary ranges and salaries that are shared internally and externally. Some might think of this as radical transparency, but for others it’s a natural extension of their culture.”
If you decide to increase your pay transparency, Herner cautions you to do so carefully. “This is something you should do in a thoughtful, measured way,” he says. “Decide where you want to be, then figure out the steps to get there incrementally.”