Compensation, Employment Law

Why the Wage Gap Solution Is Transparency, Not Legislation

Earlier this year, the U.S. House passed the Paycheck Fairness Act to further the cause of gender wage parity. Now, I’m not against government regulation, but I’m skeptical of change that’s enforced from the top down because lawmakers can’t mandate corporate buy-in. In my experience, businesses do best when solutions come from the bottom up.

Source: Ketstar / shutterstock

Legislation such as the Paycheck Fairness Act signals a shift in cultural awareness around pay disparity. But in my experience, the most substantial change will come from businesses themselves in the form of transparent pay policies. Such policies not only drive equality but also improve companies’ overall performances.

Why Pay Transparency Matters

When I was hiring my company’s first employees, I noticed right away that women and engineers didn’t negotiate as hard as other groups when it came to their salaries. As a result, we paid them less, and I worried that we would lose great people simply because they hadn’t pushed harder for higher compensation.

I decided to do something radical: publish everyone’s salaries, including my own. My leadership team and I created a salary system based on employee output, and we shared that formula with every employee. No full-time employee is exempt from this system, and we have a no-negotiation policy around pay. When compensation is based on merit, it holds people accountable for their performance. It also levels the playing field for employees who are unlikely to negotiate for higher pay.

Women are less inclined than white men to negotiate for higher pay, which perpetuates the pay gap. At the same time, women who negotiate salary are often negatively impacted. Knowing this, I wanted to be part of the solution. My team and I didn’t want a compensation system that rewards negotiation. We wanted to reward output.

No Negotiation Yields Higher Performance

A no-negotiation policy helped us create a fair compensation structure and ensures that we hire the best people for the job. Just because someone can advocate well for himself or herself doesn’t mean he or she has the skill set your company needs. Focusing exclusively on merit allows you to cut through the noise and find and reward the best people.

Once you’ve recruited great people to your organization, a transparent pay structure motivates them to achieve. Even in the animal kingdom, visible inequity drops morale and performance. One study showed that when monkeys are treated unfairly, they stop performing, expending less energy on a task if they see other animals receiving better rewards for the same effort—humans are no different. If employees are concerned about fairness, they’ll constantly compare their colleagues’ compensation to their own. Morale will drop, and so will productivity.

Publishing everyone’s compensation makes salary less of a taboo topic, as well. This creates an environment in which women and members of minority groups feel safe raising the issue. A sense of safety and openness is vital to nurturing a culture of belonging and support. Such dialogue alone will reduce the wage gap.

How to Implement a Transparent Pay Policy

If you think your company would benefit from a transparent pay structure—and I believe all companies would—start with these three steps:

  1. Make the case using better business returns.

Explain to your leadership team how merit-based systems yield better business returns. Metrics to note include higher employee retention, increased diversity, and consistency among management. Employee retention makes for a stable company, and it can save the company tens of thousands of dollars in employee replacement campaigns. Diverse companies tend to be more profitable than homogenous ones, and consistent management and raise structures make it easier for leaders to reward performance consistently and equitably.

  1. Establish an open discussion policy on compensation.

Salary is a sensitive subject, so make sure all employees know they are welcome to raise questions and concerns at any time. Consider holding conversations in which all managers discuss quarterly performance and how it relates to compensation. This reinforces the sense of transparency and encourages people to be candid in salary discussions before it becomes a huge problem and employees have other offers in hand. Such meetings bring dissatisfaction to the surface early. Because managers will carry the weight of this policy, provide training on how to talk about compensation to prevent these discussions from going off the rails.

  1. Establish pay ranges based on market data.

Set hard limits on the salaries that managers can award, regardless of how hard a candidate or employee negotiates, using market data (our company uses PayScale for compensation research). This way, when others find out what their colleagues make, they won’t be shocked by any significant discrepancies or feel they’ve been undervalued.

Solving the wage gap is a multipronged issue, but transparency is absolutely essential to ending pay inequality. As more companies reward performance over negotiation, we will see genuine change occur at all levels.

Tracy Lawrence is the founder and CEO of Chewse, a service that delivers family-style meals to offices from the best local restaurants. Her vision is to transform transactional drop-off delivery into an inclusive meal experience that also gives back through meal donations. Chewse operates in Los Angeles; San Francisco; Silicon Valley, California; and Austin, Texas. She has raised $30 million for her company and feeds thousands daily. Lawrence also mentors female founders in technology, working to fulfill her personal mission of building a more authentically connected world based on vulnerability as a leadership philosophy.