Salary transparency: An essential tool to bridge pay gaps

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  Quantumrun Foresight
• November 22, 2022

Insight summary

As governments begin to mandate salary transparency policies to reduce wage disparities between workers, companies are also using transparent salary policies to attract talent. And although salary transparency can be beneficial for lowering wage disparities, the policy change may lead to smaller-scale companies struggling to retain workers. The shift to salary transparency could increase HR disputes but also result in policies that ensure fair wages.

Salary transparency context

In 2020, Tomasz Obloj of HEC Paris and Todd Zenger from the University of Utah’s business school conducted a study that collected salary information of almost 100,000 US-based academics in eight states over 14 years. They found that salary transparency policy considerably impacts pay equity and pay equality. For example, the gender pay gap was decreased by almost 45 percent in transparent salary organizations. 

Several governments have implemented laws that require companies to be transparent about their salary structures as a measure to address and potentially reduce wage disparities. In the US, specific states and cities have taken the initiative in this regard; for example, in Maryland, California, and Washington, as well as in the cities of Cincinnati and Toledo in Ohio, employers are legally obligated to disclose salary information when asked by job applicants or employees. This move helps eliminate hidden wage gaps and promotes fair compensation practices.

Workers can also feel under-compensated if their employers do not have salary transparency policies. A 2021 PayScale study found that workers are more likely to leave their job in the next six months if their employers are not transparent about pay. As a result, companies are leveraging salary transparency policies to combat the 2022 Great Resignation.

Disruptive impact

Pay transparency serves as a tool to ensure fair compensation for employees, taking into account their skills, experience, and performance. When companies openly share salary information, it allows them to benchmark salaries effectively, ensuring that each employee is compensated at a rate commensurate with the market standard. This transparency in pay can facilitate open dialogues about compensation, allowing employees to address any concerns they might have regarding their pay. 

On the flip side, the implementation of salary transparency can lead to some adverse outcomes within the workplace. One significant issue is the potential increase in worker resentment, as employees become aware of wage discrepancies between themselves and their colleagues, potentially hindering collaboration. This issue can be particularly pronounced in environments where there are wide variances in pay for similar roles. Additionally, organizations that are transparent about salaries may face challenges in attracting and retaining top talent, especially when they cannot compete with the salaries offered by larger companies.

Companies may need to develop new strategies to maintain employee morale and cooperation, even in the face of transparent salary structures. For governments and regulatory bodies, the challenge lies in crafting policies that encourage or enforce pay transparency while also providing support to smaller organizations that might struggle under these requirements. It is essential for all stakeholders, including employees, employers, and policymakers, to navigate these complexities to ensure that the benefits of pay transparency are maximized.

Implications for salary transparency

Wider implications of salary transparency may include: 

• Envy and hostility increasing in companies with substantial salary disparities between employees at the same level.
• Increasing HR disputes discussing nepotism, favoritism, and disparities in the workplace. For instance, organizations that maintain immense wage differences may see HR concerns more often. 
• More governments creating regulations to mandate companies implementing salary transparency to combat wage gaps of marginalized workers.
• More companies implementing salary transparency policies.
• Public perceptions of businesses that do not have salary transparency policies becoming negative, impacting the recruitment prospects of these firms.
• Companies revising their compensation strategies, leading to the development of more merit-based pay systems to justify wage differences.
• The emergence of new business models prioritizing employee welfare and equity, attracting a more diverse talent pool.
• Consumers increasingly favoring products and services from companies known for fair and transparent salary practices, impacting market dynamics.

Questions to consider

• Should governments mandate companies to have salary transparency policies?
• How else can organizations continue to work towards fair wage distribution?