Pay transparency has been dominating the headlines lately — but the concept tends to raise more questions than answers.
Should you start distributing spreadsheets that include employee names and salaries? Are there any legal requirements to consider? What should you do if you discover inequities in your compensation practices? And how do you appease chatty or web-savvy employees who complain they're being paid less than they deserve?
Two types of pay transparency
Pay transparency can have two different meanings, according to attorney Liz Washko, a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart, who spoke to HR Dive via email.
"First, pay transparency can refer to permitting employees to discuss their pay with other employees without repercussions," Washko said. "From a legal standpoint, employers cannot prohibit this for any employees covered by the [National Labor Relations Act]." Some recent state laws forbid employers from enforcing such rules as well, Washko said.
Attorney Marissa Mastroianni, an associate at Cole Schotz, similarly cautioned employers about Section 7 of the NLRA: "Employers can't have a policy (written or unspoken) saying that employees can't speak about compensation with each other."
Second, pay transparency can refer to "one or more systems whereby the employer provides or publishes information regarding its applicable pay ranges for a position or even the specific pay for an employee or position," Washko said. While a limited number of states, including California, require employers to provide the pay range for a position upon the reasonable request of an applicant, in most places this is not legally required, she said.
How much should you share?
"Many external factors are putting pressure on employers to be more transparent about compensation," said Felicia Davis, a partner at Paul Hastings. "Employees are asking more questions, shareholder groups are asking employers to be more transparent, and foreign countries are asking for more information to be reported. There is also an EEO-1 component."
That said, added Davis, there are different ways to be transparent. "You can be transparent about the company's overall compensation philosophy, how it sets compensation, and how it evaluates performance, salary increases, and bonuses without actually handing out a spreadsheet indicating how much each person earns," she said.
Very few companies, Davis said, are completely transparent with respect to individual compensation decisions. "So many factors go into what an individual is compensated, and I have never met an employee who doesn't think they're a top performer," she said. "Disclosing this data can lead to hurt feelings and is not productive."
Mastroianni said that total openness about pay can foster a competitive workplace environment, one in which many workers "don't thrive," she said. She added that a company paying at or below market rates may find it difficult to hire and retain talent.
Complete transparency about pay can also expose a company to legal risks. Even in the absence of a pay equity law, said Mastroianni, it's still a discriminatory practice to pay employees differently on the basis of protected characteristics. And employees are likely to interpret the data subjectively. The lowest earner in a job description may wonder, for example, if he or she is illegally being paid less because of a protected characteristic, like a disability, Mastroianni said.
Davis pointed out that many compensation audits are conducted at the direction of counsel. In this situation, the more information about pay that is widely shared, "the more you might risk waiving privilege," she said.
Pros to pay transparency
Employees appreciate when employers are transparent about compensation philosophies and practices, said Davis; "It helps people feel they are being compensated fairly and helps engender goodwill." It can also motivate employees to work harder, said Mastroianni, if they know they are in the middle of the pay scale and want to move up.
Washko said providing applicants with information about pay ranges can keep both employers and applicants "from wasting time on a hiring process that was not likely to be successful." On the other hand, if a business pays at or above market rates, said Mastroianni, this can be a plus — applicants may be able to envision their possible earnings trajectory at your company over the long term.
Pay transparency may have broader societal implications as well. "Transparency is the only path that leads to income equality," said Steven Power, global president at Deputy, who spoke to HR Dive via email. "It should be a company's obligation to demonstrate their approach to the remuneration and benefits process in a consistent manner for the same positions across the organization. This will lead to equal opportunities — approached congruently by businesses — as well as an amazing morale boost."
Management can be "blissfully ignorant" about pay disparities sometimes, said Mastroianni. Publishing and analyzing compensation information "can bring pay equity issues to the forefront" and help remedy gaps.
What to do about disparities?
"The first thing an employer should do when it discovers a pay disparity is to determine whether the individuals subject to the pay disparity are performing equal or substantially similar work," said Washko. "The reference to 'equal' work is applicable under the federal Equal Pay Act; the reference to 'substantially similar' work is applicable under some state pay equity laws that have recently been passed."
If the work is equal or substantially similar, she said, the employer should determine if there is a legitimate justification for the pay disparity — such as meaningful differences in education, experience, training, or performance.
If there is no such justification, a remedy could "include an adjustment in pay to the person or persons determined to be underpaid," said Washko. "But it should also include an assessment of how the disparity came about and whether there are opportunities to improve one or more policies or procedures to prevent these issues from arising in the future." This process could involve a legally privileged pay equity analysis, she added.
How to handle individual employee complaints?
There is potential for drama when it comes to pay transparency, said Mastroianni, which might require "company leadership to sit down with management and say, 'people will have questions.' The company should be able to explain those numbers — not only what they are, but how they were obtained."
Additionally, Mastroianni said, employers must be prepared to "have a discussion with a disgruntled employee; you must give this employee a solution." Employers could explain, for example, why employees are paid the amount they're paid and lay out a roadmap for improved performance and pay going forward, she said.
Individual concerns may be handled on an individual level, said Washko. Employers may need to adopt a broader strategy if the complaints spread: "If a larger group of employees raises concerns, the employer may need to consider a broader message to help employees understand the types of information the employer considers in making pay decisions — to illustrate that the employer takes the matter of compensation seriously and makes decisions based on fair and appropriate reasons."