Like It or Not, Pay Transparency Is Coming (So Better Get Ready)

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Apr 17, 2014

Yes, the big focus today on pay transparency is political.

The history of the Paycheck Fairness Act is a dead giveaway – it was proposed by Senate Democrats last Wednesday and filibustered again by Republicans just as it was in the two preceding election years, 2010 and 2012.

The legislation has no chance of passage in the current Congress, but it’s almost certain Democrats will do their best to keep the idea in the headlines. Advocates undoubtedly will as well.

Pay confidentiality has been eroding

The Executive Orders recently signed by President Obama are more important. Now federal contractors are prohibited from retaliating against employees who discuss compensation. (NLRB protection is also available.) Contractors, according to media reports, account for roughly a quarter of the country’s workforce and include a number of Fortune 100 companies.

More importantly, the President ordered the U.S. Department of Labor to draft regulations requiring contractors to submit summary data on compensation, including data by gender and race. If the reports are based on EEO-1 job categories, they would receive a lot of attention.

Pay confidentiality has been eroding for years. In my 40 years in consulting it’s been accepted, but I have never seen a written policy nor has it surfaced in conversations.

There are some companies where everyone’s salary is posted. It’s been true in government for decades and it’s also common in public universities as well in many not-for-profit organizations. Union contracts are another example, plus (of course) the compensation of top executives is disclosed annually.

All of this leads me to believe pay confidentiality will be impossible to maintain. The pressure will come from young employees. HR offices need to prepare for what is likely to emerge.

Keeping them in the dark no longer possible

The emphasis on confidentiality goes back decades to the earliest factories. It was a way for managers to maintain control. It was definitely not a gender issue.

Salaries are inherently problematic because current pay levels reflect decisions all the way back to an employee’s date of hire. It was not too many years ago that women often started at lower salaries than men. The Lilly Ledbetter case confirmed differentials can continue for years.

Central to the problem is that managers have had virtual autonomy. Pay increase decisions are controlled by the budget and merit policies. HR oversight has been minimal.

The potential for problems has been compounded by inadequate training in performance management and salary management. Employee surveys repeatedly show dissatisfaction is common but with confidentiality problems remain hidden.

Tomorrow’s workers are unlikely to be as complacent.

Does pay secrecy negatively impact performance?

Millennials share every thought it seems. And, they want to understand management actions. When that’s combined with the growing number of web-based sources of salary data – e.g., SalaryExpert or Glassdoor – it is no longer possible to keep employees in the dark. They are not hesitant to discuss compensation with co-workers. When they ask their manager or HR how their salary is determined, the answer needs to be credible.

When we refuse to disclose information, it raises questions – and where there is little trust, people assume the worst . The two most frequently cited theories linking pay and motivation – equity theory and expectancy theory — both argue for openness and transparency.

The research is sparse but suggests secrecy may actually dampen performance if employees believe they were treated unfairly. Other research suggests transparency can actually trigger better performance among employees in similar jobs. It seems that relative rank is important and employees will work hard to increase their income relative to their peers.

Significantly, research on pay and communications by Hay Group and others show that the effectiveness of reward communications strengthens employee engagement and improves performance. Their recommendations stop short of disclosure. Communication is always important but essential here.

The employer’s dilemma

Employers have two choices:

  • Wait and do nothing (that is, take the chance that a costly law suit will not be filed; or,
  • Adjust individual salaries to levels “fair” and consistent with the company’s value system.

Of course, that’s taking a risk as well but if the problems are acknowledged and the reasons for the adjustments communicated effectively, employees may be open to the gesture.

Communication is a key. Under any circumstances avoiding a class action suit will save money and avoid damage to the company’s image. But the decision will not be an easy one.

This leads to the recommendation to clean up our pay systems and open the curtain of secrecy. The Department of Labor reports will be a catalyst. Smaller federal contractors will be among the first to move in that direction. As this evolves over the next year or two, there will be increasing pressure for transparency

An issue that won’t go away

As a suggestion, an assessment to identify problems should be completed work group by work group. Extend the analyses beyond the “substantially equal work” requirement and compare the pay in similar jobs where men and women routinely work together. The initial purpose is to determine how much ‘corrective’ adjustments will cost.

“Cleaning up” could also trigger questions about performance ratings. Performance management is frequently the weak link in salary management.

Realistically, this issue is on the horizon.

The country was not ready for comparable worth in the 1980s, but back then, Baby Boomers still controlled government and the economy. That era is ending.

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