Why True Pay Transparency is the Future

What does “pay transparency” even mean?  

Surprisingly, the definition is not that clear. What HR and Employers typically mean (pay process transparency), is often very different than what an Employee expects (full compensation disclosure).  The widely accepted definition is:

Pay transparency in the context of pay disclosure, where employee-specific information on compensation is disclosed to other individuals. This is the "generally accepted internet definition" of pay transparency: organizational disclosure of what each employee earns, so that comparisons of "Abe earns $X, Bella earns $Y, and Charlie earns $Z" can be made directly by employees themselves. (Source: Compensation Cafe)

Three Schools of Thought

There tend to be 3 schools of thought on sharing compensation data:

  • Keep it a secret

  • Tell everybody everything

  • Only tell some of the people, some of the time

While there are pros and cons to all 3 arguments, studies have found that companies like SumAll and Buffer, who openly share all of their compensation data publically are better positioned to both recruit and retain top talent.  With access to vast amounts of data via the internet, companies need to keep with the times as employees and potential candidates have more resources available to them upon which to base their choices.

Dane Atkinson, CEO of SumAll, says the pressure of working with investors encouraged this type of practice. “If you can get talent at a discount,” he says, “your board will cheer. That’s why it’s an abusive system.”

For SumAll, Atkinson built in salary transparency from the beginning. In the past he would sometimes pay far more than an employee was worth, simply to get some work done on a tight deadline. These days, that kind of action wouldn’t be taken well since the inequality is open for everyone to see.

The trade-off is worth it, though, according to Atkinson. He believes, “salary transparency is the single best protection against gender bias, racial bias or orientation bias.” (Source: CultureAmp)

Most companies tend to fall somewhere in the middle.  By telling their employees how they structure comp and what criteria they use, they feel they have done their job. They don’t exactly encourage people to discuss it, but also know that they legally can’t prevent them from talking about it should they choose to.  

While compensation disclosure hasn’t been a thing in the past, there’s no reason it couldn’t be now.  Culturally, it’s been so ingrained in us to negotiate for the “rockstar” or to overpay for a role we are desperate to fill quickly, that we come into the hiring process prepared to push outside the set compensation range we budgeted for.  Crossing our fingers in the hopes of getting what we’re paying for.

So what does this haphazard approach do for us?

Rockstars and Super Heros

First, what does a “rockstar” candidate even look like?  Ambiguously defining your requirements from the start will set you up for issues all through your hiring process and well into the lifecycle of anyone you hire. By clearly defining what is needed in the role, you hire for the skills and attributes you need that person to have to be successful - period.  No rockstar status required.

Millionaires and Royalty

Overvaluation of any one player on a team has far reaching effects.  And if a candidate comes in already overvaluated, should we continue to perpetuate that?  I know from experience that being told you are at the “top of the pay scale” and won’t be receiving any type of increase for a long time to come, regardless of your contribution, feels pretty crappy.  This long-term impact of a one-time concession leads to morale issues. This also pushes the overall compensation range for that role into new territory. Should you now try to match all of the other employees to the one at the top?

History Lessons

Stephanie Thomas, Ph.D., of Department of Economics at Cornell University says “Being open and transparent about your pay practices and providing information about the pay process and how decisions are made is in the best interest of both the organization and its employees… Being able to openly and publicly support your decisions where variance occurs is critical to the health of your organization.”

As Mark Lobosco said in this ERE article “To decide what form of pay transparency is right for your company, seek input from those affected by it the most: your employees! As you draft a transparency model, provide staff with a safe space to share their thoughts and concerns. Making sure they are part of the process from the beginning can help you achieve employee buy-in and support. Prepare for these conversations by auditing your internal pay structures in advance, establishing a clear criteria for compensation, and having a good answer when employees ask why. Start small and progress at your own pace, always connecting transparency policies back to the core values of your company — and trust your staff to understand measurable compensation policies and appreciate your honest efforts.”  While HR has typically towed the company line policy-wise, the pay dynamic is changing.  What’s clear is that the employer-employee dynamic is evolving rapidly in the era of online data.  Making the workplace a more equitable relationship than it has ever been, at all levels and across gender and diversity categories.

The HireLabs team has over 20 years of startup experience. We are here to coach you as you build your foundations - both in process and people. Schedule a free consultation call with us today to learn more about how to tackle big issues like pay transparency.  And look for part 2 of this series where we offer pointers on how you can begin to establish equitable pay policies.