Pay Transparency: A Game-Changer or a Risk?

Imagine a company where employees feel valued, motivated, and empowered. A place where there's no hidden agenda and everyone feels like they're part of something bigger. This is the power of trust. Studies show that employees who trust their employers are more likely to be engaged, productive, and loyal. This is the reality for many companies that have embraced pay transparency.

A culture of salary openness. Well, that may only be just around the corner; pay transparency is gaining more and more traction. The trend towards pay transparency continues gaining momentum as employers increasingly recognise its importance. A recent KPMG study revealed that over 53% of European companies are considering the level of pay transparency in their organisation. So what are your intentions towards pay transparency? If you are still taking a wait-and-see approach or considering implementing a pay transparency plan, this article is for you.

Despite governments increasingly promoting transparency by introducing legislation to prevent pay discrimination, plenty of organisations still follow the ‘strictly no salary talk’ policy. Others, such as Buffer, publicly list each employee's salary (including their names and job titles).

This transparency trend has increased in popularity over the last few years due to several factors. One is that third-party websites, such as Glassdoor and Payscale, allow employees to share their salaries anonymously and, therefore, easily access the salaries of companies—including their own employer.

Similarly, multiple recruitment agencies produce annual Salary Guides, which show market pay rates for permanent employees and contractors based on thousands of placements. These guides provide the average salaries organisations are paying for any given position.

Finally, the vast number of professionals in the global workforce (a generation comfortable with sharing personal information online) is also a significant contributing factor to pay transparency gaining traction.

To understand pay transparency, we have looked at:

• What legislation has been introduced to increase pay transparency in organisations?
• What are the benefits of pay transparency?
• Are there any downsides to pay transparency?
• Essential Elements for Effective and Transparent Pay
• Which companies have full pay transparency policies and why?

Pay transparency legislation

In 2023, the EU Parliament and Council approved a set of pay transparency regulations to address gender pay gaps. These regulations require employers with at least 100 employees to publish information on the pay gap between male and female workers. Companies with 250+ employees must report annually, while those with 150-249 employees report every three years. Companies with a gender pay gap exceeding 5% must conduct an analysis and develop an action plan.

While UK employers with 250+ employees are subject to gender pay gap reporting, the EU directive imposes stricter requirements. For example, UK employers are encouraged but not obligated to provide a narrative explaining the pay gap and their action plans. The EU directive's more comprehensive approach aims to drive greater transparency and accountability in addressing gender pay disparities.

Canada’s Equi’Vision, an employment equity tool, provides citizens with user-friendly, online information on employer wage gaps. It will present aggregated wage gaps in the form of hourly rate gaps, supported by:

• Bonus pay gaps
• Overtime pay gaps
• Hourly pay gaps
• Representation rates

The Pay Transparency Act, introduced in Ontario, requires (a) all publicly advertised job postings to include a salary range, (b) prohibits employers from asking about past compensation, and (c) mandates that employers report gender earning gaps to the province.

In Australia, the Workplace Gender Equality Amendment (Closing the Gender Pay Gap) Bill 2023 requires employers with 500 or more employees now need to report on a wider range of gender equality indicators. The WGEA is required to publish gender pay gap information for relevant employers.

Based on the Transparency in Wage Structures Act of 30 June 2017, as last amended by Article 25 of the Act of 5 July 2021 to enforce the right to equal pay for women and men for equal work or work of equal value. Employers are legally obligated to ensure equal pay for equal work, regardless of gender.

Since 2017, as per the Gender Pay Gap Reporting, firms in the United Kingdom with more than 250 employees are required to report salaries and bonuses by gender.

In Ireland, the Gender Pay Gap Information Act 2021 requires organisations with 150 or more employees to report on gender pay differentials, including bonuses, and indicate the reasons for any such differentials.

The above are just a few examples of countries introducing pay transparency legislation.

Note: Listing all countries would exceed the length and purpose of this article. However, a quick search of ‘pay transparency law [country] provides great insights into what other countries are doing.

Benefits of pay transparency

1. Exposing and closing pay discrimination based on gender

Source: UN

With multiple countries introducing legislation, Baker et al. examined the effectiveness of these transparency laws on the gender pay gap in their research paper, "Pay transparency and the gender gap.”

They examined the impact of the introduction of pay disclosure laws in Canada on university faculty salaries. They found that these laws have, in fact, led to a statistically significant two percentage point reduction in the gender gap.

This effect represents a 30 percent reduction in the gender gap, compared to a base of 6-7 percent.

Employees who discover they are underpaid are empowered to negotiate for a higher and fair salary by exposing pay differences.

For more research on this topic, see:
How much does your boss make? 
Does Pay Transparency Affect the Gender Wage Gap? Evidence From Austria,
Pay Transparency & Cracks in the Glass Ceiling. 
Research: The Complicated Effects of Pay Transparency

2. Increased trust and productivity

Research: The Complicated Effects of Pay Transparency shows that pay transparency policies can positively impact productivity. Dane Atkison, CEO at SumAll, says in an interview with The New York Times:

“Everybody knows everybody’s salary. It’s pure transparency, which manifests itself with a much greater level of trust. Everybody knows each other’s ownership stake, too.”

Once people understand what they are worth to the company and know the information is there if they want to see it, that creates more trust in a more profound way.

3. Happier customers

A recent study by HBR found that consumers valued a company’s product less and posted more negative content when they found out about existing gender pay gaps within an organisation.

When asked, participants were 32% more likely to choose a competitor after reading about a company’s gender pay gap.

Companies can stay ahead of the narrative by being more open about how salaries are defined. This trend isn’t going anywhere given that Glassdoor, Payscale and Salary calculators/ Guides are making it extremely easy to access salary information, so introducing more open salary conversations will allow companies to lead the conversation and avoid risking backlash.

Are there any downsides to pay transparency?

1. Potential negative impact on employee wellbeing

Unfortunately, pay transparency also leads to pay comparison. According to research (Cruces, Perez-Truglia and Tetaz 2013), this can have a negative impact on the self-esteem of ‘poorer’ individuals. It can also impact their social esteem.

Conversely, individuals who discover they are more prosperous than they thought often experience a boost in self-esteem.

2. Pay difference can be misread

If an organisation doesn’t clearly communicate why a certain employee gets paid more (e.g., higher KPIs, seniority, etc.), this can potentially lead to frustrated employees. Companies need to communicate how a salary is calculated.

In his article ‘The case against pay transparency’ Zenger argues that the majority of employees (in 2016 he interviewed a group of 700 engineers from two large Silicon Valley companies) severely overestimated their performance. This means an open pay policy would lead them to believe they are ‘underpaid’ and potentially leave the company.

However, researcher David Burkus explains that keeping salaries hidden can harm performance, hiring and even the economy at large. Burkus cites research that found ‘people who are kept in the dark about pay performed worse than those who were informed’.

Essential Elements for Effective and Transparent Pay

Which companies have full pay transparency policies and why?

Despite some potential risks to open salary policies, more organisations are now fully embracing salary transparency.

Buffer, for example, not only communicates their salaries internally but has gone one step further and has published each and every employee’s salary publicly. Buffer’s statement reads:

“Transparency is one of our core values. We’ve found that it builds trust, holds us accountable, and can push our industry forward.”

For Whole Foods CEO, John Mackey, this concept of openness is nothing new. He introduced this open policy in 1986. In the book ‘The decoded company: Know your talent better than you know your customers’, Mackey explains:

“If you’re trying to create a high-trust organisation where people are all-for-one and one-for-all, you can’t have secrets.”

Mackey wants employees to understand why there are pay differences amongst people. When employees know what types of performance and achievement earned certain colleagues more money, he thought, perhaps they would be more motivated and successful, too.

At SumAll, a marketing analytics company, it is a company-wide policy to publish employee’s full salaries, including stock and all. CEO, Dane Atkison, explains:

“It began as a simple way to avoid dishonesty, but it has since morphed into a unifying productivity booster that keeps people around.”

So, what’s next?

While the literature is growing and pay transparency is gaining increasing attraction, more research is needed on exactly how pay transparency impacts employees, their relationships, and organisations as a whole.

However, an increased level of transparency, whether it is pay transparency or simply being more transparent in your communication as an organisation or a leader, is here to stay.

Employees and customers expect transparency from organisations on all levels. Transparency creates trust, and trust is key to any relationship, whether with employees, stakeholders, or customers.