Looking at Pay Transparency

Strategic Pay recently asked a range of New Zealand organisations how transparent they were with their employees about pay. Nearly three quarters said their employees have some access to pay related information. However, almost 40% said some of their employees have very little or no access. (Some organisations apply more than one policy at diff erent staff levels.) 

While the focus of recent attention has been around pay transparency as a lever to achieve pay equity, the issue of pay transparency has been around for a while at a broader level and the concept has both proponents and detractors.   Proponents say that pay transparency will contribute to pay equity, and that it increases motivation. Evidence highlights both positive and negative effects.

Research supports the theory that pay transparency could increase motivation. 

One US report found that when participants were shown their earnings and where they stood in comparison to others they generally began working harder and showed increased performance levels. (Emiliano Huet-Vaughn, 2015) Other research concurs that transparency can have an impact on motivation. In a study by Belogolovsky and Bamberger1, it was revealed that pay secrecy was tied to decreased performance levels. The same study found that companies that promoted pay transparency reduced gender wage gaps and various other forms of salary discrimination. While some research supports proponents claims, other research does not. Other studies demonstrate some of the downsides, which include the risk that transparency about pay breaches privacy and can give rise to negative behaviour in the office and out of the office, affecting the culture and decreasing motivation.

Employees may regard pay transparency as a breach of their privacy. One 2019 review by Christina LeBeau summarized a number of studies related to pay transparency. One study looked at employees at a large Asian bank, traditionally very secretive about pay. About 65 percent of respondents felt they would benefit if the bank made salary data available, but they preferred it to be anonymous. Only 20 percent wanted to share their own salary; about half said they would not share their pay information with five peers even for $125.

LeBeau’s review also highlights potential broader negative impacts. When Norway put individuals’ tax records on-line in 2001, Norwegians spent hours (at the busiest time of the year from their employers’ point of view) using “apps to browse maps that showed neighbors’ income, and to create leaderboards with the highest and lowest earners among Facebook friends. Media accounts told of Norwegians’ online tax records being used to shame low-wage workers and bully their children.”

1. “The Dark Side of transparency” 2017, Elena Belogolovsky and Peter Bamberger.

Pay transparency can also lead to disengagement

In California, a team of UC-affiliated researchers surveyed a random subset of university employees, first informing them about a website which listed California state workers’ names and salaries including the university’s, and later polled them about job satisfaction. Lower-paid employees who visited the site reported feeling less satisfi ed with their jobs and likelier to look for new opportunities.

Knowledge about others’ pay levels can have an adverse eff ect on pay equity – increasing salaries at senior levels and decreasing salaries of the lower paid.

In a 2020 working paper on pay transparency the authors (Cullen and Pakzad-Hurson) note that “Wages are more equal, but lower under transparency [for low-skill, temporary workers].”  

In the US, with the disclosure regime for senior executive’s pay, salary inflation at the senior level has been seen over the past 20 or so years. 

In New Zealand salary inflation also occurred following the 1993 Companies Act which required disclosure of executives’ pay levels. 

So, if the research is contradictory and the outcomes potentially contrary to the intended effect, does it make sense to require pay transparency?  

Notice that most of the issues outlined above relate to transparency about pay levels. In our view pay transparency includes how open an organisation is about the what, why and how, as well as how much they pay their employees.  It also includes variable pay and other reward components such as development opportunities.

The Human Rights Commission recently published the results of their survey about workers’ pay experiences. Almost half of the 2300 employees they surveyed said they’ve been paid less for doing the exact same job as another person. 

However, differences in pay levels arise as a result of a number of valid reasons – the nature of the job, the incumbent’s experience and contribution to the organisation, and skill shortages which often give rise to pay premiums. Bias and discrimination are not necessarily the cause of differences in pay levels. 

Using a blunt tool such as transparency about pay levels will not solve pay inequity and could be demeaning for people, demotivating and result in the opposite outcome to that intended. 

Organisations need an overall strategic, considered and defensible approach to rewarding their employees. This will reduce the likelihood that transparency about pay will be damaging. Organisations also need to examine the underlying causes of any pay gap they may have by conducting a “hygiene check” or audit of their pay and reward practices and then committing to addressing, reporting on and monitoring the outcomes on an on-going basis to ensure action continues to be taken to resolve pay and related inequities. The outcome of an audit should identify the extent of any pay inequity, the specific causes underlying that inequity, and a way to move forward to address them at a broader level than simply focusing on differences in pay levels alone. In the interests of transparency, the results of such an audit should be made public to employees.

Having a strategic approach, being transparent about the approach to pay and rewards within the organisation, and demonstrating a will to examine and address inequity, will be a good first step to inspiring confidence and trust from employees that they are treated fairly on pay and everything else the employer has to offer.

BY LYN BRIESEMAN, SENIOR CONSULTANT AT STRATEGIC PAY

At Strategic Pay, we specialise in helping organisations retain and motivate key talent. Get in touch today to find out more.

www.strategicpay.co.nz | [email protected]

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