Is pay transparency good for business?

Some companies are taking a radical approach to the discussion of salaries by implementing complete pay transparency. Is this good or bad for business?
By John McGill.

Salaries are undoubtedly a touchy subject in any workplace. Whether it is discussing your pay with colleagues or addressing salaries with your employees, the conversations can be difficult to navigate.

Yet, internationally some companies are taking a radical  approach to the discussion of salaries by implementing complete pay transparency. Locally we are seeing some moves with the most recent draft of the NZX Corporate Governance Best Practice Code – where pay transparency is highlighted but focusing on senior positions.

The issue is a contentious one. On one side of the spectrum is the argument that people have the right to know what other professionals in their position are getting paid. On the other side, is a conversation about privacy and the potential for these figures to fuel bad blood in the office. Let’s take a closer look at each side of the debate as pay relativity is a vital part of understanding remuneration in this country.

The upsides to pay transparency
In an article titled “Why being transparent about pay is good for business” Wall Street Journal contributor David Burkus asserts that pay transparency is good for employees, businesses and the economy as a whole.

As more companies begin releasing information surrounding salaries, research has largely backed this notion. Burkus points to two separate studies to make his case.

One report by Middlebury College Economics Professor Emiliano Huet-Vaughn 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.

In a study by Elena Belogolovsky of Cornell University and Peter Bamberger of Tel Aviv University, it was revealed that pay secrecy was tied to decreased performance levels. Additionally, companies that promoted pay transparency reduced gender wage gaps and various other forms of salary discrimination.

The downsides to pay transparency
Despite these studies, pay transparency does have its downsides. In an interview with Fast Company, vice president of PayScale Tim Low explored some of the downsides to having a transparent salary culture.

For starters is the fact that transparency cannot be reversed. Once you have started doling out the numbers there is no real way to go back to a culture of secrecy – even if things go wrong.

Additionally, Low points to the fact that pay is such an emotional topic for many professionals. The idea that one worker is being paid more for the same job could cause internal feuds and general feelings of animosity in the office. 

However, most HR practitioners are now well aware of the importance of managing these types of relativity issues and guiding both employees and their managers through the issues around them.

Gaining an understanding of the complexity of pay inter-relationships involves access and understanding of a lot of information – from data regarding different pay markets to individual performance, as well as how roles are structured and historical precedents.

Explaining it to all individuals in the organisation merely invites them to have an opinion on it all, i.e. turning all employees into experts on remuneration. While it is possible, employees investing time into understanding remuneration means they are not spending that time performing critical job functions.

Instead, organisations should develop systems that inspire confidence in the organisation and trust that they are treated fairly on pay and everything else the employer has to offer.

The ultimate takeaway
At the end of the day, whether or not your company follows a policy of pay transparency depends largely on your business culture. In some work environments, transparency can promote a certain level of increased motivation, in others it can cause some major problems.

For senior level positions pay transparency may be inevitable. Regulatory protocols may dictate the disclosure of these salaries and organisations will need to be prepared to deal with the resulting fallout. 

When it comes to pay transparency across the whole organisation, leaders should recognise their internal culture while still taking into consideration what is sensible and possible.

 

John McGill is the chief executive officer at Strategic Pay.

 

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