Could pay transparency be good for business?

Employees and job candidates want clear information on pay, and governments are moving to make conversations over salaries easier and fairer. How can businesses make it work?

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We’ve all seen the words “competitive salary” in job adverts – and probably the occasional post on social that if it’s so competitive, why don’t employers simply state what’s on offer.

But that unhelpfully vague description may be soon outmoded. Some US states have already made pay transparency mandatory, and the EU is working on a directive which will require salary ranges to be disclosed across member states. Last year, the UK government also launched a pilot scheme exploring how pay transparency might benefit women in the workplace, and a handful of individual businesses are loudly pushing for fairer hiring practices. 

Even so, the thought of disclosing salaries – whether internally with existing employees or externally with potential candidates – is a sore topic for most employers. Often, they fear that pay transparency will cause internal mutiny and dissuade candidates from applying. 

But the data paints a different picture. Liberty Hive, a tech-driven talent platform that recently launched The Great Salary Reset campaign, has found that the response time for job ads which disclose salary bands is 50% faster than those which do not, and those postings receive 67% more applications. Likewise, a survey of 71,000 US employees by Payscale has found that talking to existing employees about salary can improve job satisfaction, even if they’re being paid less than the going rate. 

Buffer, a social media company, is a prime example of the effects pay transparency can have on a business. In 2013, the company published the individual salaries of all its employees, as well as the formula it uses to calculate them. The result? The company’s turnover rate hovers at around 5.8% – almost half the industry average of 10.6%.

If companies have so much to gain from pay transparency, why are business leaders still hesitant to talk about it? 

Why are attitudes to pay changing?

Rameez Kaleem, the founder and director of 3R Strategy, an independent reward consultancy, and the author of A Case of the Mondays: How to build a culture of trust through pay transparency, says that the issue is driven by a generational gap in values and priorities. 

“When you look at most leadership teams, they don’t have any gen Z or even millennial members,” he says. “They’ve never seen organisations that had open pay ranges, so they think it would never work.”

Asking someone about their current pay risks carrying discrimination forward to the next one

Instead, many businesses choose to talk about pension schemes and other perks that don’t resonate with younger candidates. This is in stark contrast with a recent study by software giant Adobe, which shows that 85% of gen Z are less likely to apply for a job without a salary range. 

Kaleem goes on to explain that pay transparency isn’t about everyone being paid the same. Factors like location, experience and skill set all factor into how much somebody earns. The question is more about being fair and letting people know how salary decisions are made. 

This need for fairness extends not only to disclosing salary ranges, but not asking candidates about their current salary – a practice which many US states have banned but which is prevalent in the UK.

“The problem with asking someone about their current pay is that if they’re discriminated against in their job, it will carry forward to the next one, so the pay inequality isn’t tackled,” says Kaleem.

How to audit your salary structure

So, are UK businesses ready to enter the era of pay transparency? Not at all, says Clare Welsh, an organisational development specialist and owner of HR consultancy People Strength. If a law were passed tomorrow to make pay transparency mandatory, many businesses would have work to do. But that shouldn’t discourage businesses from taking small steps in the right direction, she argues.

“Businesses need to take stock and look at their salary structures now. Then think about how they want them to be,” Welsh explains. “That could mean setting up consistent salary scales. But it could also mean thinking about what’s going on in the market.”

Then, once companies have conducted their pay audit, they’ll need to think about how they want to structure their pay incentives. “We need to have clear definitions of how we evaluate a job’s salary range and what we expect from somebody at the lower end of the band, the middle and the higher end of the band,” says 3R Strategy’s Kaleem.

Managers will play a key role in driving that change across the business, he adds, and they will need support and guidance from above to help them have these conversations with employees. 

The price of pay secrecy

It’s also worth remembering that there’s likely to be a price to pay for companies that fall behind the curve on this trend. Keeping pay a secret can cause dissatisfaction, even when there’s nothing explicitly wrong in the workplace. For example, research by Payscale has found that 42% of employees believe they are paid below market rate, even when they are paid above market rate. 

Welsh also warns that the lack of pay transparency during the hiring process can undermine the trust between employer and employee, as well as make the whole experience more expensive and painful. “When someone makes that decision to apply for a job within your organisation, they’re potentially putting in a lot of emotional commitment. So, if they go all the way through the process and at the end the salary is less than they thought, they will feel they’ve wasted a lot of time. And you lose that person’s trust.”

Not having a clear salary range listed on your job ad can also invite candidates who think they can negotiate pay, but your budget might be limited. That creates a lose-lose scenario for employers and potential employees.

For Kaleem, the logic of that lose-lose scenario will make itself felt as we potentially head into a downturn. “Organisations will struggle to recruit and won’t have any option but to go down the transparency route,” he predicts. 

So, does “competitive salary” still seem the right choice of phrase?