What is pay transparency? Pros and Cons

by Srikant Chellappa Mar 22,2022

The People Strategy Leaders Podcast

with Srikant Chellappa, CEO

Pay transparency in an organization refers to the freedom or openness with which people can discuss how much they are getting paid for their role. It includes transparency of benefits and perks as well. It is about wage rights and has become a major trend to follow. In light of all this fuss, consider the potential impacts and benefits of pay transparency before implementing it in your business.

The practice of the trend has become popular for the third-party websites that allow employees to share their salaries anonymously. The practice of pay transparency can be full or partial. In the partial one, it is mainly when the pay range would be known for any particular role in the organization. In the recruiting process, the pay bands are often mentioned, and it is a type of partial transparency in pay scale. 

Also read: Continuous Feedback: What is it and its benefits

Whereas, in case of full transparency, the pay scale is revealed in detail for employees of different categories. Availability of data of pay scale may vary between in-house in small organizations and a broader range in large enterprises. With help of this practice, the employees get a chance to negotiate or communicate about compensation.

Transparency facilitates fair pay 

Employees are largely in favor of fair pay, transparency of pay scale facilitates open discussion with coworkers and authorities about remuneration. It is also a realistic solution for eliminating the gender pay gap. Who doesn’t want equal treatment in the workplace? Finding what others earn can be a solution. Therefore, transparency is a realistic solution that encourages fair pay. Once employees are aware of company policies regarding pay scale, they come to know that they are fairly paid.   

Also read: Here’s Why Employee Rewards and Recognition Fails

Pros of pay transparency 

There are a number of advantages of salary transparency. By disclosing the details to the staff, it helps retain their trust and facilitates improvement.

  • Important to employees 

Pay transparency is essential for skilled professionals and most employers claim that they are transparent with pay scale and about annual increment. However, if the scale is a secret, it is only beneficial for the negotiators. But if they maintain pay transparency, it is like justifying the details of pay scale to all employees. So, even when the organization has a tight budget, transparency helps them show the overall trend across the organization.    

  • Improves engagement and trust 

Transparency helps employees understand the pattern of pay scale better and helps them put more trust in the organization. When an organization shows honest and open pay scale details, it becomes easy for employees to understand that pay scale aligns with experience and skills in the field. In other ways, it helps boost morale and engagement of an employee as they are satisfied with a fair pay scale. 

  • Minimize chances of bias

It can be conscious or unconscious, but pay transparency helps reduce biases. Biases can be gender, background, ethnicity, demographic and characters-based. The organization should disclose employee salary differences when employee pay scales are no longer a secret. If pay philosophy remains unsolved, bias can create unwanted pay differences. However, one can set responsibilities and roles correctly and use market data to set an updated salary range. It helps eliminate bias and create a less complicated pay structure.    

Today’s job seekers want pay transparency in an organization with immediacy. Companies should be clear on how pay depends on job titles, responsibilities and level of performance. It is important for companies to reflect on these factors in order to uncover bias in the workplace. 

  • Attracts Candidates

With increasing competition in the market, employers need to stand out to attract freshers and also to retain seasoned employees. It should inculcate the trend of pay transparency to retain candidates who value an open and transparent salary approach. When they receive fair pay, it improves retention level in the company.

Further, transparency helps organizations to share the correct salary message to the market. It is useful for the aspirants searching for new jobs. Conveying the right pay scale on the portals lets the jobseekers understand the category of the job and how much they should expect. 

Also read: What are hiring managers looking for?
  • Closes Pay Gaps

Want to eliminate the pay gap? Transparency in pay scale can certainly help. By maintaining such transparency, there is little room for bias impacting on salary figures and it will promote equal pay. Though pay gaps have been reduced in many places, it is still widely prevalent. By sharing details of pay scale, it allows for examining the reasons behind the gap and helps to eliminate it. 

  • Higher productivity

Transparency around pay scales can have a positive impact on employees’ level of productivity in organizations. Studies show that employees tend to give their best efforts, resulting in higher productivity when everyone knows the pay structure.

When employees are in the dark about what colleagues earn, they may overestimate about other’s pay scales. This can result in high levels of dissatisfaction and lower levels of productivity.  

  • Fewer negotiations

Without transparency, an employee is not aware whether he or she receives less pay and, therefore, they could not negotiate. When employees get to know about details of pay scale, they would not negotiate with authorities. It will encourage less scope of negotiations with pay transparency in an organization.

The transparency works the best in the recruiting and interviewing stage as it helps cut out unnecessary negotiations. It may trigger unwanted situations both for employers and employees. So, being transparent about the pay scale will eliminate time-consuming negotiations.   

Looking from a worker’s perspective, without having accurate details on peer compensation, it is common to feel that they are underpaid, which leads to unpleasant workplace environments.

Also read: 6 Most Common Leadership Challenges At Workplace

Cons of transparency 

The transparency of pay scale has downsides too and it should be carefully taken care of. One has to make sure that transparency does not impact office culture too deeply.

  • Builds up internal resentment 

Before introducing transparency in pay scale, it is important to review the pay to ensure equal distribution among employees. Sudden revelation of previous pay details often lead to tension and resentment among employees. This salary experience contributes to lower engagement and morale.

  • Improper vision can impact morale 

Employees need to understand the responsibilities and success levels that determine the pay scale. Otherwise, one may tend to lose motivation and have a wrong notion that their performance isn’t as good as that of their colleagues. It necessitates a clear rationale on salaries and try to provide it for your employees. It is the responsibility of the manager to take employees through every pay scale. Discuss in detail to help them understand the company policies.

  • Increased Turnover

When employees are not satisfied with their compensation, it results in turnover. It impacts an employee’s motivation and productivity levels. This is when employees start to explore the market for better options.  

Also read: 7 Useful Tips To Reduce Employee Turnover
  • Creates Envious Employees

Sometimes not revealing the pay scale is a bliss. When employees get to know about each other’s pay scale details, it can make them envious or feel devalued. This is more obvious when peers having the same profile earn more. It creates a huge impact on work productivity, resulting in employees deciding to leave the job.

  • Required to include government regulations 

The transparency can invite unwanted regulations and lawsuits for the organization. However, employees can produce the salary details in court, which will bring in unwanted trouble for the company. This is where the government regulations work in favor of the employee who has raised the problem of unequal wage distribution among peers.

  • Difficult to implement

The idea of transparency doesn’t standalone, but comes with a need to evaluate an equal wage system. It mainly depends on the category of organization and how it can pay employees for different pay scales. It becomes a challenge when you have to hire employees on equal pay as you have to measure length of employment, create scopes for training, and employee experience. As these are unique to every job role and individuals appointed for it, applying a standard pay rate can be challenging.    

  • Comparing pay

Knowing how much your colleague makes from the company can trigger problems of jealousy. Because of which it is still not a common trend for most private organizations. Comparing pay can impact negatively on employees, resulting in demotivation, especially for peers who are working in the same profile. The company may face problems in hiring or retaining employees due to transparency.   

How to implement pay analysis to eliminate discrepancies?

When an organization commits for pay transparency, discrepancies are sure to crop up, which is true for any fast-growing company. Having pay analysis for every role helps get effective results. It should consider who contributes significantly to company growth.

Consequently, it is important to analyze the big difference in payroll. It may happen that a person’s responsibilities do not line up with the particular job role, or changes to a new role that impacts the pay. Without an objective reason for the change in pay, the HR team should initiate to rectify and maintain equality.

By offering equal scope for every employee, it is a good opportunity for them to earn a bonus, instead of offering someone above the market rate. It is important to focus on performance linked pay philosophy for every salary scale.

Also read: 7 Reason Why Goal setting Is Important

With open salaries, comparisons are inevitable, and so, companies should have objective reasons behind it. Therefore, analysis should include factors like level of experience, market rate of a person’s designation, and cost of living in a location to determine the final pay scale. All these are to be integrated with the company’s framework. These should be easy for employees to understand.  

Transparency without salary policy can be hard to maintain

The idea of introducing transparency in pay scale is yet a revolutionary step that is being looked at somewhat skeptically. Instead of being in a dilemma on whether to go for full or partial transparency with a pay scale, it is better to disclose it to every employee that gives few scopes of negotiations. 

Transparency without clear policy is troublesome, as salary is an emotional and impactful topic to discuss. It can lead to chaos when focused without proper policies to run for in an organization. Employees often fail to understand the importance of a job role and its requirements, experience, and qualification. These have an impact on the pay scale of an individual. So, it should be the responsibility of management to be clear about salary structure and logical reasons behind the final decision and help employees understand it right. 

If you are focusing on employee engagement, you can have it smoothly when team members know how salary is determined than knowing who is earning more. A fair process is trustworthy and drives engagement without making one demotivated. By deploying this pay transparency policy, it is easy to promote diversity. Therefore, businesses can eliminate discrimination with transparency policy that further promotes equal opportunity for employees in an organization. 

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Srikant Chellappa
CEO & Co-Founder of Engagedly

Srikant Chellappa is the Co-Founder and CEO at Engagedly and is a passionate entrepreneur and people leader. He is an author, producer/director of 6 feature films, a music album with his band Manchester Underground, and is the host of The People Strategy Leaders Podcast. He is currently working on his next book, Ikigai at the Workplace, which is slated for release in the fall of 2024.

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