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Should your startup embrace salary transparency?

Posted by Shivali Anand

October 25, 2021    |     4-minute read (778 words)

The practice of allowing a company's employee compensation figures to be visible to other people – often referred to as salary transparency -- is uncommon in the U.S. What a business pays to whom is usually kept secret, except for public employees and executives at public companies, and the cultural norm is that salary discussions are usually off-limits.

But salary transparency is increasingly viewed around the world as an important tool to reduce gender and pay gaps. For example, Germany and Ontario, Canada, have both enacted pay transparency laws. Norway allows its citizens to see any other citizen’s salary online.

Like many other countries, the U.S. has not moved toward implementing wage transparency as a national policy. But a few states, like New York and California, have enacted laws that prohibit businesses from penalizing employees for discussing pay. 

Meanwhile, some companies have implemented wage disclosure rules. Whole Foods has had an open salary policy since 1986, and social media scheduling business Buffer makes wage data available to workers and the general public.

Weighing the pros and cons

Pay transparency policies range in openness, from internally posting pay ranges for each job to publicly disclosing every employee's compensation. But how can you tell if this is the best plan for your business? Consider these benefits and downsides of implementing open compensation practices.

Advantages of salary transparency:

  1. Promotes equal pay for equal work
A wage gap persists for many women and members of minority groups, but salary transparency encourages equal pay for all employees, Open salary information also communicates to staff how much your value their contributions and helps negate the risk of unfair treatment claims by disgruntled workers.

  1. Boosts employee morale
Tel Aviv University researchers analyzed the behavior of 280 Israeli undergraduates and found that keeping pay hidden was closely connected with lower employee performance. If employees understand what they need to do to earn more money – and why — they are more inclined to remain engaged and work harder for it.

  1. Increases efficiency
A 2011 study found that switching from pay secrecy to open pay and performance information resulted in "a substantial and long-lasting improvement in productivity that is costless to the firm.”

Transparency can instill a sense of fairness among staff. If people perceive their workplace to be fair, it is apt to boost job satisfaction and productivity.

  1. Reduces turnover
Payscale surveyed over 71,000 employees to investigate the relationship between pay and worker engagement. An employer’s willingness to communicate openly about compensation was found to be more significant at decreasing attrition and boosting engagement than career advancement opportunities and employer appreciation. 

  1. Attracts, retains talent
You are more likely to attract applicants whose salary expectations are aligned if you provide the information upfront. This saves time for both you and candidates, especially if they want a higher wage than you can afford.

Pay transparency can also attract hire superior talent and reduce the danger of being accused of discrimination. Candidates know their gender or race has no bearing on their pay.

Now let’s look at potential disadvantages of salary transparency:

  1. Risk of employee dissatisfaction
Even if you define compensation reasonably and transparently, some employees may see it as unjust, even if you supply them with ample explanation. This could affect their performance or make them think about leaving.

  1. Loss of privacy
Some employees may be unhappy with their wage information being shared with co-workers or the public. And competitors may tap your salary data to try to entice talent away. 

  1. May encourage dishonesty
According to research published in the journal Organizational Behavior and Human Decision Processes, lower-paid employees were more inclined to cheat on assignments if they could compare their wages to higher-paid colleagues. However, this only occurs if people at the bottom of the pay range think they have no alternatives and that the wage discrepancy is unjust. This points to the need for openness regarding why salary differences exist.

Judging whether salary transparency is right for your firm

Openness about salaries is conducive to trust among employees if you share the logic behind their pay. But before releasing any salary information, check that your salary levels are fair and consistent. 

If revealing employee salaries isn't feasible in your company’s culture, any steps you do take toward pay transparency are likely to improve feelings of engagement and fairness and, in the long run, boost performance. This is especially true if you've been following the traditional model of keeping wages hidden,

Before undertaking a move to salary transparency, let existing staff members consider such a decision. Also take into account the perspectives of your board of directors and executives weigh in, if applicable.

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