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The Pros and Cons of Salary Transparency

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. / Credit: Salary Image via Shutterstock

Businesses want happy employees. Hiring and retaining top talent is critical to the success of organizations, and there are several tactics organizations employ to keep their best employees happy and willing to stay on the team. Offering a fair salary in relation to industry standards and what co-workers are earning is just one strategy to keep employees content.

While managers determine what to pay their employees, some companies are extremely transparent about the factors that go into determining pay. Other companies reveal the salaries of their employees. When implemented properly, aspects of salary transparency can boost employee morale as workers appreciate the openness about compensation.

When implemented poorly, salary transparency can lead to frustration, productivity loss and resignations. Below are the pros and cons of implementing transparent compensation practices in your organization.

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One benefit of pay transparency is encouraging equal pay among employees. By openly sharing information regarding compensation, your business is encouraged to create fair pay, as employees help to hold the business accountable.  

"Usually, it's easy for companies to get away with paying two employees entirely different salaries despite having very similar jobs," said Peter Yang, the co-founder and CEO of ResumeGo. "However, with salary transparency, this becomes a whole lot harder to justify, and as a result, companies are more incentivized to give equal pay for equal work."

Incorporating elements of salary transparency, like explanations for salaries of employees at different levels of seniority, can keep your business from revealing every individual salary while still giving employees an explanation of compensation practices.

"If salary transparency is done correctly, there would be clearly defined compensation bands, which makes that part of compensation management easier for both employers and candidates," said Marielle Smith, vice president of people at GoodHire. "Plus, compensation bands clearly define levels for the entire organization. Salary transparency is great for keeping executive compensation in check."

Being transparent about salary can help your business gain the trust of current and prospective employees, and sharing the logic behind compensation with employees can make it easier for them to understand and accept their paycheck.

On the flipside, poorly implemented salary transparency practices cause turmoil if employees feel they aren't being paid fairly. 

A lack of understanding among employees is one of the biggest downsides to salary transparency. It's easy for an employee to put the blinders on and only feel frustration after seeing they're making less money than a co-worker.

"Salary transparency can backfire because it's the nature of people to compare, and they wouldn't necessarily be making accurate comparisons because they don't have all of the information required to do so," said Smith. "Also, there are different philosophies on how compensation is determined." 

There are various ways for determining compensation, and if employees don't have, or agree with, the information used to create a pay gap, it's likely that tensions will rise.

Perception causes trouble when it comes to salary transparency and pay discrepancies within a business. If employee A perceives their work to be equivalent to employee B, but those determining the pay between both employees don't and pay employee B more despite the two workers sharing a title, there will be tension. This may result in the loss of quality employees.

"Good employees who feel underpaid may demand more money or exit the workplace," said Joan Marques, professor of management at Woodbury University in California. "If they cannot do so (due to circumstances, such as poor market conditions), they may become less productive."

Being transparent about salary opens your business up to the possibility of frustrated employees. There's no perfect system that'll appease everyone, which makes adequately explaining pay discrepancies a priority.

Pay transparency requires a plan. If you share salary information, be extremely clear in how you came to those salary determinations.

"A small business can easily explain the difference in pay scale by providing the formula that was used to calculate each scale as well as a qualitative comparison in job description and responsibilities," said Kamyar Shah, a business consultant. "The key is transparency in data sharing."

It's best to get ahead of any pay gaps within your organization by explaining why different pay levels exist. For example, if pay within your organization is contingent on years of experience and expertise, make that known. Clear guidelines and understanding make it easier for a new hire to understand why their senior colleague earns a higher salary. It's also important to follow legal guidelines to ensure your salary practices don't break laws.

If you're honest with your employees about pay, the chances of them understanding payroll decisions increases. This doesn't mean, however, that everyone will agree with your decisions. Full pay transparency opens the door for anger and frustration among employees.

On the other hand, some employees appreciate the honesty and clear salary explanations. When deciding whether to implement salary transparency within your organization, you need to evaluate your company culture. Once you've determined what makes sense for your business, stick to smart payroll practices. If you set logical determinations for paying employees different salaries, your business will be fine.  

"With an open salary transparency policy, companies should have a payroll structure that makes sense, and can be justified when asked about by employees," said Yang. "Obviously, those who have been with the company longer and hold more responsibility deserve to be paid more, and employees understand this. Small business owners that create sensible payroll structures typically do not need to worry about salary complaints from their staff."

Bennett Conlin

Bennett is an editorial assistant based in New York City. He graduated from James Madison University in 2018 with a degree in business management. During his time in Harrisonburg he worked extensively with The Breeze, JMU’s student-run newspaper. Bennett also worked at the Shenandoah Valley SBDC, where he helped small businesses with a variety of needs ranging from social media marketing to business plan writing. Contact him through email or Twitter.