Salaries - Should they be visible?

This month New York State made salary ranges on job ads mandatory - with a fine of up to 250K after a first offence warning 1. Being transparent about pay can level the playing field for minority groups and those less likely to bargain, but risks impacting existing employees. This article explores how pay transparency affects business - the findings may surprise you.

How does pay inequality affect motivation?

Many companies are reluctant to make pay transparent. They worry it will demotivate lesser-paid workers, overburden supervisors, and increase salary costs. But according to a 2018 study by Harvard Business Review, that worry may be unjustified.

In their study, pay inequality had a surprisingly positive effect on workers. Researchers discovered that knowing the bosses' salary can make employees work harder. "For each 10% increase in the perceived salary of the boss, employees spent 4.3% more hours in the office, sent 1.85% more emails, and sold 4.4% more" 2. Knowing their future earning potential motivated employees.

But while verticle salary transparency had a positive effect, horizontal salary transparency did not. Workers who discovered their peers were paid more for the same work became less motivated, "spend(ing) 9.4% fewer hours in the office, send(ing) 4.3% fewer emails, and sell(ing) 7.3% less" 2.

What are the risks of disclosing pay information on job ads?

It could create conflict among existing workers

If pay is unequal among workers doing the job, disclosing pay information on job ads risks disgruntling lesser-paid employees. Companies should consider standardizing pay across workers doing the same role to reduce the risk of walkouts and avoid burnout among managers left to justify pay differences.

It reduces the candidate pool

Some recruiters believe including a salary range in the job advertisement can reduce the pool of candidates. They prefer to attract many candidates across a range of pay expectations, knowing a hiring manager will push the limits of their pay scale for someone with the right experience.

Minor differences can ruin the perfect match

The rise of automated filtering software means the ideal candidate's resume may not reach the hiring manager's desk if their salary expectations are slightly higher than the stated range. A difference of just €1,000 could mean the perfect candidate would lose out on their dream job.

What are the benefits?

It promotes a healthy work culture

Trust and security are the foundation of a thriving company culture. Putting salary information on the job posting signals to the candidate the employer is trustworthy - setting the relationship on the right path from the first interaction.

People are more likely to apply for the role

Including a pay range can boost quality applicants: "About 60 percent of job postings on Indeed include salary information and those that do see about 30 percent more people starting applications" 1.

It can decrease attrition

Lowballing a candidate won't help anyone - as this recruiter's now-deleted viral social media post proves. Posting a salary range on the job ad can help candidates negotiate fairer compensation in line with the market rate. When companies pay a fair rate, they reduce the risk of a new employee walking out if they find out they're paid less than their peers.

It strengthens bargaining power

Pay transparency gives hiring managers more bargaining power during the negotiation. They'll need to adjust internal salaries before they offer a new recruit higher than the disclosed salary range. It standardizes the hiring process One recruiter said the new law that enforces pay transparency in New York has made his hiring more consistent. It "forces you to have that kind of rigor around your compensation so that you are consistent in the way that you're hiring"1. This could lead to more objective hiring decisions. 

Does pay transparency lead to higher business costs?

Apparently not. When pay becomes transparent, managers must justify pay inequalities between two workers doing the same role. This process is distressing and leaves managers feeling emotionally drained. To avoid this situation, many managers adopt practices to reduce the pay gap. One company found this type of pay compression led to a 7% reduction in overall salary costs 3 - challenging the assumption that pay transparency leads to higher business costs. Should all companies make salaries visible? Pay transparency can motivate employees, attract future talent and build trust - but only if companies can keep salaries similar for workers doing the same role, and offer them large raises when they get promoted. Knowing your boss is paid much more than you can be motivating, but knowing peers are better paid can demotivate employees, increase the odds of an early exit and derail company culture.

Could pay transparency laws soon affect everyone?

New York isn't the first and won't be the last. Colorado, California and Washington State have adopted similar laws, while the UK launched a pay transparency pilot scheme earlier this year. Finland has also been working on proposed equal pay legislation but scrapped it earlier this year due to coalition differences, even though 90 percent of respondents surveyed said they feel salaries should be included on the job ad 5. How long before these laws become commonplace worldwide?

 

  1. New Laws Force Honesty About Pay. Companies Are Catching Up, New York Times, 31 October 2022
  2. The Motivating (and Demotivating) Effects of Learning Others’ Salaries by Zoë B. Cullen and Ricardo Perez-Truglia, Harvard Business Review, October 25, 2018
  3. Research: The Unintended Consequences of Pay Transparency by Leon Lam, Bonnie Hayden Cheng, Peter Bamberger, and Man-Nok Wong, Harvard Business Review, August 12, 2022
  4. Finland scraps equal pay legislation amid coalition differences, Reuters, August 15, 2022
  5. Palkka-avoimuus edistää yhdenvertaisuutta työelämässä, Oikotie, April 20, 2022