Pay Transparency: Advantages and Disadvantages

Discussing your take home pay tends to be a taboo subject, however pay transparency is a very significant and current issue. In the current employment market, the call for more transparency is growing. More than half of UK workers are currently not being given information about their co-workers pay.

Not only is pay transparency in terms of the gender and diversity pay gap important, but it is also worth noting it isn’t just small companies that have unfair pay. Big companies such as Google and BBC have been examined in regards to these disparities too.

In the post-pandemic world, invisible barriers and glass ceiling are beginning to crack and in order to ensure greater diversity and gender equality at work. However, there’s more to it than that.

Pay Transparency Laws In The UK

Don’t exist. The only law close to something of the sort in the UK is the 2010 Equality ACT which states that employees in the UK must receive equal pay for equal work, regardless of their gender.

Sometimes however, there are cases where a difference in pay can be justified based on experience, length of service, or geographical location.

While there aren’t pay transparency laws in the UK, there are also no laws that tell workers they’re not allowed to tell co-workers or candidates their salary, regardless of whether your employer has made you sign a pay secrecy agreement or something similar.

However, some of the best companies are taking it upon themselves to proactively disclose salaries within job ads and campaign for pay transparency. Businesses who want to follow best practice should ensure they have an equal pay policy, grading structures, job evaluation schemes (performance reviews), and transparent job titles alongside job descriptions.

So what are the advantages?

Closing the gender gap

While pay transparency is gaining momentum across the globe, however the progress achieved through it can be slow.

There is evidence showing that pay transparency has positive impacts on businesses. An example of this is Denmark, which implemented pay transparency laws in 2006. A study by Bennedsen and other researchers found that those measures contributed to a narrowing of the wage gap by 13%.

Trust in the workplace is improved when all workers are treated fairly and equally, a factor which has been found to increase productivity by 50%.

Higher Productivity

As just mentioned, productivity increases when pay transparency is implemented. According to a study by the Academy of Management Journal, employees will perform better, and more effectively when they know they’re being paid fairly.

Everyone benefits, when employees are happy in their jobs. They’re more engaged, which ultimately leads to higher profits and better outcomes for businesses.

Decreased Turnover

Pay transparency will also have a positive effect on pay perception. This relates to how employees feel about whether they’re being paid fairly or not. Research has found that workers who believe they’re being paid below market rates are far more likely to search for a new job than those who believe they’re being paid fairly.

When workers feel valued and engaged, it creates more effective and tight-knit teams. The goal is retaining quality talent which reduces high turnover and costs associated with HR that can have a damaging effect on companies in terms of output and bottom line.

Improved Talent Attraction

In today’s competitive recruitment landscape businesses have to stand out to be attract and retain the best talent. Not only that but by promoting pay transparency and equality, businesses will be able to recruit from a wider pool of candidates.

Companies will attract the interest of potential hires who look for an honest and open approach to salaries and the assurance that they’ll be paid fairly.

According to an analysis by of job adverts during 2020, adverts that showed the salary received 43% more applications than those that didn’t. Furthermore, salary transparency will allow businesses to share salary messaging that’s accurate with potential candidates. If they don’t, job-seekers will look to online review sites such as Glassdoor for salary information from current and former workers. This information will not necessarily be accurate as it shows each individuals’ employee experience but without the full context.

And finally, in today’s candidate-driven market it’s important to be able to have access to as wide a pool of candidates as possible. When businesses provide greater pay transparency they’ll be able to attract more candidates from minority backgrounds and more women.

That’s not all. In today’s candidate-driven market, being able to draw talent from a wider pool is essential. Greater pay transparency attracts more women and candidates from minority backgrounds. This allows employers to cast the net wider when looking for the perfect candidate. 

The disadvantages

While there are definite positives when it comes to pay transparency, the issue does have some disadvantages and only 12.6% of companies across the world actually practice this.

Employee Resentment could rise

Some businesses worry that if employees know each other’s salaries then resentment can start to build among the teams. However, before making salaries transparent employers should review each of their employees’ pay to ensure they are being paid fairly. If employees find out that co-workers with less experience earn more it can create tension which will affect engagement and morale.

This can happen when workers make false comparisons without knowing all the information. This is what the human brain is trained to do- fill in gaps when it doesn’t have the whole data. It is a good idea to make sure that pay differences are rectified before salaries are disclosed. Make sure you have formulas in place that ensure employees doing similar or the same job with similar experience, do not earn vastly different salaries.

To make salary context clear make sure you share the formula or rationale you used to calculate pay levels. It’s a good idea to also share any other factors that determine pay, like additional duties, performance results, years of experience, and achievements. When these details are share, workers will understand how their salaries are justifiable.

You may miss out on Unicorns

Unicorns are the perfect candidates that tick all the boxes. When you find one of these candidates you’ll want to potentially offer them a higher salary to ensure they accept the offer.

But if you do this, there are chances you can create resentment among the wider team if pay transparency is your business’s policy. Therefore you don’t offer that higher salary and you risk losing out on your ideal candidate. This can limit a company’s ability to hire the right people, which could lead to talent drain.

Turnover can increase

If your workers still feel dissatisfied with how they’re being compensated, even after you’ve discussed how the business determines salaries, their engagement and productivity can fall. Employees that feel like this are far more likely to explore other options in the job market and leave the company.

Detrimental to the work environment

As we know by now high morale and engagement among employees is key to performance and productivity. Employees can start feeling undervalued and underpaid when they know co-workers salaries.

Those who are earning less can feel unfairly treated, and on the flip-side higher-qualified employees may feel less valued. This can happen if they believe employers haven’t offered them higher pay that is an accurate reflection of their experience and seniority.

If this situation occurs, it can lead to talent leaving the company. This is why pay transparency policies are approached with caution so often.

With pay being a key driver for retention, this type of situation could lead to quality talent actually leaving the company. If an employee’s individual performance isn’t sufficiently rewarded, it’s tempting to go elsewhere.

HR teams work hard to boost employee engagement. So, with this in mind, pay transparency policies are often approached with caution.  

Maybe the best way for businesses to understand pay transparency is to include it in their long-term strategy. They must also seriously consider how they want their future employees to perceive them. What are your thoughts on this subject? We’d love to hear from you in the comments.

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