Pay transparency has recently become a hot topic as local, regional, and national governments around the world are enacting laws lifting the curtain on pay practices making them more visible in an effort to close the pay gaps that still exist across gender, race, and ethnicity. Pay transparency refers to a company’s pay communications policy in which the company voluntarily provides pay-related information to employees and applicants. WorldatWork, a global association for human resources management professionals and business leaders focused on attracting, motivating, and retaining employees, defines pay transparency as “the degree to which employers are open about what, why, how and how much employees are compensated—and to what degree they allow employees to share that information with others.”
Pay transparency can take many forms and sometimes isn’t an all-or-nothing approach. Companies with a more conservative approach may share pay ranges based on position, seniority, and other factors. Companies engaging in full transparency may share the pay ranges for every position in the company. Pay information may be voluntarily provided on the company’s website or in job postings or may be withheld until requested by a candidate well into the interviewing process.
Pay Transparency’s Effect on Pay Gaps?
The premise behind pay transparency is that it helps close wage gaps. In the U.S., women and people of color are paid less than men regardless of job or experience. Published Census Bureau data showed that in 2021: women earned about $.82 for every dollar men earned; Hispanic or Latina women earned about $.58; and Black women earned about $.63 for every dollar White men earned. This gap often occurs at the beginning of a woman’s career and is compounded over the years when employers base starting salaries on a candidate’s previous pay and are less likely to give women pay raises. Also, research shows women are less likely to negotiate their pay, and, when they do, women take a less vigorous approach than men.
Then there is the “motherhood penalty” based on a stereotypical view that women are primary caregivers, duty bound to stay home and raise children. Mothers who choose to work may be seen as less competent or committed to their jobs, adversely affecting a woman’s ability to get hired, earnings and promotions. According to a 2018 study by Kelton Global, commissioned by Bright Horizons, 72% of both working mothers and fathers believe that women are penalized in their careers for starting families, while men are not. The Institute for Women’s Policy Research reports that women who take time off to care for their children are paid nearly 40% less than women who do not. The COVID-19 pandemic made these abysmal statistics even worse. According to a study from Qualtrics and the Boardlist, when employees shifted to remote work during COVID-19, approximately 34% of men with children at home reported they received a promotion in 2020, while only 9% of women with children at home could say the same.
Pay transparency benefits both employers and employees because it can help detect and avoid discriminatory pay practices and patterns. Disclosing the salary or salary range for a position levels the negotiating playing field for candidates and helps employers detect and remedy unjustified pay disparities among employees. Conversely, when pay conversations occur in secrecy, it can be easier for discrimination and bias to factor into compensation decisions. Studies show that pay transparency helps narrow pay gaps. In a 2022 study published in the journal “Nature Human Behaviour,” the gender pay gap was cut by up to 45% in companies with transparent pay practices as opposed to those without transparency. In reference to pay transparency laws’ effect on narrowing the pay gap, Harvard Business School economist, Zoe Cullen, states, “It is totally 100 percent true across all the studies I’ve seen, with very few exceptions.” Pay transparency laws are “very good” at reducing wage disparities, she added.
Additional Advantages to Pay Transparency
Pay transparency “puts it all out there” in terms of pay at the onset and can save valuable recruiting time and other resources by weeding out candidates in search of a salary outside the company’s budget. All too often a company spends considerable time and money on a desirable candidate only to find a complete mismatch between the candidate’s salary requirements and the company’s budgeted salary for the open position. Pay transparency in job postings can potentially eliminate this situation all together.
Company culture can be greatly enhanced by pay transparency practices that ensure pay is equitable across gender, race, ethnicity, and geography. By proactively gathering both internal and external pay data, identifying and rectifying any disparities and sharing this information with employees, companies engender good will and trust among all employees leading to a strong, vibrant corporate culture.
Limitations/Potential Disadvantages to Pay Transparency
Beyond the clearly advantageous effect pay transparency has on narrowing pay gaps, saving on recruiting resources and improving corporate culture, its influence is harder to assess. Some studies suggest pay transparency actually lowers overall wages of the broader population of employees while elevating pay for the inequitably underpaid. By publicly disclosing current pay or ranges, employers more credibly commit to not negotiating pay with candidates or current employees. Employers can claim any individual negotiations would necessitate their having to negotiate with all or many others to maintain equitable pay among all.
Some studies also suggest that while pay transparency can result in more equitable pay, it can also result in pay that is less performance based. A weakened relationship between pay and performance can lead to lower employee productivity. Social Science Research Network found that if pay transparency revealed to employees their company had been consistently equitable in its pay for performance practices, then overall employee productivity remained positive. However, if pay transparency revealed the company had been unfairly allocating pay, then overall productivity declined.
Turnover may also be impacted by pay transparency practices. When employers compress pay in response to pay transparency weakening the link between pay and performance, top performers are more likely to leave in search for companies more willing to reward their higher performance.
Pay Transparency Laws
Equal pay is required by federal law and equal pay laws exist in nearly every state. However, laws requiring companies to provide pay transparency are fewer but are gaining ground. The National Labor Relations Act (NLRA) protects employee discussion of wages and prevents employers from establishing a policy prohibiting employees from discussing working conditions including pay with other employees. Following is a summary of state pay transparency laws as of early 2023:
California employers have long been required to provide applicants with the pay scale for a position upon reasonable request. As of Jan. 1, 2023, employers with 15 or more employees, at least one of whom is located in California, must include the pay scale for a position in any job posting, including positions posted by third parties.
Employers with one or more employees in Colorado are required to disclose the hourly or salary compensation, or a range of the hourly or salary compensation, that the company would pay for the role, in each posting for a job opening. The Colorado Department of Labor has confirmed that this law applies, with a few narrow caveats, to all remote job openings if the employer has at least one employee in Colorado.
Employers with one or more employees in Connecticut must provide a wage range to current employees and applicants upon the receipt of either: (1) the applicant’s request or (2) the communication of an offer of employment, whichever comes first. The Connecticut Department of Labor has confirmed that the law applies to employers within the state using the services of one or more employees for pay even if such employees are located outside the physical confines of the state.
Employers must provide the wage range for a position at the applicant’s request, and employers are prohibited from refusing to interview or hire an applicant because they requested the wage range for the position.
Employers must provide the wage or salary range or rate of pay for a position to applicants who have completed an interview for the position.
New York City
As of Nov. 1, 2022, employers with four or more employees are required to include a position’s minimum and maximum annual salary, or hourly wage, in any job posting. The law applies to any position that could be filled by a candidate who resides in New York City or any position that could be performed at least in part in New York City.
As of January 1, 2023, employers with one or more employees in Rhode Island must provide the wage range for a position to an applicant on request or at the time of hiring, whichever is earlier. Even when the applicant does not make a request, the law encourages employers to provide the wage range for the position prior to discussing compensation.
Since 2019, employers in Washington state with 15 or more employees have been required to disclose the minimum wage or salary for a position on an applicant’s request if an offer of employment has been made. As of January 1, 2023, employers must disclose the wage scale or salary range for an opening in any job posting.
Pay Transparency Law Predictions for 2023
It’s widely predicted Massachusetts will be the next state to pass a pay transparency law in 2023. Lawmakers have introduced a bill that would mandate the disclosure of pay bands in job descriptions for employers of a certain size. If passed it would make Massachusetts one of the most progressive states in the country concerning pay practices. South Carolina and New Jersey also have pay transparency pending legislation in 2023.
Pay Transparency Best Practices
Ensure Compliant Job Postings
A company advertising for a position that could be performed by a remote worker in any state, must ensure the posting complies with all applicable pay transparency laws, including, for example, the salary range requirements under Colorado law. Employers cannot avoid these obligations by stipulating residents of a particular state aren’t eligible to apply.
Review Pay Transparency Laws
As with all employment laws, companies must comply with pay transparency laws in all states in which they operate. Employers should determine which state transparency laws are applicable to them and ensure all steps in the recruiting and hiring process are compliant. For example, some states prohibit employers from asking employees about previous pay history. An employer operating in such a state must remove such questions from their applications and during their interview process.
Standardize Pay Practices and Policies
Rather than have different pay practices and policies for every state in which a company operates, most employers find it easier to overhaul and standardize recruiting practices, and compensation structures to include hourly wage or salary ranges for all positions nationwide. Employers can adjust compensation structures to include variable compensation components, like discretionary bonuses, that may be excluded from the required pay transparency disclosures or express the variable compensation components in terms of percentages of base compensation to provide some flexibility in negotiations while still working within the law’s requirements.
Other possible ways in which to comply with the law while still retaining some flexibility and employer leverage is to state the hourly or salary wage range in a job posting more broadly as long as the high and low numbers disclosed are in good faith. Also, a job posting that identifies a salary or wage range for a position can include qualifiers stating where an applicant ultimately falls within the stated range depends on factors like geographical location, seniority, and experience.
Know the Market
Even if a company isn’t yet bound by state pay transparency laws, its HR team needs to know if its competitors engage in pay transparency practices. Candidates are well informed and can blindside HR during an interview or salary negotiation when armed with publicly disclosed salary ranges of its competitors. If HR isn’t well informed about the salary ranges of other companies, it loses its competitive edge in salary negotiations with candidates who are.
Get Smart HR
Pay transparency laws are gaining momentum and companies, whether currently subject to state pay transparency laws or not, must get ready. Remote work has changed the employment landscape and resulted in a flurry of new legal compliance challenges, pay transparency laws included. Depending on the jurisdiction, penalties for noncompliance with state pay transparency laws can range from $300 to $250,000 per violation. Smart HR has followed and is up to speed on this quickly evolving trend. If you want to ensure compliance with all employment laws in the states in which you operate, leave it to the experts at Smart HR. Call today.