Pay Transparency. The Impact and How to Manage it

Pay transparency legislation is moving up the equality agenda and gaining traction globally. Ultimately, this legislation is about organisations putting in measures that require them to be open about the compensation they provide, for current and prospective employees.  

Pay transparency measures that are covered by legislation include:

• Publicising salary ranges to candidates
• Establishing rules about not discussing past salaries as part of the recruitment process
• Allowing employees to request data on what comparable employees are paid on average with this information broken down by sex

Although legislative requirements may differ in each location, fundamentally, what they have one overall aim in common; achieving equal pay for equal work for employees from under-represented groups.

There are global organisations that are ahead of the curve and have been taking pay transparency further than the legislation, such as Buffer who, since 2013, has published all employee salaries online.

Pay Transparency in the U.S.

According to Census Bureau estimates, in the U.S. women are paid 82 cents for every dollar paid to a man. One key measure being used to try and address this disparity is pay transparency.

There are currently 10 U.S. states that have already introduced pay transparency legislation, with many others in the process of doing so.

New York State's bill came into effect in September 2023, and all employers with 4 employees or more are now required to include the compensation, or a range of compensation, when advertising for a job, promotion or transfer.

California's Equal Pay Act has been in place since 2016 and prevents employers from asking about candidates' previous salaries. The state introduced additional legislation in 2023 that requires all employers with at least 15 workers to include the hourly rate or salary range on all job postings.

Over 1 in 4 U.S. employees are now covered by pay transparency legislation with that number due to rapidly increase over the next few years.

E.U. Pay Transparency Directive

With the E.U. gender pay gap at around 13%, the EU Pay Transparency Directive was approved in June 2023 to strengthen the application of the principle of equal pay for equal work, or work of equal value, between men and women through pay transparency and enforcement mechanisms.

The directive provides:​

• A right to know the initial pay or pay range for an advertised job​
• A right not to be asked about current pay or pay history during the application process​
• A right for employees to know the criteria being used for determining pay and what comparable employees are paid on average, broken down by sex​
• A right to disclose pay to colleagues to enforce equal pay rights​
• A requirement to report on the gender pay gap across the company as a whole and within each category of worker who does work of equal value​
• A requirement to remedy gender pay differences, which cannot be justified by objective and gender-neutral factors

E.U. member states must transpose the Directive into national law by June 2026.

Although legislative requirements may differ, fundamentally, what they have in common is one overall aim; achieving equal pay for equal work for employees from under-represented groups.

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Pay Transparency in the U.K.

The situation around pay transparency in the U.K. is less certain than the U.S. or the EU.

In the UK, companies with more than 250 employees are already obliged to disclose pay information under the Equality Act 2010 and report annually on their gender pay gap, i.e. the difference between the average (mean or median) earnings of men and women across a workforce.

In March 2022, a pilot scheme was launched by the UK government to tackle pay transparency. Those taking part in the pilot listed salary details on job adverts and purposefully didn’t ask about salary history during recruitment.

On 17 May 2024, it was confirmed that work on the UK pay transparency pilot scheme had been paused pending further research, and to analyse the impact of pay transparency around the world.

Therefore, whilst the UK does have established gender pay reporting, it is currently lagging behind much of the world in terms of pay transparency legislation.

However, an increased global focus on increased pay transparency, combined with a new Labour government committed to closing “gender, ethnicity and disability pay gaps”, makes it more likely that implementing legislation in the UK around pay transparency will move up the agenda.

UK organisations will need to consider their approach if they operate in territories that already have pay transparency legislation. There is also nothing stopping organisations from going above and beyond the current legislative position in the U.K. to prepare for any future changes.

Does Pay Transparency Work?

Pay transparency is popular with employees and those seeking new roles.  Given the current war for talent, companies should take notice of findings showing that 60% of U.S.employees and 57% of U.K. employees would switch companies to one with more pay transparency. However, research looking at the wage data relating to 100,000 academics in the U.S. over two decades, found that increased pay transparency can result in a 20% reduction in the pay difference between individuals.

‍What are the Other Outcomes of Pay Transparency?

Harvard Business Review recently shared some interesting research on the often, unintended impacts that a pay transparency policy can have in an organisation:

• Pay transparency policies can actually reduce reward responsibility for explaining pay discrepancies often passes to supervisors and managers, they might then take steps to reduce differences in compensation within the same level by compressing pay. One study cited in the article found that average compensation dropped by 7% when the government of California made the pay of city managers transparent in 2010.
• ‍Pay transparency policies can lead to employees increasing their overall reward in other ways not covered by the policies – employees may negotiate other ways to increase their reward such as asking for funding for training and development or requesting additional benefits (e.g.healthcare).

These additional, non-monetary benefits have been termed "idiosyncratic deals" or "i-deals" and the research further found that these i-deals were more likely to be agreed by supervisors as a way of retaining key talent. So, base pay may be fairer but inequality may still exist in the additional rewards that some employees are able to negotiate for themselves.

Another fear that organisations might have is that by publicising their salaries, competitors could poach key talent with higher offers. This is something that Buffer feared but say they haven’t experienced so far.

How to Prepare for Pay Transparency

At the very core of pay transparency, and pay equity, is the ability to look across the organisation at the landscape of jobs, pay and reward, and make comparisons between the compensation for similar roles and dive deep into roles to ensure equal pay for equal work.

For many companies this landscape is still a very chaotic, with individual teams and departments having their own job structures, titles and pay scales with little governance in place to manage and align.

To prepare for pay transparency an essential first step is to put in place a comprehensive skills-based job architecture with roles organised into job families.

Organisations need the ability to fully analyse their job architecture and pay structures in order to have confidence in their pay equity position. The underlying structures, job evaluation processes and levelling frameworks must all be in place to support pay decisions.

Innovative organisations are investing in technologies that create automate simple, flexible, future-proofed job architectures that help govern job creation and pay bandings, manage scope creep and provide instant access to job and pay inequalities.

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