Five steps on your journey to effective pay transparency
Whether you’re in a state that’s recently passed a pay transparency law or not, now is the time to start thinking about how pay transparency affects your organization.
In order to address historical pay inequities between employee demographics, many states have passed legislation to increase pay transparency − a powerful tool in solving for unfair pay. California recently passed a law requiring employers to include a salary or hourly wage range in all job listings and, perhaps more crucially, to disclose pay ranges to current employees. This is just the latest example of what is now one of the biggest HR market trends we’ve seen in recent years, with several other states passing new pay transparency legislation. New York, Colorado, Washington, Nevada, Connecticut, Maryland, and Rhode Island have all passed similar laws to California, with some set to take effect starting in January 2023. What’s more, employers in the US are not the only ones witnessing these legislative changes; rules around compensation disclosures are growing quickly in Europe and other parts of the world too.
Only about 12% of job postings from US online job sites (an increase from 8% in 2019) currently include salary ranges. That means most of the companies we engage have not yet thought about how pay transparency is going to affect them. For the first time ever, they need to consider how both employees and potential job candidates will react to their current compensation structure as they move toward a more transparent model. While posting salary ranges may seem like a simple adjustment, implementing these changes without careful consideration and proper preparation could have negative effects on your business.
In this article, we explore five critical steps that will prompt you to think through all the different implications of establishing an effective pay transparency model at your organization.
Step 1: Ensure legal compliance
Seems like an obvious step, but it’s important to dig into the new legislation and get a firm understanding of what is required of your company and how compliance will be measured.
Look to understand how pay transparency might affect:
- Your current recruiting processes.
- Policies and procedures in your Human Resources Information System (HRIS).
- Internal pay structures, including select pay ranges for different roles.
- Current open positions and posted start salaries.
Step 2: Revisit your current compensation structure
A key attribute of any good compensation program is its defensibility. This means that compensation decisions can be explained rationally and objectively.
The next step on your pay transparency journey is to start thinking about how compensation decisions get made at your company. If an employee were to question whether your pay model is equitable or not, could you easily defend the decision-making process with evidence for why it is fair and reasonable?
Your company’s pay practices are determined by its compensation structure, which can be laid out in a few different formats. But regardless of which format your company operates on, you will still need to conduct a thorough review to understand the logic behind the model.
You can use the following checklist to help you check for consistency across company positions and their respective pay ranges:
- Is the starting salary range for new hires appropriate? Review current employee pay alongside job-specific market data, then compare those numbers to your starting salary ranges.
- How many employees are being underpaid? Confirm who at your company has a salary range that is under the range minimum and be prepared to give increases or justify appropriately.
- How many employees are being overpaid? Check for employees who are over the maximum salary range. If someone is way over the max of a published range, consider whether their level is appropriate.
- Conduct a pay equity exercise now and on an annual basis to ensure there aren’t large pay discrepancies across similar job families/levels and that all discrepancies can be justified.
Step 3: Update your compensation structures
Now that you have a better handle on your compensation structure, it’s a good time to review how your company matches candidates to open positions. Take the time to perform a job description audit to confirm that matching is up to date with current responsibilities and that compensation is based strictly on the job − not on the characteristics and attributes of the people in those roles. If reviewing every single job match at your company feels overwhelming, start by reviewing salary range midpoints against market data, and then employee data against the market percentiles to help identify potential problem areas.
Step 4: Implement your transparency philosophy
You may already have a compensation philosophy in place, either formal or informal. But do you have a transparency philosophy and a clear understanding of how to implement it?
Let’s envision how you might develop and deliver a new transparency philosophy at your company. First, you’ll want to confirm that your compensation philosophy is well documented and up to date. Not only will this help ensure consistency in the application of pay policies, but it will also serve as your main resource for justifying any exceptions or discrepancies. Employees’ newfound visibility into pay ranges across the company may raise questions, so ensuring as much consistency as possible is going to be key.
Next, you can decide what level of transparency is appropriate to offer prospective employees. For example, rather than sharing the entire salary range for a position that has multiple tiers, maybe you choose to post only the lower portion of that salary range. That might be a more accurate reflection of what the pay looks like for someone new to the position. This strategy also has the potential to mitigate perceived equity issues from internal employees who are concerned that new hires are being paid more.
Transparency doesn’t refer only to pay ranges. Company performance, bonus plan funding, equity performance, funding rounds, among others, are opportunities for leaders to be more transparent with their employees. In one study, 70% of employees stated they felt more engaged when leaders communicated company performance on a regular basis. Consider this an opportunity to evaluate what “transparency” truly means to your company.
Step 5: Training
The biggest obstacle for most companies in increased transparency will be preparing for the conversations that follow. Most managers are naturally uncomfortable discussing pay with their direct reports but are willing and eager to improve given the opportunity.
While many compensation professionals are familiar with basic concepts such as salary ranges, compa-ratios, market data, and percentiles, for many managers, these terms may be unfamiliar, leaving them feeling defensive or at a disadvantage when it comes to pay conversations.
So, your fifth and final step is around communication and change management. Communicating the new philosophy, along with comprehensive training and FAQs, will empower managers to have meaningful pay conversations with their direct reports. With clarity on the salary structure approach, how pay is managed across ranges, the rationale behind geographic pay, and leveling structures, managers will be much better equipped for these discussions.
The message for HR managers, employees, and candidates
Ultimately, salary transparency doesn’t simply ensure compliance, it will help you to pay people fairly, promote diversity, and increase the long-term engagement of employees. However, increased transparency gives both current and prospective employees an opportunity to compare compensation both internally and externally, resulting in questions that don’t always have a clear answer.
Consider these changes as an opportunity rather than an obstacle. Many demographics that have historically been unfairly paid will benefit from these legislative changes. What is currently a fundamental shift in HR practices will soon be the norm. It is worth noting that a recent study confirmed that most employees would quit over a lack of commitment to DEI initiatives, meaning that this is a critical aspect to attracting and retaining top talent. This creates a unique opportunity for HR leaders to firmly stake their seat at the leadership table, deliver on promises to employees, and create a stronger foothold in the talent market.