Navigating the Practical Complexities of Pay Transparency: Implications for Employers and Public Policy

Abstract

While governments around the world have adopted policies and regulations making pay more transparent, pay transparency continues to be a contentious issue. Proponents argue that greater transparency is more consistent with the ethical underpinnings of humanistic societies and likely to benefit employees, employers, and/or society. In contrast, opponents highlight the ethical challenges that transparency may pose to personal privacy, as well as its potential social, psychological, and economic risks for stakeholders. Despite mixed beliefs, there may be some transparency-related shifts that most stakeholders welcome, or at least accept, as well as reforms whose benefits likely outweigh particularistic stakeholder costs, offering society-wide, longer term utility. We first discuss steps that policymakers and leaders may take that are likely to have positive implications for both labor and management while minimizing unintended, negative consequences and then review recent public policy interventions already adopted, as well as additional interventions to be considered for future adoption.

Once the forgotten stepchild of compensation and benefits, since 2009—the year that the Obama Administration signed the Lilly Ledbetter Fair Pay Act—pay communication has become a critical issue in rewards management. While governments around the world have adopted a myriad of new policies and regulations aimed at making pay more transparent, pay transparency continues to be a highly contentious issue. Proponents argue that greater transparency is both more consistent with the ethical underpinnings of liberal, humanistic societies and likely to benefit employees, employers, and/or society at large. In contrast, opponents highlight the ethical challenges that transparency may pose to personal privacy, as well as its potential social, psychological, and economic risks for employees, employers, and/or society at large. Accompanying the growth of interest in the topic has been a burst of empirical research, offering us the first bits of evidence to support—or challenge—the conjectures of both sides.

Research in economics, psychology, and management suggests that pay transparency does make a difference at work, impacting individuals and groups, as well as the organizations in which they work and, more broadly, the societies in which they live, and often doing so in rather surprising ways. For example, studies indicate that pay outcome transparency (i.e., disclosure of actual pay rates) helps employees better understand the impact of performance on pay and thus has positive implications on individual task performance (Bamberger and Belogolovsky, 2010; Belogolovsky and Bamberger, 2014). Studies also indicate that pay transparency reduces gender-based pay discrepancies (Baker et al., 2019; Bennedsen et al., 2022; Castilla, 2015) and—when combined with employee perceptions of generally fair pay practices—boosts retention intentions (Belogolovsky and Bamberger, 2014) and generates positive sorting effects (i.e., reducing the turnover of better-performing employees, while increasing it among those performing less well; Alterman et al., 2021; Card et al., 2012).

In contrast, studies also indicate that pay transparency may be associated with several less desirable consequences. For example, while pay process transparency (i.e., increasing employees’ understanding of how rewards are allocated) can have beneficial implications on collaboration (SimanTov-Nachlieli & Bamberger, 2021), pay outcome transparency can have adverse effects on employee peer collaboration. Specifically, employees aware of peers’ actual pay rates are less likely to provide unsolicited assistance to those earning more than they do (Bamberger and Belogolovsky, 2017) and those earning less than their comparison peers are more likely to actively engage in counter-productive work behaviors against their employer and peers (SimanTov-Nachlieli & Bamberger, 2021). Other studies indicate that the beneficial implications of pay transparency on gender-based pay disparities can come at the cost of reduced pay dispersion (i.e., pay compression) (Mas, 2017; Wong et al., 2023). This means there is a reduced sensitivity of rewards to differences in individual contribution and performance (Obloj and Zenger, 2022), and a shift in the composition of total rewards from forms that are more observable under pay transparency to other, less observable forms such as employee benefits (Wong et al., 2023).

In sum, although there are clear and increasingly consistent findings regarding the implications of pay transparency on specific outcomes, across the range of outcomes and criteria examined, the evidence remains equivocal. That is, while the adoption of more transparent pay practices is likely to benefit the interests of a particular set of stakeholders (e.g., workers, employers, women, minorities) along some set of parameters of particular concern to them, the same practices are likely to have adverse effects with respect to a different set of parameters of primary concern to other stakeholders. Nevertheless, there may be some transparency-related practices or policy shifts that most stakeholders are likely to welcome, or at least accept. There are also transparency-oriented reforms whose benefits are likely to outweigh particularistic stakeholder costs, and thus, from a public policy perspective, offer meaningful society-wide, longer term utility.

Drawing from the findings of the studies noted above, in this article, we aim to identify those practical steps that policymakers and organizational leaders may take regarding pay transparency that are likely to (a) have the most broad-scale positive implications for both labor and management while (b) minimizing unintended, negative consequences. In the following sections, we first discuss steps that organizational leaders might consider adopting and then review recent public policy interventions already adopted, as well as additional public policy interventions that may be considered for future adoption.

Policy Implications for Organizational Leaders

Organizational leaders concerned about pay transparency should first understand that pay transparency policies can address (a) the accessibility of information about organizational pay processes and practices (pay process transparency); (b) employees’ ability to disclose their own pay information to others or discuss organizational pay practices with others (pay communication transparency); and (c) organizational disclosure of actual personal or aggregated pay information (pay outcome transparency). Research evidence suggests that steps taken to improve employee pay understanding (i.e., offer greater transparency regarding pay processes) and lift restrictions on employees’ ability to discuss pay with one another (i.e., greater pay communication transparency) can have beneficial implications for both employers and employees with few if any documented negative consequences (Bamberger, 2023). In contrast, given the complexities involved, careful analysis is warranted prior to the adoption of policies and practices targeting the disclosure of individual or aggregated pay rates (i.e., pay outcome transparency).

Pay Process Transparency

The adoption of more transparent pay processes typically involves providing employees more extensive information about how base pay, benefits, pay raises, and incentive pay are determined in the organization. Although the subject of only a handful of studies, we are unaware of any negative consequences associated with enhancing employees’ pay understanding. Rather, the research points to largely beneficial implications largely stemming from employees’ perceptions of pay as fairer when pay processes are more open. For example, SimanTov-Nachlieli and Bamberger (2021) found pay process transparency to be positively associated with employee perceptions of both procedural and distributive justice. Meta-analytic evidence indicates that fairness perceptions such as these are strongly associated with job satisfaction, trust, organizational commitment, organizational citizenship behavior, and job performance (Colquitt et al., 2001). Furthermore, because transparent pay determination processes are open to monitoring, they are likely to boost managers’ sense of accountability when making pay-related decisions. This, in turn, should motivate the adoption of more equitable and carefully validated pay practices, thus reducing exposure to gender- or race-based pay disparities and boosting employee fairness perceptions. Managers may complain that such transparency forces them to adhere rigidly to the rules when making pay-related decisions, thereby restricting their autonomy and agility in responding to singular or uncommon situations. However, the upside of such transparency is that it limits the ability of managers to be “cognitive misers” (Tetlock, 1985), forcing them to work harder to ensure that pay-related decisions are based on justified and accepted criteria and that these criteria are applied consistently (Wong et al., 2023). Recent legislative initiatives in Europe require larger employers to share information on how pay is set, progressed, and managed, as well as to disclose details on their promotion and progression criteria (Aon, 2023). But even in the absence of such legislation, survey data suggest that organizations are becoming increasingly receptive to reducing restrictions on pay process information. For example, in their 2017 study of over 500 HR professionals in Switzerland, Arnold and her associates (2018) found that 69% of the firms in their study (public, private, and NGOs) informed employees about how benefits were determined; 50% provided similar information about base pay, pay raises, and team/organization-level variable pay; and 40% provided information on the determination of individual-level variable pay. Similarly, nearly two-thirds of the HR managers responding to a recent SHRM in the United States reported that they have clear guidelines for how base pay (63%) and raises (63%) are determined (Alterman et al., 2023). An even higher proportion (72%) reports having transparent guidelines for how bonuses are determined. Finally, HR information systems are increasingly incorporating features aimed at providing employees with more information about and a greater understanding of their pay and the factors determining it. For example, HiBob, a leading HR platform, incorporates an employee self-service (ESS) feature that allows employees to review their compensation history, yearly earnings, and other total pay information.

Pay Communication Transparency

Pay communication transparency refers to the extent to which employers refrain from imposing restrictions—whether normative or penalty-based—on employees’ freedom to discuss pay-related matters. Under the National Labor Relations Act (NLRA), it has long been illegal for employers in the United States to impose restrictions on employee pay-related communication, much less to take retaliatory action against employees who violate such restrictions. In Europe, the 2023 European Commission Directive on Pay Transparency makes it illegal for employers to prohibit employee pay disclosure (Aon, 2023).

Nevertheless, survey data indicate that most employers in the United States routinely discourage their employees from engaging in pay-related discussions with coworkers (Institute for Women's Policy Research, 2014; Rosenfeld, 2017). Indeed, 6% of the HR managers participating the SHRM study noted above reported that their firms explicitly forbid employees from discussing pay with one another, with another 20% of them reporting that their organizations actively discourage employees from disclosing their pay with peers (Alterman et al., 2023).

For several reasons, employer efforts to dissuade employees from disclosing their pay to others may be problematic. First, while the NLRA does not necessarily make such “discouragement” illegal, recent regulatory action at the state level seeks to deter explicit employer efforts to discourage employee pay disclosure. Second, the growth of web-based pay information intermediaries such as Glass Door and PayScale has greatly facilitated the (largely anonymous) exchange of pay information, with tens of thousands of employees disclosing and sharing their personal pay information with coworkers, potential and actual job candidates, and other employers in a manner that employers are hard-pressed to deter or control. Third, data from Australia indicate that formal employer restrictions on employee pay communication may in any case do little to deter such behavior, particularly when employees believe that by sharing their own information they may gain useful information from others (Bamberger, 2023). Finally, given the ubiquitousness of the social taboo against discussing one’s finances with others, one has to wonder whether employers need even bother discouraging employee-to-employee pay disclosures.

Pay Outcome Transparency

Pay outcome transparency, or employer disclosure of individual or aggregated pay levels, is the most controversial of all three forms of pay transparency. The more detailed and extensive the pay information disclosed, the greater the potential for unintended negative consequences. On the one hand, individuals can more easily compare themselves with their peers and monitor their relative pay levels when individual pay levels are accessible to the public. Studies indicate that such individual-level pay outcome transparency may have beneficial implications with respect to employee motivation, task performance, and the retention of superior performers (Bamberger and Belogolovsky, 2010; Belogolovsky and Bamberger, 2014; Cullen and Perez-Truglia 2018b). Furthermore, the social monitoring afforded by pay outcome disclosure allows women and minorities to more easily detect unjustifiable pay discrepancies (Bennedsen et al., 2022). In turn, this is likely to motivate managers to conduct periodic and comprehensive pay equity audits or, at the very least, pay greater attention to whether their pay-related decisions are based on validated criteria, and whether they generate or reinforce gender- or race-based pay discrepancies.

On the other hand, as noted above, the social comparison facilitated by the disclosure of individual pay information has been associated with a number of problematic outcomes, including envy and reduced peer collaboration (Bamberger and Belogolovsky, 2017), as well as increased counterproductive work behavior (SimanTov-Nachlieli and Bamberger, 2021). Additionally, employer disclosure of individuals’ pay raises significant privacy concerns, particularly since, as noted by Montag-Smit and Smit (2020), many employees—especially those at the higher or lower ends of a pay scale—may prefer not to have their personal pay information shared with others. Finally, the disclosure of individual-level rates of pay can have negative implications for pay dispersion (Mas, 2017; Wong et al., 2023), the sensitivity of pay to individual differences in productivity (Obloj and Zenger, 2022), and—at least in the gig employment context—even workers’ bargaining power and wage levels (Cullen & Pakzad-Hurson, 2023).

Some of these disadvantageous consequences of disclosing individuals’ pay levels—particularly those relating to individual privacy concerns, envy, and contextual work behaviors such as helping and counterproductive work behavior—may be avoided or at least diminished by opting for disclosure of more aggregated pay information, in the form of the mean, median, and/or range for salaries and any merit-based increases or bonuses for a given pay grade or level. Indeed, a number of practitioner reports suggest that increasingly, organizations failing to provide salary range data (or providing unreasonably wide ranges) for open positions may be at a competitive disadvantage in the labor market due to poorer recruitment success and longer times to hire (Green et al., 2022).

Such public aggregate information might even be broken down further, for example, by gender or race. An advantage of making such aggregated pay equity data transparent is that it signals to both current and potential employees that the organization is committed toward achieving fair and equitable remuneration even if they are not quite there yet. Similarly, data might be made available showing how individuals’ performance-based pay (e.g., merit increases, bonuses) or relative position in a pay range is associated with their current performance rating and/or history of performance over time. In this way, organizations may mitigate the tendency of employees to underestimate the degree to which pay is influenced by performance (Cullen and Perez-Truglia 2018a), thus potentially boosting motivation.

In theory, such aggregate approaches should be able to mitigate at least some of the negative ramifications of individual pay outcome transparency while retaining the beneficial motivational effects noted earlier. Furthermore, such approaches should retain most of the pay equity benefits associated with the disclosure of individual pay levels, in that they would still facilitate a high degree of social monitoring and provide a rudimentary form of pay equity analysis. Yet questions remain as to the ethical basis of obligating employers to disclose such information when a reasonable case can be made that they are not responsible for broader social conventions underlying gender- or race-based pay discrepancies (Caulfield, 2021), and when the release of such “proprietary information” or “trade secrets” may adversely affect their ability to compete effectively (Estlund, 2014, p. 792; see also Bierman and Gely, 2004).

Despite the concerns associated with pay outcome transparency, the 2023 European Commission Pay Transparency Directive gives those applying for jobs in enterprises employing over 100 workers the right to receive pay level and/or range information for the advertised position. Moreover, although PayScale’s 2020 Compensation Best Practices Report indicated that only 19% of the 5000 North American enterprises in its survey share full pay range data with their employees, it shows that over 35% of enterprises share level-specific pay range data (the range of pay for a given pay level or grade). For firms with over 5000 employees, that proportion is closer to 45%. Together, these data indicate that over half the enterprises in that sample share some pay range data with their employees. Moreover, PayScale’s findings indicate that a substantial portion of responding firms which had yet to adopt such aggregated forms of pay outcome transparency were considering doing so even prior to the adoption of regulations (e.g., in California and New York City) requiring them to do so. Similarly, Arnold and colleagues (2018) report that 40 and 30% of the Swiss enterprises they surveyed disclosed, respectively, aggregate and exact individual-level base pay information to their employees; and 37 and 23%, respectively, disclosed aggregate and individual-level information on performance-based pay.

Public Policy Implications

A key objective of any public policy initiative on pay communication should be to enhance labor market efficiency. Such efficiency, typically manifested in terms of labor mobility, is generally deemed beneficial for two reasons. First, it ensures that human capital assets are distributed where they are likely to be the most productive. Second, heightened labor market mobility is likely to drive excess liquidity to employees themselves, as opposed to asset markets. This itself has two advantages: it (a) incentivizes employers to adopt work innovations that boost productivity while simultaneously enhancing employee efficiency (e.g., McDonald’s self-service kiosks; Tšernov, 2021) and (b) raises income levels for all, but especially for those with a higher marginal propensity to consume (i.e., low-income workers), thus reducing inequality (Bapuji et al., 2020) while increasing aggregate demand and boosting economic activity (Card and Krueger, 2015).

Policy initiatives aimed at making pay more transparent and enhancing employees’ pay knowledge may boost labor market mobility and slow the growth of income inequality in several ways. First, when pay transparency is adopted broadly, workers are more aware of better-paying alternatives in the labor market. Second, it should give them enhanced insight into what they might be sacrificing (or gaining) with respect to their earnings by moving to some other employer as opposed to remaining with their current employer. Third, it should give employees a greater understanding of the underlying fairness of organizational remuneration practices, as well as of the relative probabilities of increasing their income through advancement within the organization (versus by moving to a different employer). Finally, although recent research suggests that pay transparency may in some cases weaken employee bargaining power (Cullen and Pakzad-Hurson, 2023), there is substantial evidence supporting the ideas that enhanced pay knowledge has the potential to significantly boost employees’ leverage when negotiating with employers over pay-related matters (Kleiner and Bouillon, 1988; Rosenfeld and Denice, 2015).

These effects, while potentially redistributing a greater share of income to workers, may also carry potential advantages for employers. For example, there is some evidence that heightened levels of distributive pay transparency (particularly regarding the pay of managers and executives) can address subordinates’ tendency to underestimate the pay of those above them, thus boosting subordinate motivation and productivity (Cullen, 2023). And, as noted, studies indicate a positive association between distributive pay transparency and employee task performance (Belogolovsky and Bamberger, 2014). Nevertheless, these beneficial consequences for employers need to be balanced again some of the more problematic consequences already noted such as envy and reduced peer collaboration, and diminished pay dispersion which, in turn, may motivate an organization’s top talent to seek alternative employment.

In light of the negative consequences associated with distributive pay transparency, policy makers may prefer to give greater consideration to some alternative and lower risk initiatives. These include the following:

Protecting employee pay-related communication. The past decade has seen substantial legislative progress in North America and Europe aimed at protecting workers from employer retaliation for either discussing their wages or for refusing to waive their right to disclose their pay to others. For example, in March of 2023, the European Commission adopted a new Pay Transparency Directive making it illegal for employers to prohibit employees from disclosing their pay details (Aon, 2023). Despite these advances, even in countries where contractual provisions prohibiting pay disclosures are not legally enforceable, these provisions remain in many firms, reinforcing the social convention of keeping pay secret. Accordingly, especially in countries such as the United States, where employer retaliation for employee wage disclosures is illegal, policy makers might consider requiring employers to inform job applicants and employees about their pay communication rights.

Prohibiting employers from demanding that applicants disclose their pay history. As of April, 2023, in 21 states and 22 territories and municipalities in the United States it is illegal for employers to ask candidates for their pay history (although in most cases, employers may still ask candidates about their pay expectations) (HR Dive, 2023). Similarly, the 2023 European Commission on Pay Transparency prohibits employers from asking job applicants to disclose their pay history (Aon, 2023). The motivation behind such legislation is the recognition that (a) employers clearly have leverage in salary negotiations when requesting this information from job applicants; (b) candidates’ pay history information may further exacerbate pay information asymmetries in favor of the employer; and (c) as a result, such information asymmetries can further enhance existing gender- or race-based pay discrepancies. Indeed, a recent PayScale survey of visitors to the site found that 43% of participants had been asked about their salary history when applying for a job, with only 25% of these refusing to answer. Interestingly, refusal to answer was associated with a 1.8% lower rate of pay for women, as opposed to a 1.2% increase for men (PayScale, 2017). A recent study by Barach and Horton (2021) found that eliminating wage history information from the equation boosted initial wage offers for candidates who chose to bargain by 9% more than in a control group where employers were permitted to ask about candidates’ wage histories. Despite the apparent positive effects of restrictions on employers’ ability to inquire about candidates’ salary history, Harris (2018) points to a number of potential drawbacks for both parties: employers and job applicants. First, prior wages can offer an indication as to candidates’ productivity, which is something employers legitimately have an interest in knowing, although evaluations of productivity and pay-for-performance may vary widely across organizations. Second, such information is often used by employers to tailor a more attractive offer, eliminating the time potentially wasted by negotiating a low offer. Accordingly, Harris (2018) proposes a policy alternative aimed at maximizing the information available to both parties: namely, allowing employers to ask candidates for their prior pay history contingent on them offering information on the average or median pay of existing workers in comparable positions in their enterprise. That is, as he puts it (p. 13), laws regarding discussions of a candidate’s wage history should make such discussions contingent on reciprocity. In this way, “firms could choose between either forgoing any discussion of prior pay levels (for both the firm and prospective worker) or fully disclosing pay of comparable workers.”

Mandating pay audits. Equal pay and civil rights legislation in the United States and other countries make pay disparities based on ascribed characteristics such as gender or race subject to prosecution. However, enforcement of such legislation can be weak and haphazard (Bamberger, 2023). Not only do employees have to be aware of such disparities, but with the burden of proof on them, the challenges to holding employers accountable can be significant. No less concerning is that, in many cases, employers may themselves be unaware that their pay practices (unintentionally) discriminate against one or more protected groups. To address this problem, in January 2016, the Obama Administration announced that enterprises employing more than 100 workers would be required to submit to the EEOC an annual report covering aggregated wage and hours data across job categories, pay bands, and demographic characteristics. Although the Trump administration issued a stay against the implementation of this order in 2017 in the United States (just weeks before it was to go into effect), individual states are adopting such requirements, and many U.S.-based firms such as Accenture, Cisco, and Salesforce have begun to regularly conduct internal pay audits (Merluzzi, 2016). Still, 35% of the HR managers responding to the 2022 SHRM survey noted earlier reported that their enterprises (all medium and large firms) do not conduct pay equity analyses (Alterman et al., 2023). Moreover, even among those reporting that they do conduct such analyses, a quarter indicated that they conduct such analyses less than once a year (Alterman et al., 2023). Furthermore, as of March 2023, per a new European Commission Directive, pay audits and audit reporting are now mandated throughout the European Union. According to this new Directive, employers with at least 100 employees will need to publish information on the pay gap between female and male workers, with the frequency of reporting contingent on employee headcount. Moreover, where a gender pay gap of 5% or above exists (the average gap in Europe is 13%), employers will also be required to work with their employee representative/work councils to conduct a deeper analysis and develop a corrective action plan (Aon, 2023). Similar requirements are in place in Japan, where companies are required to disclose their gender wage gap on company websites and in annual security reports (Aon, 2023). Such policy initiatives, aimed at exposing and addressing pay inequities, offer a number of significant advantages. First, they provide an incentive for enterprises to proactively identify existing pay inequities, as well as prevent future ones from occurring. This can help employers when recruiting talent in competitive labor markets and contribute to firms’ efforts to meet social responsibility goals (Estlund, 2014). Second, they make it easier for agencies responsible for enforcing equal pay legislation to screen enterprises for possible pay discrimination without requiring them to publicly disclose proprietary pay information. Finally, in the same way that equal employment regulations transformed the nature of employee recruitment and selection (e.g., forcing employers to validate their selection tools), mandatory pay audits may motivate employers to more carefully examine the efficacy of pay structures and practices.

Providing safe harbor protections for employers who make individual or aggregated pay outcomes transparent. As noted earlier, a strong ethical argument can be made against regulations mandating employers to publicly disclose their employees’ individual pay, namely, that it is unfair to hold individual employers accountable for a societal or labor market problem for which they may not be responsible (Caulfield, 2020). Mindful of these concerns, Ramachandran (2012, p. 1061) suggests a “safe harbor” policy, balancing such ethical considerations against the fact that regardless of who is at fault, “employers are profiting from the past and [from] societal discrimination.”

Safe harbors are a legal tool that protects organizations from prosecution when alleged to have engaged in rule-breaking conduct, so long as they meet specified requirements. While various pay transparency safe harbor arrangements have been proposed (see, e.g., Harris, 2018; Ramachandran, 2012), they all have two basic components in common. First, in order to qualify for a safe harbor defense, employers must demonstrate evidence of two things: (a) good faith disclosure of pay rates to their employees (e.g., job or level-specific ranges of base and variable pay, or any employer-commissioned salary survey data) and (b) employees’ failure to voice concerns over possible pay discrimination within a reasonable amount of time (e.g., 180 days) following such disclosure. Second, employers meeting these safe harbor requirements are guaranteed to have any pay discrimination claim made against them automatically dismissed.

From a policy perspective, such safe harbor provisions offer two important advantages. First, employers need not make pay outcomes transparent unless they deem it in their own best interests to do so. As noted by Ramachandran (2012, p. 1048), such provisions incentivize pay transparency “by targeting employers whose own self-assessment indicates higher risk of liability for pay discrimination and lower costs of pay transparency.” Therefore, employers who are confident of the ethics of their practices can turn pay transparency into a potential source of competitive advantage. Second, by encouraging employers to implement transparent pay practices, these provisions give employees the information they need to monitor their employer’s pay systems, thereby shifting some of the social responsibility for pay discrimination onto the workforce. Should they fail to demand (either individually or collectively) resolution of any observed pay discrepancies, workers are left with only one option, namely, to seek new employment.

Conclusion

Various stakeholders may take (or advocate) more aggressive steps to promote pay transparency, address pay disparities, or boost employees’ pay knowledge. However, research on pay communication is still in its infancy. We still have much to learn about how individuals and groups respond to the removal of restrictions on pay communication and greater access to pay information, not to mention the longer term implications (including unintended negative consequences) of some of the more basic initiatives already implemented. Indeed, while the idea of pay transparency may appeal to those who subscribe to the norms of progressive neoliberalism (e.g., Harari, 2016, 2018), as we’ve noted, in many contexts certain forms of transparency can be a double-edged sword. Until we learn more about the mechanisms underlying the potentially adverse consequences of pay transparency, as well as the conditions governing them, it may be best to follow a path of caution, adopting innovative interventions slowly, and with systems in place to carefully and systematically monitor and evaluate their effects.