Pay Transparency and Pay Communication

Abstract

A culture of well-communicated pay transparency drives better workforce outcomes and will enable the organization to achieve and sustain a competitive advantage over its competitors. This white paper discusses how organizations can prepare for the legal requirements related to The Pay Transparency Act, as well as ways to properly communicate pay in a transparent manner with employees.

Introduction

Pay transparency laws are regulations that require employers to disclose information about employee compensation, either to employees or to the public. These laws may require employers to disclose the pay range, a description of non-discretionary incentive compensation and benefits offered, and other perks of each position. This information must be disclosed either in postings, during hiring, or upon request.

This white paper discusses how organizations can prepare for the legal requirements related to The Pay Transparency Act, which is a law that establishes requirements for the disclosure of information about the compensation of employees and prospective employees.

The stated goal of this legislation is to help reduce discrimination-based pay gaps. Each particular state or city has unique requirements detailing what organizations need to do to comply with the law. Employers should become familiar with state and city pay transparency laws, as it is up to each employer to comply with the laws. However, employers may define how transparent they are within their organization as long as they meet the legal requirements for their jurisdiction (Brian Nordi, 2023). Some organizations may choose to be more transparent than others even when pay transparency is not required by law.

Communicating pay practices that help employees and prospects understand how their salary is set will vary depending on the company and industry (Amy Stewart, 2020). The level of transparency an organization chooses will depend on its goals, objectives, and factors such as the size of the organization, the industry in which they operate, and the culture. An open salary model is not right for every organization, but employers may want to think beyond meeting the bare-minimum requirements.

To date, 10 states have enacted pay transparency legislation that includes a salary history ban as part of the sweeping amendments.

These states include (Aiden Farrish, 2023):

California	Effective from Jan. 1, 2023, employers with 15 or more employees must include the pay scale for a position in any job posting and provide it upon request, as well as a description of any bonuses, incentives, or commissions. Pay scale is defined as the salary or hourly wage range the employer expects to pay for the position
Colorado	Effective from Jan. 1, 2021, employers must disclose the pay or pay range in the job posting along with a description of incentive compensation and benefits. Employers must also announce to all employees all opportunities for promotion and disclose the compensation and benefits for each position. Employers in Colorado must also keep records of pay rates and job descriptions
Connecticut	Effective from Oct. 1, 2021, employers must provide applicants with the wage range for a position upon request or before an offer is made, which includes hybrid and remote employees who may not live within the confines of the state. The wage range should include bonuses and commissions
Hawaii	Effective from Jan. 1, 2024, employers must provide an hourly rate or salary range in job postings that reasonably reflects the actual expected compensation for the role
Illinois	Effective Jan. 1, 2025, employers are held liable if recruiters fail to include pay ranges and benefits within the job postings. The specific language states the bill “provides that if an employer with 15 or more employees engages a third party to announce, post, publish, or otherwise make known a job posting, the employer shall provide the pay scale to the third party and the third party shall include the pay scale in the job posting”
Maryland	Effective from Oct. 1, 2020, employers must provide applicants and employees with wage range for position upon request. The law also lists criteria employers may use to determine if employees in the same position can be paid differently depending on factors such as seniority, experience, and more
Nevada	Effective from Oct. 1, 2021, employers must provide applicants with the wage range or rate of pay for all new positions, promotions, or position transfers
New York	Effective Sept. 17, 2023, employers must disclose the salary or salary range in any advertisement for a job, promotion, or transfer opportunity within a company
Rhode Island	Effective from Jan. 1, 2023, employers must provide a wage range upon request from an existing or prospective employee
Washington	Effective from Jan. 1, 2023, employers must provide applicants with the minimum wage or salary for a position upon request or after an offer is made and must provide employees with the salary range for their position upon request
Alaska and Georgia	These states have also introduced legislation to require salary range transparency, but they have not been passed yet

As more cities and states enact pay transparency laws, it is important to understand what pay transparency is, the advantages of pay transparency, and how to implement it.

What is Pay Transparency?

Pay transparency, also known as salary transparency or wage transparency, is the practice of openly sharing information about compensation with employees and job candidates (Brian Nordi, 2023). It refers to the degree to which employers are open about what, why, how, and how much employees are compensated and can extend beyond base pay to include variable pay and other rewards (Mercer).

The Pay Transparency Act is gaining traction throughout the United States and the legal landscape is changing rapidly. Due to the Equal Pay Act, employers cannot prevent workers from talking about their pay. Organizations that have a cultural commitment to compensating employees appropriately and embrace pay transparency will be better equipped to comply with this legislation (Expert Panel, Forbes Human Resources Council, 2020).

Organizations may interpret pay transparency simply as communicating pay practices to employees and explaining how pay is determined, while other organizations may provide the salary range for the role or may provide the salary range for every role in the organization (Sally Percy, 2022). Should organizations disclose more or less of their pay information to workers beyond the legal requirements? According to BetterUp, there are three different types of pay transparency (BetterUp):

1. Full Transparency: Employees know what their colleagues earn.

2. Partial Transparency: Employees know the salary range for their position but not what their colleagues earn.

3. Limited Transparency: Employees know how their salary is calculated but not the salary range for their position.

Organizations that practice making pay information available to employees demonstrate higher levels of engagement, trust, a commitment to diversity, a commitment to fairness and transparency, promoting gender pay equity, and have improved employee satisfaction by fostering a culture of openness and accountability.

Advantages of Pay Transparency

Pay transparency is an essential component in preventing wage discrimination.

• It promotes fairness and equity in the workplace by ensuring that employees are paid according to the value of their role, competence relative to the role requirements, and performance in the role (Greene).

• It fosters trust and collaboration among employees and managers by reducing the uncertainty and speculation about pay decisions and practices.

• It enhances employee engagement and retention by increasing the satisfaction and motivation of employees who feel valued and recognized for their work.

• It supports diversity and inclusion by addressing pay gaps and disparities that may exist among different groups of employees based on gender, race, ethnicity, disability, etc.

• It improves the reputation and attractiveness of the organization by demonstrating its commitment to ethical and responsible business conduct.

Transparency has other advantages. Women are better able to negotiate their salaries and ensure they are paid fairly. When employees know they are paid fairly, they are more likely to be satisfied with their jobs.

How to Implement Pay Transparency

Pay transparency can be conceptualized by establishing and communicating pay practices. This can be achieved by ensuring the organization has a compensation strategy, compensation philosophy, and corresponding pay practices and policies that are fair and equitable. Support from senior leadership is critical for the success of pay transparency policies.

Before disclosing pay information, auditing your existing compensation strategy is the most important step toward achieving greater pay transparency. This important internal audit helps identify gaps in compensation practices and ensures all compensation data is accurate and up to date. Then organizations can establish policies around the disclosure of pay information, including who can access this information and how it will be used.

Developing a compensation strategy will help organizations prepare for pay transparency and the disclosure of pay information. A strong compensation strategy has the following objectives:

• A transparent compensation system accessible to all employees with objective metrics around recruitment, performance, advancement, and compensation to ensure consistent application across the organization (Lisa Nagele-Piazza, J.D. SHRM-SCP, 2020).

• A compensation philosophy that supports your goals and objectives and defines why and how you plan to pay your employees.

• Up-to-date job descriptions that accurately reflect the work being done to ensure employees are being paid fairly for their work.

• Labor market comparisons to help your organization attract, retain, and reward employees. Consider your competitive positioning and percentile standings for salary pay levels, variable pay ratios, and appropriate type and level of incentive pay eligibility.

• A job leveling map of all employee jobs to a hierarchical level in the organization focusing on the job, not the individual (Han, 2023).

• Salary structures that allow management to reward performance while controlling overall base salary costs (Culpepper and Associates, 2010).

• A documented process on how the organization determines starting pay, merit increases, promotions, and other factors that impact pay equity (Lisa Nagele-Piazza, J.D. SHRM-SCP, 2020).

• Wage range disclosure guidelines regarding the publication of external job postings, internal promotions, and transfer opportunities.

• Recruitment and talent management pay transparency tactics to ensure equitable hiring practices that attract and retain the best candidates.

• Internal systems for handling employee requests for salary reviews ensuring records are kept on pay decisions to defend against any pay equity claims.

• Annual compensation review of employee salaries to ensure pay equity with others doing the same or similar work. Model out and budget cash needed for pay adjustments, promotions, merit, etc.

• Pay equity analysis using the compa-ratio as a starting point for comparisons to find gaps by job family and job level.

• Incentive plan design review to ensure you are encouraging the desired behaviors.

• An effective way of communicating that is simple, brief, and honest so workers know the reasons for their compensation and can get answers to their probable questions.

• Compensation training for managers that covers topics such as compensation philosophy, pay transparency, salary ranges, market data, pay equity, merit, performance, and how to have effective compensation discussions with employees (Live Virtual Seminars).

• Annual review of your compensation strategy to ensure you remain competitive in the marketplace.

Wage Range Disclosure Guidelines

A pay communication strategy does not mean total pay transparency. Different states have different requirements for what employers must include in their job postings regarding pay ranges, commissions, bonuses, and other forms of compensation. A holistic approach to compensation and a unified message to all employees and prospective employees are the first steps to becoming pay transparent.

A pay communication strategy means being intentional about what you share and how you communicate compensation to your internal employees and external applicants (Amy Stewart, 2020). Becoming a pay transparent organization isn’t as simple as assigning a salary range to a job posting. You don’t have to post employee salaries, or the full salary ranges publicly for all to see and discuss to become legally compliant.

Focus on avoiding false advertising around the pay range. Employers must disclose a wage range in which the employer anticipates setting wages and can do so using any of the following methods:

• Any applicable pay scales.

• Any previously determined wage range for the position.

• Actual range of wages for current employees holding comparable positions.

• The amount budgeted by the employer for the position.

Employers should do the following:

• Notify hiring personnel (including third-party recruiters) about your wage range disclosure guidelines.

• Create wage ranges for positions you plan to fill and consider preparing wage ranges in anticipation of requests.

• Consider the internal value of the job along with the external market value when developing wage ranges. Wage ranges are the anticipated salary you are willing to pay for a job within your organization that is fair and equitable. This does not mean posting the entire salary range.

• Review remote positions to determine whether the Act applies to any employees residing outside of your headquarters’ jurisdiction.

• Consider developing a nationwide approach that covers all your state requirements by using the most stringent pay transparency law for your multi-state organization (Brett Christie, 2022).

Solution

While managers are not solely responsible for communication about compensation with employees, they do play a significant role. Communications from human resources also play a role in the employee’s understanding and acceptance of their total compensation package (Heathfield, 2020).

The current trend is to use total compensation statements that list the employee salary, bonuses, paid time off, and all short- and long-term benefits along with the financial value of each one (figures, 2023). This can show the employees the true cost of the entire compensation package, which represents the investment the organization is making in the individual and is a visual guide that may help employees feel more engaged.

But for employees and managers to fully understand how pay is set, the communication must broadly educate them about the company’s compensation philosophy and pay practices (Heathfield, 2020). To be effective, managers must be educated in these pay practices so that they are consistently applied throughout the organization. Then managers can establish a process for addressing employee concerns related to pay before taking action.

Main Points

Point 1

Pay inequities exist and disproportionately impact women, especially those who are Black, Indigenous, and people of color (BIPOC). According to U.S. Census 2020 data, women earned 83 cents to every dollar a white man earned. Black women are only paid 63 cents and Latinx women earn 57 cents for every dollar paid to a white man (Miles, Understanding pay transparency and its importance, 2023).

Studies show that the gender gap narrows with pay transparency because it helps identify and address pay disparities in employee compensation based on gender, race, or other factors. To ensure greater pay transparency, conduct a pay audit based on your pay practices so that you understand where you may have gaps in pay and correct any pay inequities as soon as possible.

To conduct a pay equity audit, follow these steps (Pinarchick, 2019):

1. Identify the purpose of your audit: This will drive the process and methodology and identify a budget that addresses the costs to correct potentially unlawful pay disparities. But it will also require buy-in from senior leadership.

2. Review your recruitment and hiring process: Map out the candidate and internal processes using quantitative and qualitative data to identify areas for improvement.

3. Examine your pay practices and policies: This is a key step in establishing the correct methodology for analyzing pay and understanding and explaining pay disparities.

4. Collect relevant data: This can be time consuming depending on what information is captured in your HRIS or payroll databases. Ordinarily, this includes job title, department, job grade or level, hire date, and gender. Depending on the scope of the audit, other data collected are race, age, performance ratings, level of education (if required for the job), and years of relevant experience.

5. Look at your workforce representation: Ensure that certain roles are not dominated by one group. This means you may need to revisit a commitment to diversity as this element may reduce the possibility of true equity across your organization (Rebecca Messina).

6. Group employees that perform comparable work: This is work that requires substantially similar skills, responsibilities, and effort, and is performed under similar working conditions.

7. Analyze the data: Consider outliers during your assessment (employees compensated significantly above or below the average are grouped properly) and re-run your analyses or refine your job groupings as part of the process. Rarely are employees performing comparable work paid exactly the same.

8. Assess whether differences are justified under the law: The legal requirements for how employers can justify different pay for employees may vary depending on the state, the industry, and the type of work. However, some of the common factors that employers may use to justify pay differences are: (1) a seniority system; (2) a merit system; (3) a system that measures earnings or quantity or quality of production; (4) education; (5) experience; or (6) geographic location.

9. Take corrective actions to remediate pay disparities: Consider the timing and consider rolling the pay changes into your annual pay adjustment process. This is the time to communicate with hiring managers and others responsible for pay decisions about the issues identified in the pay audit and the corrective actions being taken to remedy the problem so that the inequities do not perpetuate.

Point 2

While managers and recruiters do not create compensation programs, they do execute them. Organizations need to ensure that managers are well prepared to face a compensation conversation or else they may risk employee attrition, loss of productivity, and employee dissatisfaction. It also means preparing your recruiters to discuss compensation with applicants during the interview process (Pave Team, 2022). The role of managers and recruiters is to carry out compensation programs, not to develop them.

To improve the relationship between employees and management, your organization should consider developing compensation training modules that educate managers on the importance of pay transparency in the organization. There are many ways to share compensation educational programs. Some companies use online training courses while other companies may use in-person training sessions or workshops.

Some important training topics include:

1. The company’s compensation policy and philosophy: Managers should be familiar with how the company determines pay levels, ranges, and pay adjustments, and what factors influence pay decisions, such as performance and market data (Lam et al., 2022).

2. The legal and ethical implications of pay transparency: Managers should be aware of the laws and regulations that require pay transparency, such as the Equal Pay Act, the Lilly Ledbetter Fair Pay Act, and state or local laws that prohibit pay secrecy or discrimination (Roberta Matuson, 2023).

3. Communication skills and strategies for pay-related conversations: Managers should be able to explain the rationale and process behind pay decisions to employees and address any questions or concerns they may have (Roberta Matuson, 2023).

Managers should also understand the benefits of pay transparency for promoting fairness, trust, and diversity in the workplace. The goal of educating managers is to prepare them to handle difficult or sensitive situations such as pay disparities, complaints, or requests for raises. To be ready, managers must understand how factors like budget, performance, and employee pay and benefits contribute to their total compensation package (Brett Christie, 2022).

Point 3

Pay transparency may not suit every organization or culture and it requires careful implementation and communication. Pay transparency can have unintended or complicated consequences, such as envy or the perception of inequity as employees compare their pay with others (Samra, 2021). Before beginning a dialog around pay with employees, organizations must be confident that their compensation strategy aligns with company culture.

To prevent employees from learning their pay range from external applicants, organizations should consider sharing the relevant pay information with them. This can help mitigate some of the potential or complex drawbacks of pay transparency, such as resentment or the feeling of unfairness when employees compare their pay with others.

The goal of pay transparency is to increase employee confidence in the fairness of the compensation process (BetterUp). One of the most important results of pay transparency is an increase in pay equity. Pay transparency, when coupled with robust analytics, can support fair pay equity outcomes.

Conclusion

When managers understand how compensation works, they become better at making informed pay decisions. When employees understand how compensation works, they are well equipped to make decisions about their careers (Enrique Esclusa, 2023).

There are several theories (Miles, Understanding pay transparency and its importance, 2023) that relate to the importance of an effective and strategic pay transparency program:

1. Equity Theory: People are motivated by a sense of fairness, and they will be more motivated when they feel they are compensated fairly.

2. Social Comparison Theory: People compare themselves to others to evaluate their own compensation and performance.

3. Self-Determination Theory: People are more motivated when they feel they have autonomy and control over their work environment.

Based on these theories, organizations that develop effective and strategic pay transparency policies will help with motivating employees and improving job satisfaction.

Pay transparency does not always lead to true pay equity. Systemic change only happens when company leaders can champion change from the top down. Create a plan to maintain your compensation strategy even as your organization changes, grows, and responds to external forces like inflation or a recession.

Compensation varies according to experience levels. When this information is divulged properly, pay increases are clearly defined and explained, which in turn makes it easier for employees to work toward specific goals and aspirations (Joanna Fragopoulos, 2019). Practices like regular pay audits and equity analyses are key to identifying discrepancies around privilege, and proactively budgeting to correct for pay discrepancies ensures that leaders can move quickly to make salary adjustments that correct pay inequities.

A culture of well-communicated pay transparency drives better workforce outcomes and will enable the organization to achieve and sustain a competitive advantage over its competitors.