Pay Transparency: Has the Time Come for the Private Sector to Reveal Confidential Salaries?

Some of you may have heard blogtalkradio's recent HR Happy Hour show titled "Show Me the Money," featuring Ann Bares, Margaret O'Hanlon and me as guests.  The questions asked during the show provided lots of ideas for future posts on the Cafe, and today's post features just one of the many, yet widely diverse questions posed by listeners.

It was a loaded question that made all of us pause and think a bit before responding, simply because it embedded so many different but inter-related compensation issues.  The question was something like this:

• "Lately, we're seeing many public sector salaries published in newspapers and other media.  A recent example was found at the University of Illinois, where the local paper published U of I employee's salaries.  If the public sector is being so transparent, don't you think the private sector should follow suit and publish their employee's salaries too?"

My first impression was that he was mixing two systems that operate differently because of their original employment value proposition.

• Private sector employees theoretically had an opportunity to earn more salary because of a merit based pay system that paid employees based upon their performance/results.  The trade off was that they didn't have job security.  Since they were paid for performance, their salaries were "secret."  Employees had confidence in management that pay decisions were made for the right reasons using a sound pay system designed to pay people fairly for their contributions. Executive management was accountable to their Board of Directors and ultimately, their shareholders.
• Public sector employees were granted job security and better benefits as a trade-off for lower salaries in civil service roles.  It was designed to be difficult for an employee to get fired from a public sector job. Since everyone was paid essentially the same wage for the same job, performance was not a priority in their pay system. Since wages were paid with taxpayer funds, they were published and generally available for public knowledge. Executive management was accountable to their governing Board and ultimately, to the taxpayer.

So I thought the listener was mixing apples with oranges, so to speak, based on my understanding of the differences in the pay systems for public versus private sectors.  That said, the question of pay transparency remains.  Should the private sector begin to publish their employees' salaries for all to know?

Let's revisit some basic assumptions first:

1. Everyone already knows what others earn.  The grapevine is alive and well, and though many companies work hard to keep their individual pay rates for employees confidential, it's generally known what your co-workers earn.
2. The value proposition has eroded over the past few decades for both the public and private sectors, but mostly for private sector employees.  Wages & benefits have grown at much faster rate increases for public sector employees over the past decade to the point of the public sector average wage exceeding that of the private sector.  Public sector employees have recently suffered furloughs and wage reductions, yet the private sector felt the effects of the recession more directly through job loss, furloughs, wage freezes and reduced benefits.
3. Private sector employees are paid with earned revenues, and are accountable to their shareholders.  But public sector employees are paid with tax dollars paid by the public, and that is why their salary information is made public.

So going back to the listener's question regarding pay transparency in the private sector, I'll respond, "It depends."  And what it depends on for me is the individual organization,their compensation philosophy and dedication to educating their employees regarding their compensation practices. 

I think it's a really touchy area that has the potential to spiral out of control and create all sorts of bad feelings between employees unless it's handled extremely well.  Since most employers aren't very savvy in terms of handling these issues, I'd recommend a compromise.  Minimally, publish your annual salary ranges for base salaries, plus your merit matrix if you're a "pay for performance" employer.  

If you want to take it a step further, distribute slotted jobs included in each salary range.  And if you really do want to become transparent, go for it and reveal everyone's salary.  But only after you've done a thorough review of each individual salary to ensure you're in compliance with every conceivable possibility for pay discrimination. 

Conduct the project under the supervision of an attorney so your work product is protected during your review.  And go forward in publishing your actual salaries only after you've educated your managers and employees in the basics of your pay system.  Even then, you'll still be challenged on individual pay decisions, because individual employees have difficulty in viewing their performance holistically from an organizational perspective.

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products.  A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build better organizations.

Comments

[Paul Hebert]

I know I wouldn't have any issue with pay transparency since I've never been paid what I think I'm worth (wink).

Couple of thoughts to throw into this discussion:

1. I think that employees really DON'T have a good idea of what others make. I think they always believe others make more than they should and they, themselves make less. I know in my career I've heard the grapevine discussions of pay and when I was promoted to run a division - most of those assumptions were way off. So I think in most companies the reality and the gossip are miles apart (IMHO.)

2. If you start from the assumption that pay is nothing more than a transaction - my time and expertise for the company's money the issue of transparency becomes one of value.

How much is that job worth? What is the output from that job? What is the job description? In most public sector jobs they have very strict and delineated job descriptions - designed to try to quantify the pay-work equation and eliminate any grey areas. That, again IMHO, leads to "work to rule" environments where employees only perform to the letter of the job description.

In the private sector, being more market driven and at the mercy of ongoing and accelerating change - it would be almost impossible to codify and job to the point that everyone could agree on the transaction value.

I think pay transparency would reduce employee engagement, create a less flexible workforce and drive more private companies to look like public agencies. Not a good thing in my mind.

There are some notable exceptions to the rule but I think they were designed from the start to incorporate transparency and have hired to that culture.

As long as there is ambiguity in the job description you will need a bit of ambiguity in the pay - it's just the way math works.

[Darcy Dees]

Great post Becky, I really like how to put the public/private employment in context.

There has been a great deal of research into how people view their ability to perform vs. their actual performance. The reality is that most people don't have a realistic view of how well they can do something. So I think pay transparency in a P4P environment can create huge issues since most of the employees will believe they're underpaid for their value.

Thanks for starting this interesting discussion!

[Becky Regan]

Thanks, Paul & Darcy for your input on this post.

Regarding Paul's point on employees not really knowing what others earn, I think that's true. However, in the absence of knowledge, assumptions are made that become their reality. So they think they know, even if they don't, which creates issues in a work environment where employees don't understand how pay decisions are made.

I've worked primarily in the private sector, but learned compensation by consulting in the public sector. There are huge differences between them in all of these areas.

One other note is that one quality of the highest performing employees frequently is that they don't necessarily see themselves as such, so they don't believe they're underpaid. (I'm not talking about sales people here....). More frequently, it's the average or poor performer who believes they're not paid what they're worth.

Let the discussions continue!!

[Chris]

I think this is always an interesting topic, however I disagree that everyone in the Public sector is paid basically the same. I've worked in the Public Sector for years and done extensive compensation work. There are many public sector organizations that have compensation systems very similar to those found in private sector companies, with open salary ranges where pay is based on experience, education, skills and performance. There are also numerous cases of pay for peformance programs and variable pay programs that work well in these situations.

It's been my experience that the compensation challenges faced in public sector are not that different from private sector. The trick is ensuring that you have sound decisions behind every action, every market study, every promotion and merit increase because you never know when that will hit the front page of a paper.

Even if private sector organizations choose not to increase pay transparency, it would be a good exercise for them to review pay decisions and ask if the decisions could be defended in a public environment such as a paper, or at a public hearing? If you have sound compensation practices, I don't see how you risk losing motivation and engagement from employees. In fact, having more information about pay decisions can really help with enagement, and studies have shown that in both private and public sector environments increased information on pay decisions has a direct link to employee satisfaction.