Should Pay Disclosure Be a More Common Practice?

Editor's Note:  Today's post comes to us courtesy of guest contributor Rory Trotter.

It’s an established practice within most U.S. based firms to keep pay a secret. Ergo, while federal securities law requires publically traded companies to disclose the compensation of their five highest paid executives, most people are in the dark about how their earnings stack up relative to peers. Websites like Payscale and Glassdoor have made it easier than ever to get a ballpark estimate of the market rate for a job and/or skillset, but understanding where one falls on the pay continuum from an internal equity perspective remains in many ways as tricky a proposition as ever.

With that said, research from Elena Belogolovsky and Peter Bamberger suggests that perhaps companies should be rethinking their approach to pay disclosure. In a 2010 study, they found that pay secrecy can negatively impact the work performance of less inequity tolerant individuals. Part of this phenomenon is no doubt attributable to illusory superiority; many people overestimate their abilities relative to peers, assuming the value of their contributions far exceeds actual output. In this respect employers may be wise to be cautious about disclosing general population compensation data – even if pay is equitable there will always be someone who feels shorted.

Conversely, suspicion over the objectivity of organization’s pay policies is often justified. Managers have been known to take subjective, short-term approaches to divvying out merit increases to their direct reports as opposed to awarding pay increases based upon merit. And this practice says nothing of the role that new-hire salary negotiation plays in where one falls within a population from an internal equity perspective (a disparity that often only compounds on itself over time). These realities make pay disclosure an inadvisable endeavor for many companies. After all, as one of my comp mentors communicated to me early in my career, we need to be able to defend any decision we make around pay. Unfortunately, for many organizations this proves quite a tall order; and in such cases disclosing pay and bringing rampant salary compression issues to light would not only lower employee morale and engagement, but also open said employers up to significant legal liability. In this respect, a company’s ability to consider disclosing employee salaries comes down to its ability to justify how its workforce is paid.

But it can be done. There are organizations – like the San Francisco-based startup Buffer – that are disclosing the pay packages of every employee in the company. Having said that, Buffer unveiled what appears to be a fairly regimented salary formula at the time of its disclosure. Applying such a formula to a more mature company with a larger employee population and decades of compression issues might prove decidedly more difficult (Buffer has less than 50 employees at the time of this writing). Ironing out equity issues in such cases can take years and is sometimes never fully resolved.

Ultimately, however, I’m of the mind that salary disclosure – or at least range disclosure – is something that companies should aspire to… if for no other reason than because the publication of such information holds employers accountable for making sure their compensation structures are both aligned with performance and the external marketplace.

What do you think – yay or nay on salary disclosure? When and why? Please share your thoughts in the comments section below.

Rory C. Trotter Jr. is an HR Manager specializing in Compensation, Talent Management and Employee Relations. He has provided enterprise wide support on matters related to base pay, executive pay, and long-term incentives for a Fortune 50 company, managed employee relations for various operations and commercial client groups, and led recruitment efforts for hundreds of jobs spanning a wide range of functions, complexity, and scope. He has both an MBA and a Master of Human Resources and Industrial Relations from the University of Illinois at Urbana-Champaign. You can read more of Rory's thoughts on compensation and HR at rorytrotter.com and you can find him on Linkedin here, Twitter here, and Google+ here.

Creative Commons image "Magnifying Glass and Money" by Images_of_Money

Comments

[Dan Walter]

Rory,

I like your point that pay disclosure "is something that companies should aspire to."

In my experience one of the biggest hurdles to pay disclosure is the lack of consistency in pay at many companies. If they opened up their information there would be more questions than answers.

Regardless of whether a company DOES make pay an open issue (something I would not always support), they SHOULD have put things together well enough that if disclosure was required they would not be embarrassed (or worse).

[Rory Trotter]

Thanks for the comment here, Dan.

For many companies internal and in some cases external equity issues across departments (and in some cases the entire enterprise) can make disclosure risky from both employee engagement and EEOC perspectives.

If a company wants to avoid messy salary compression issues and broader external market challenges, the smartest thing for them to do is to introduce a comp structure early and then let it evolve with the business (as opposed to waiting until problems manifest themselves in the form of retention and engagement challenges).

Best,

Rory

[John A Bushfield]

Rory - I appreciate your comments on compensation disclosure. I've been advocating for more pay transparency, on this blog and others, for quite a while. The risks you site are real, but will eventually be outweighed by the risks of keeping salary information in the closet. Frankly, I think its inevitable; the millennial generation entering the workforce, and those that follow, will become increasingly intolerant of pay secrecy. Their view of corporate responsibility, and accountability, differs in significant ways from that of their predecessors, and organizational credibility will be a key factor in employment decisions. In that context, companies would be wise to assess their compensation practices against the philosophy they articulate, and begin to take whatever steps are necessary to align them. This train is leaving the station, and those left behind will find it increasingly difficult to compete.

[Rory Trotter]

Really good points, John.

For a cultural standpoint millennials and generation Z are simply going to demand greater transparency around pay. As such, organizations that don't take steps to resolve compression issues now are going to have to absorb huge costs to catch up when societal norms around disclosure force them to bring their practices to light.

Thanks for sharing here.

Best,

Rory

[John Snyder]

Re: Pay disclosure: One partial solution is to provide the employee a summary distribution of employees' pay, expressed as a histogram of their percent of midpoint. This could be one for all employees, one for the department, or one for the job classification, etc., depending on the size of the organization and the HR/Comp. department.

Then there could be a discussion with the individual about where that individual's pay lies as a percent of their midpoint, what can be done about it, and what is a reasonable time frame to address any issues.
JDS

[Rory Trotter]

That's a really interesting communication strategy, John.

Would you ever see this as a general use tool for the entire population, or is it only practical/viable as part of a larger discussion with disengaged colleagues expressing displeasure around their pay?

Best,

Rory