Pay Transparency Is Not Going Away

If you don't know the meaning of the contract theory and economics term, "information asymmetry," what would you do? What I did and what everyone who has a smart phone or computer would do, Google it.

And that brings us to the heart of the matter when it comes to the issue of pay transparency. In an era of almost limitless information access, pay may be one of the few remaining examples of rigid information asymmetry. In most companies, HR keeps all the relevant information about compensation for services provided close to the vest, even though I (the employee) have essentially contracted to provide those services.

And we often take this information imbalance to an extreme. Compare pay increases to the everyday transactions of buying a house or even an insurance policy. The exchange of goods and services are also asymmetrical in these cases, as the seller will limit what s/he tells us to what we ask about -- but we can do some additional, independent research as a consumer. 

I bring this up to highlight the inevitability of change in our pay communication practices. With so much data available about just about everything else, how long is the working person going to put up with severely restricted access to compensation information? At some point, we're going to have an Edward Snowden event if we don't start to evolve our thinking and practices.

This came to mind while I was researching today's article. I ran into an HBR.org article, "Why Keeping Salaries Secret May Hurt Your Company" and a related TED Talk, "Why Do We Keep Our Salaries Secret?" A stickler for practical advice and solid research, I was uncomfortable with the studies quoted, especially since the speaker, David Burkus, doesn't seem to have had a business leadership role where he would have to deal with the practical implications of his recommendations. When he talked about revealing the "formula" for calculating pay, I wondered what he was referring to.

I count myself one of the loudest voices for more, and more effective, compensation communications in our community, but I was not comfortable with the case he seemed to be making, with two really meaningful exceptions. Here's what I want to pass on:

1. The way we communicate compensation right now makes it easier to ignore the discrimination inherent in our practices. We have known for a long time that women, for example, are routinely paid less than men. We have data that people of color run into similar discriminatory trends. Shine a brighter light on these pay trends, as the federal government does through broad-based reporting of employee salaries, and the prevalence of this problem drops by double digits. This should teach us that we and our employees would benefit from the self-policing inherent in making pay data more open.
2. It's just common sense. Information asymmetry in transactions is an economic boon to the entity that owns the information. In other words, our companies save money by barricading the information about pay practices behind executive and HR doors. Shine a brighter light on that operating principle and the question arises, "Are we being frank with ourselves about our motives when we don't communicate in detail about compensation?" Maybe we don't want to invest the time or budget because we unwittingly work toward limiting compensation?

You can decide that I am advocating publishing everyone's salary but you would be wrong. (I am no Snowden supporter.) But right now, most employees who are being paid market rate believe that they are unfairly and uncompetitively paid. Why? For one thing, all they have to do is ask PayScale, a dubious but easily accessible online information source.

But if employees knew and understood the steps that you and your colleagues take to address their pay issues, they would have questions (for sure), and concerns (pretty likely), but they would also have more trust that a systematic, time-consuming effort is being made on their behalf to recognize their contributions to the company.

We and our employees will benefit when we do a lot better job balancing out the information asymmetry currently involved in employee compensation. Don't call it, "pay transparency," if it gives you the willies, but do realize that the pressure to improve is here to stay.

Everything you do in compensation is communication, so why not do everything better? Prepare yourself for explaining the DOL overtime changes by getting yourself a copy of the popular ebook, Everything You Do (in Compensation) Is Communication @ https://gumroad.com/l/everythingiscommunication. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio and performance management discussions at the Café. Before founding re:Think Consulting, Margaret was a Principal at Willis Towers Watson.

Comments

[Alan]

Can you refer us to any research to read on the value of pay transparency? Thanks.

[wernst]

I found these journal articles to be helpful:

Marasai & Bennet (2016). Pay communication: Where do we go from here?, Human Resource Management Review, 26, 50-58.

Risher (2014). Pay transparency is coming, Compensation and Benefits Review, 46, 3-5.

[E. James (Jim) Brennan]

Margaret is right. Pay that is not openly defended will be assumed to be unfair. Denying access to information perpetuates indefensible bias and improper imbalances. Keeping pay-setting procedures secret makes a lie out of claims of reliance on "the free and open competitive market." Anything hidden from sight is neither free nor open.

[Tony Bergmann-Porter]

Pay at the very top of public companies is completely disclosed; pay in the public sector is completely disclosed; hourly pay in virtually all settings is either implicitly or explicitly disclosed.

So what, exactly, is the point of pay secrecy for below C-Level salaried employees in the private sector?

[Dan Walter]

The lack of transparency in pay, is kind of like the old saying "You don't want to see how sausage is made." (even if you love a good sausage)

We try hard to balance internal equity, survey data, a myriad of pay programs, poor or inconsistent performance management, rogue managers and locations, dubious algorithms and subtle bumps up and down that are driven by good and bad things no wants to speak about publicly.

All of this with the goal of have some type of defensible pay.

For transparency to really work, survey data would need to be far less of a secret black magic box of information. Comp pros would need to be better (or, more like have more staff members) in order to provide easily understood pay decisions, rather than just defensible decisions.

I work with several companies who practice open book management and have transparency in pay and nearly everything, It is hard to get used to not wearing the clothes that have hidden (or so we believe) our flaws. But, in the end it really shouldn't be that traumatic.

[E. James (Jim) Brennan]

Power is behind it. Anything voluntarily disclosed reduces the power of secretive people. Managerial discretion would be challenged if/when feeble excuses or nonsensical reasons are offered for pay decisions.

The fact that they SHOULD be challenged is missed by many senior executives who are afraid to admit their own personal inability to comprehend or explain the actual pay-setting rules in place by HR/compensation types. Even when the practices are valid, consistent and proper per the relevant strategic policy directives, most managers prefer to punt rather than confess "I don't know."

Those organizations that practice pay transparency communicate with a capital C. They always invest a tremendous amount of time and attention in buttressing their procedures, explaining, training and communicating the messages with integrity.