Is Salary Transparency the New Key To Employee Retention?

Religion, politics, money — they’re all topics we’ve been taught are bad manners to discuss or inquire about, no matter how well you know someone. Conversations about how much you or your colleagues are paid can feel awkward and uncomfortable for that very reason, and it means most people don’t know what their colleagues, managers, or employers make. 

But salary transparency is a practice that’s on the rise in companies around the world and has become less of a taboo subject over the last decade. In fact, many human resources experts predict pay transparency will be one of the keys to employee retention. 

For example, the social media platform Buffer publishes employee salaries, including their location and title, claiming that the increased transparency helps build trust and increases accountability. Other companies have begun to do the same in recent years, either voluntarily or due to statutory requirements. 

Let’s dive into what salary transparency is and how it benefits — and doesn’t benefit — companies and their employees. 

What is salary transparency?

Salary transparency is the act of letting employees, and sometimes the public, know how much money those who work for the company are paid. According to an article in Time, “About 17% of private companies practice pay transparency, while 41% discourage and 25% explicitly prohibit discussion of salary information.” 

In some states, there are laws that prohibit companies from taking adverse action against employees that discuss salary information. For example, Colorado’s Equal Pay for Equal Work Act went into effect on January 1st, 2021, and requires employers to post compensation and benefits information with each job posting for jobs in Colorado. 

The federal government is also required to operate with salary transparency, posting the salaries of each role from patent officers to the attorney general. Members of the public can use a central website to look up specific roles using a searchable database as well as an interactive map. 

Benefits of salary transparency

The practice of publicly sharing salary information is becoming more widespread with more companies embracing transparency to take advantage of the benefits. From employee happiness to closing gender pay gaps, let’s look at some of the benefits of salary transparency. 

  • Increased employee productivity: In a study by Emiliano Huet-Vaughn that compared two groups of workers — one group that was informed about their colleagues' pay and one that wasn’t — there was a 10% increase in productivity by the former. Huet-Vaughn also determined that the way employees were informed about salary transparency impacted their performance relative to the control group. 
  • Diminished pay gaps: Across the board, women currently earn $0.82 cents for every $1 earned by men. But according to research by PayScale, when pay is transparent, the gender pay gap closes: “Women who agreed that pay was transparent at their organization earn between $1 and $1.01 on average for every $1 a man earns.” The study also reported, “Participants who strongly agree that their organization is transparent are estimated to have slightly less pay equity than participants who merely agree.” 
  • Improved trust: Another reason employers undertake salary transparency is to improve the trust their employees have that they are being paid fairly. However, it is especially important that employers have a solid salary policy to ensure that employees believe they are being paid fairly compared to their colleagues. A clear salary policy will eliminate confusion about employees being compensated more or less for vague categories like experience, which can sometimes only be determined subjectively. 

Drawbacks of salary transparency

However, others argue that salary transparency can cause issues for both employers and employees, from hiring limitations to employee jealousy. 

  • Hiring limitations: When employers make salaries public, they might have to adjust salaries to ensure there are no discrepancies between salary rates. To meet tight budgets, companies might resort to hiring fewer people because they need to ensure they are paying each person a wage they feel comfortable publicizing. 
  • Employee jealousy: With salaries made known to the public, employee animosity is a potential drawback companies could face. However, with a salary policy in place, employees should understand why their colleagues are being paid a certain rate. 
  • Contextual confusion: Likewise, salary transparency can cause confusion when a salary policy isn’t put in place. If employees are informed of their colleagues’ pay but don’t have information about the compensation rationale, it can cause confusion about roles and responsibilities. 

While these drawbacks are worth considering, both employee jealousy and contextual confusion can be mitigated by providing a salary policy that outlines compensation. Using objective information to determine salaries, like cost-of-living data about an employee’s location, their role relative to others in the company, and their level of education can lead to a salary policy that results in fair wages across the board. Additionally, salary policies should be reviewed regularly to ensure they remain accurate and effective. 

Can salary transparency affect employee retention? 

Employee retention has always been a key goal for most companies, but the Great Resignation has caused employers and HR managers to focus on it even more. Salary transparency could have a strong connection to employee retention, making it even more appealing for employers. 

When employees perceive a gender pay gap in their company, it results in a 16% decrease in their intent to stay in their position, according to a report from Beqom. The report further determined that 58% of employees would consider changing jobs to work for a company with salary transparency, with the number jumping to 70% for Gen-Z employees. 

Not only can salary transparency increase productivity, improve company loyalty, and close gender pay gaps, it might be the key to companies decreasing their employee attrition rates during a time of increased upheaval. 

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