A Secret Weapon in the Fight for Talent: Pay Transparency
By Sunshine Farzan, global marketing executive
Legislation requiring employers to publicly disclose salary ranges in job postings has been sweeping the nation, aiming to close pay differentials based on gender or race. New York City’s new law, after being delayed, is expected to go into effect later this year. Similar pay transparency laws are already in effect in several other municipalities and states – including California, Connecticut, Maryland, Nevada and New Jersey.
This sea change in pay transparency is rolling in a tide that will inevitably change the course of all boats. Even if a company hasn’t been legally bound to pay transparency yet, new laws are on the horizon and the ongoing labor shortage means we’re in a job seeker’s market.
In other words, now is the time to get on board with pay transparency. Companies that miss the boat will not only find themselves in rough waters, legally speaking; they will also forego opportunities to drive diversity, equity and inclusion (DEI) and tap talent.
Overhauling compensation practices
Most of the pay transparency laws are straightforward, only requiring job postings to include salary information. This may seem like a simple change to adapt to on paper. However, in practice, it fundamentally changes how companies approach hiring and promotion.
In order to comply with the law and uphold credibility, employers will have to implement measurable compensation structures, update their job descriptions more frequently and document all compensation decisions.
Notably, these laws are not just changing the game for new hires. Only a few of the pay transparency laws specify the right of employees to request information on pay structures. However, even without this provision, the pay scale ranges published with new job openings will shine a new light on how current employees are being paid relative to their peers.
New practices in pay transparency will potentially trigger a chain reaction for companies and workers.
Using the federal Equal Pay Act (EPA), Title VII and other similar antidiscrimination laws as the catalyst, more women and minorities will be empowered to file claims of pay discrimination if they discover they are being paid less than their colleagues.
Closing the ‘ask gap’
Pay transparency may also help reinvent the art of negotiation, a core factor that has been widening gender and racial pay gaps.
Research recently published by Glassdoor suggests women are less likely than men to ask for a raise and are also less inclined to negotiate for a pay raise, bonus or cost of living increase. But with a new wave of pay transparency on the horizon, more women may feel more encouraged to state their case at the negotiation table and ask for better compensation.
In terms of race, pay transparency may also change the outcomes of negotiation. According to a study published by the Journal of Applied Psychology, race doesn’t impact whether or not someone will try and negotiate their salary but minorities are still less likely to get the pay increases they ask for. The study attributes this to bias on the part of decision-makers – both implicit and explicit. However, reducing the role intuition plays in determining salaries can improve negotiation outcomes, according to Harvard Law School’s Program on Negotiation.
By requiring decision makers to compare the salaries of those with similar backgrounds, pay transparency is a key tool for making the shift from subjective intuition to objective analysis. When done correctly, companies can help close the ‘ask gap.’
Shifting to skills-based pay
The pivot to pay transparency is a transformative trend because it holds companies accountable for how they compensate employees. To keep pace, companies will have to explore new ways of measuring the value an employee brings to the table.
For many companies, a skills-based pay framework can help them adapt to the changing regulatory landscape and revamp compensation practices appropriately. This framework may also help companies close the gender pay gap.
Most companies still operate in a traditional role-based pay system, where employees develop their careers in specific job functions and departments. Their pay is primarily based on whatever role they are in.
Employees in a role-based pay system are usually rewarded financially when they move up to a new role. However, women are 14% less likely than men to be promoted at a company in a given year, according to research from Yale University. Again, like the ‘ask gap’, this disparity is attributed to implicit and explicit bias.
In a skills-based system, an individual’s compensation is determined by the concrete skills they bring to the table. Salary structures are typically formalized and holistically influenced by an individual’s experiences, certifications, education and specialized training. Skills become the currency of salary negotiation, as opposed to an individual’s current or previous role.
Longitudinal data from Pew Research Center underscores the compelling role skill development can play in closing the gender gap. For example, from 1980 to 2018, as the proportion of higher-skilled jobs in the workforce grew, the inflation-adjusted average wage for women shot up 45% compared to just 14% for men. For roles requiring analytical skills, women’s earnings increased by 58% during this same period as compared to just 23% for men.
Pay transparency: a clear path onward and upward
As the Great Resignation restricts operational capacity, employers are looking for new ways to attract, develop and retain talent. For employees who quit a job in 2021, the majority (63%) attributed the decision to a lack of opportunity for advancement, according to data from Pew Research Center.
Employers should note that a clear path to advancement does not just benefit employees. The latest LinkedIn Workplace Learning Report found employees who work at companies with high opportunities for mobility stayed nearly twice as long as those who work at low mobility companies.
In the face of a labor shortage, companies will also have to adjust to growing expectations for DEI. More than three out four (76%) job seekers and employees said a diverse workforce is an important factor when considering a job offer, according to recently data from Glassdoor. Furthermore, nearly a third of employees and job seekers (32%) said they would not apply for a job if there is a lack of diversity among the company’s workforce.
Pay transparency can be used as a tool to respond to both the tight labor market as well as the growing emphasis on DEI in the marketplace. When companies enjoy the benefits of pay transparency, such as skills-based pay systems and greater levels of DEI, employees of all backgrounds can understand what it takes to rise up.
Pay transparency effectively outlines a clear path onward and upward, for both companies and their employees.
Sunshine Farzan is a global marketing executive with a passion for helping companies build and scale their business through the integration of digital, marketing, product innovation, demand generation and public relations. She has two decades of experience building brands, enhancing customer experiences, and transforming businesses through digital innovation in Asia Pacific and North America. She currently leads Global Marketing & Communications at Tricor Group, a PE-backed professional services firm. Sunshine is a board director, an active contributor to business publications and a certified career coach.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.