Employees these days are demanding fairer hiring practices and more transparency in business. As a result, increasing numbers of companies have started practicing pay transparency. Employers in certain states including Colorado and California are bound by recent changes in the law, but companies in other states are also embracing the concept as they believe it is an effective way to promote equal pay for all. In fact, studies are already demonstrating that pay transparency is reducing pay inequities across gender, ethnicity, and sexual orientation.
So, what is pay transparency and why is it so important? How does it relate to Equal Pay Day? And do you know how to implement pay transparency in your business?
Let’s find out what it is, what you need to consider, and what the pros and cons of pay transparency are.
Table of Contents
Table of Contents
The importance of pay transparency
Pay transparency is the practice of openly disclosing your pay scales, both internally and externally. The strategy is designed to enhance business transparency, build trust and, above all, promote pay equity for all. By disclosing your salaries, you are showing your employees and the job market in general that you are a fair and transparent employer that follows equitable compensation policies.
So, why is pay transparency so important?
For one thing, pay transparency reduces gender and racial biases that fuel wage gaps. These pay gaps still exist in many businesses in the US. By being transparent about how much you pay your employees, you reduce the chances of conscious or unconscious biases creeping into your hiring practices. Plus, pay transparency increases accountability for equal pay.
What’s more, promoting pay transparency shows job seekers that you value an open and honest approach to salaries. This can work wonders for your employer brand and help you attract and retain top talent.
There are many other benefits of pay transparency in the workplace, as we will see further down in this post. First, though, let’s discuss how to implement pay transparency in your business.
4 ways to implement pay transparency
If you’re located in a state that enforces pay transparency, or even if you’re not but you’ve decided to implement the approach, then there are a few strategies that can help you prepare for the change so that it is a success.
Here are 4 essential strategies to keep in mind.
Conduct a pay equity analysis
Before you start publishing your pay scales, it’s a good idea to conduct a pay equity analysis to make sure your salaries are fair and balanced. Equal Pay Day is a perfect opportunity to conduct yours if you haven’t reviewed your salaries in a while. In case you weren’t aware, Equal Pay Day is today!
A pay equity analysis is where you analyze pay rates in your organization and establish if there are any unjustified salary differences. You can do this through the statistical analysis of your payroll data. Make sure you compare similar roles within your company to see if you are paying the same salary to employees in similar jobs.
Are you paying employees performing similar duties equal salaries, regardless of gender or race? Can you directly attribute any differences to gender, race, age, or any other unjustified criteria?
Once you’ve done that, you can work on an equitable compensation framework to ensure equal pay for equal work in your business.
Design a clear compensation strategy
It’s important that you offer all employees performing the same duties the same salary, in line with wage and hour laws. The best way to do this is by designing a clear compensation strategy. This tool can help you avoid potential issues with unjustified pay gaps. Plus, the more transparent your process for determining salaries is, the easier it will be to be publicly transparent about the salary ranges that you offer candidates.
Start by creating clear guidelines for salaries. Define pay scales for each role and establish which requirements an employee needs to meet before they are eligible for a promotion or pay rise. Make sure all salary levels for a role directly relate to skills, abilities, roles and responsibilities, and experience. You also need to ensure that your department managers calculate bonuses according to clear performance benchmarks.
Once you’ve defined your compensation policy, make sure your hiring managers understand how the structure works. That way, they will understand how to negotiate fair and equitable salaries during the hiring process.
Finally, share your compensation strategy with your entire workforce so that everyone understands how salaries are calculated and there is no confusion once you start disclosing salaries for different roles. Make sure your department heads understand that no single manager has unilateral authority over salaries, bonuses, or other forms of compensation.
Nurture a culture of transparency
Aside from communicating your compensation framework to your employees, it’s also a good idea to nurture a culture of transparency. That way, employees will understand why salaries are being disclosed. Use Equal Pay Day as an opportunity to take your first step towards developing a more open and transparent culture.
Start by explaining to your employees that you value trust and transparency and that your goal is to be a fair and equitable employer. Explain that there are a number of benefits to pay transparency, especially when it comes to strengthening workplace culture.
Don’t be afraid to be open and honest here. You’ll probably find that the majority of your workforce supports the approach. In fact, recent studies have shown that 91% of employees who believe their organization is transparent about pay decisions also claim to trust that their organization pays people equally for equal work regardless of gender, race and ethnicity. Help your employees understand that pay transparency will help you become a more diverse, inclusive and equitable organization.
Use data and technology
Finally, make sure you are using data and technology to support your pay transparency efforts.
For example, predictive analytics and automation can help you reduce potential biases and pay discrepancies. Use solutions like Factorial’s HRIS to collect payroll software data and enhance your gender pay gap data. Our solution also includes tools such as a gender distribution chart, which shows you the percentage of men and women per team. You can also create gender pay reports and filter data by teams, seniority, and more. Then use this data to identify potential gender pay gaps and take action.
You can also use Factorial’s DEI dashboard to measure and track your diversity metrics. That way, you can instantly access all the insights you need to ensure you are creating a diverse, equitable and inclusive environment at every level of your organization. And the more diverse and equitable you are, especially in terms of salaries, the easier it will be to openly disclose your pay scales.
Finally, the right technology can help you create a fair and objective performance management process to support your compensation framework. You can establish and track clear performance benchmarks for salary increases in line with output. That way, you can reduce biases and avoid potential claims of unfair compensation practices.
Recent pay transparency laws
Pay equity has attracted a lot of attention recently. As a result, many states in the US have recently enacted pay transparency laws to tackle the issue of pay discrimination. For example, states including Colorado and California as well as New York City have all enacted pay transparency laws. Other states with similar laws include Connecticut, Maryland, Nevada, Rhode Island, and Washington.
Let’s take a look at some of these pay transparency laws.
Colorado’s Pay Transparency Law
Colorado was one of the first states to pass a pay transparency law. The state approved it in 2019 and enacted it on January 1, 2021. The objective behind the Act was to address salary disparities and reduce the gender pay gap by requiring employers to openly disclose salary ranges for all open positions.
Colorado’s pay transparency law applies to any entity employing at least one employee working in Colorado. Employers must disclose salaries in all job advertisements together with a general description of all employment benefits. They must also keep records of job descriptions and wage rate history for each employee for the duration of the employment, plus two years after the end of employment.
The Act also prohibits employers from:
- Paying one employee a wage rate less than the rate paid to an employee of a different gender for substantially similar work, unless the disparity can be legally justified.
- Asking about or relying on an applicant’s salary history.
- Restricting employees from discussing their compensation with other employees.
- Retaliating against an applicant who fails to disclose their wage history.
If an employer violates these requirements, they may be required to pay a fine of between $500 and $10,000 for each violation.
NYC’s Pay Transparency Law
New York City’s 2022 pay transparency law is an amendment to the New York City Human Rights Law. The amendment was enacted on November 1, 2022.
The NYC pay transparency law requires employers to disclose minimum and maximum pay ranges in good faith for all on-location and remote jobs, promotions and transfer opportunities based in New York City. Failure to comply with this law can result in penalties of up to $250,000 per violation.
A similar law that will apply to the entire state of New York is expected to come into effect later this year.
This pay transparency law is expected to contain three additional requirements:
- A posting must include a job description if one exists.
- A posting must include a general statement that compensation is based on commission, if applicable to the position.
- Employers must keep and maintain records of compensation history for posted jobs, promotions and transfer opportunities.
California’s Pay Transparency Law
The California pay transparency law came into effect on January 1, 2023. The Act requires all companies with employees based in California to share pay scale data with current employees and prospective candidates. The new employment law also establishes employer obligations relating to pay data reporting. Failure to comply with this law can result in civil liabilities and hefty non-compliance penalties.
California’s pay transparency and pay scale disclosure law has one primary objective: to promote equal and transparent pay for all. With this law, the state hopes to build on the existing work it has done to identify and eliminate wage disparities.
Specifically, the Act requires employers to:
- Include pay scale data in all published job advertisements (for companies with 15 or more employees).
- Disclose the pay scale for a position that an employee currently holds, upon request.
The new California Pay Transparency Law also defines a number of pay data reporting obligations. Specifically, these relate to the reporting of mean and median pay data to better identify gender and race-based pay disparities. This makes California a pioneering state that is leading the nation towards a working culture based on equity and fair pay for all.
Pros and Cons of pay transparency
Legal obligations aside, pay transparency can be a polarizing topic. Some organizations are totally in favor of full disclosure, and they understand the benefits that it can bring. However, others believe that salaries should be private, and they prevent their employees from discussing pay rates altogether.
There are obviously advantages and disadvantages to being fully transparent about your compensation framework. It’s on each company to weigh up all factors in order to determine the best approach to salary disclosure.
Let’s take a look at some of the pros and cons of pay transparency to help you decide if it can benefit your business.
Pros of pay transparency
Let’s start with the pros:
- Helps to close the gender and racial pay gap.
- Enhances your employer brand. Disclosing your salaries shows the world that you are an equal opportunities employer and that you pay your employees in line with the skills and qualifications that they can offer, not their gender, age, or race.
- Ensures HR compliance in the case of states with pay transparency laws.
- Access a wider pool of quality talent. By creating more diverse and inclusive hiring practices you get access to a wider variety of talent.
- Attract and retain top talent. Transparency builds trust. Being open and honest about your pay scales shows employees and candidates that they can trust you. This makes it much easier to build loyalty and to attract and retain top talent.
- Streamlines your hiring process. Pay transparency makes the hiring process run more smoothly as you remove the uncertainty of salary negotiation. Being upfront about your salaries also stops you from wasting your time interviewing candidates whose salary expectations you cannot meet.
- Increased productivity. When you are transparent about pay scales, your employees are more likely to feel that you are paying them fairly. This will help them feel more valued, boosting employee performance and engagement.
- Pay transparency can help you build a culture of trust and transparency. When employers are open about their compensation policies it builds trust between employees and managers. And this is essential for nurturing an environment of collaboration, communication, and innovation.
- Increased diversity, equity, and inclusion in the workplace. This, in turn, improves the employee experience and helps you develop a nurturing workplace culture.
Cons of pay transparency
Here are some of the challenges you might face when you implement pay transparency in your business:
- Exposing your salary ranges can cause issues within your workforce if employees discover that salaries aren’t fairly distributed. For example, if there are obvious examples of gender pay gaps or favoritism then it could have an impact on turnover and performance. And if employees share this information publicly then it could negatively impact your employer brand and recruitment efforts. The best way to overcome this issue is to conduct a pay equity audit to ensure that there are no unfair or unsupported pay gaps in your business.
- If you don’t manage the process of disclosing salaries in a transparent and informed way, then it can cause internal conflict. To overcome this issue, it’s important to define and communicate a clear compensation policy with defined guidelines for your salary ranges.
- If employees feel dissatisfied with their compensation after disclosure, it could impact motivation, engagement and productivity. This is usually because employees may make false comparisons when they don’t understand the guidelines for setting salaries.
- Pay transparency could lead to increased payroll costs if employees demand pay rises after finding out what their colleagues earn. Again, the only way to overcome this is to define a compensation framework with clear guidelines.
- Some employers worry that privacy could be an issue. Employees might be upset that you are publicly disclosing salary ranges for their position. However, if the current wave of pay transparency laws continues to evolve then pay transparency will eventually become a legal requirement for all businesses in the US.
Why Equal Pay Day matters
So, how does Equal Pay Day relate to pay transparency? And why is Equal Pay Day so important?
Equal Pay Day is an annual campaign that aims to increase awareness of pay inequality and eliminate unfair pay practices and pay disparity. The campaign’s organizers, Equal Rights Advocates, hope to motivate businesses to close the gender and racial wage gap that persists in nearly every industry and profession in the country.
In the United States, Equal Pay Day is being held on March 14 this year (today!). This date represents how far into the year women must work to make as much as men during the previous year.
The ultimate goal of Equal Pay Day is to further the fight for gender equality in the workplace. Equal Pay Day is important because it raises awareness of these issues, encourages conversations around pay equality and transparency, and reminds people that pay parity is still an essential goal if we are to evolve as a society.
Final tips for employers and HR
Let’s finish by taking a look at a few final tips to help you promote pay transparency in your business and become a fairer and more equitable employer:
- Implement the right structures and processes. Make sure you design and share a comprehensive compensation framework with clear guidelines.
- Create a pay transparency policy. This policy should define how you collect and store salary data, how you define job descriptions, and how you calculate salaries. The clearer you are, the easier it will be to justify your salaries.
- Determine specific salary ranges for all the positions in your organization. Establish benchmarks for promotions and pay rises.
- Educate your hiring managers on fair hiring practices and pay transparency. Make sure they understand your pay structures, apply them fairly and consistently, and include pay scales in all job descriptions. You should also offer them unconscious bias training to ensure fair and equitable hiring practices.
- Conduct regular pay audits and look out for any potential gender pay gaps. If you identify pay gaps that you cannot reasonably justify, correct them as soon as possible.
- Generate reports on a regular basis to review your DEI metrics.
Above all make sure you are open, honest, and transparent with all employees and candidates. With the right approach to pay transparency, you can increase trust, boost your employer brand, close gender pay gaps, and eliminate unconscious and conscious bias in salary decisions.
Happy Equal Pay Day, everybody!