Why pay transparency is confusing and how to overcome it
States like California, Washington, and New York, have introduced legislation to disclose salary ranges in job postings, which may create more questions than answers from job seekers and employees. More than 40% of young adults surveyed said companies don’t do a good job of showing salary ranges.
Consider what happened in New York when the new legislation rolled out. Some of the pay ranges disclosed were so broad that employees did not know how to make sense of them. Take the example of a compliance director job at a financial institution, where the pay range was nearly $200,000. Job seekers became confused about what the job really pays, making the pay range seem useless.
We also can’t overlook the growing Generation Z workforce that comprises about a quarter of the global workforce population and is anticipated to increase to a third in 2025. This group expects transparency and openly talks about pay among their colleagues to understand and know their worth.
Historically pay has been a secretive topic, a one-sided conversation with the employer holding all the cards. Pay is shifting from being a tool for companies to drive retention and engagement to also be a tool for employees and candidates to achieve competitive pay—it’s leveling the playing field and putting the cards on the table. It’s no longer a one-sided conversation, but a two-way dialogue, and companies are still adjusting.
In 2020, 90% of organizations reported that pay transparency would have neutral to extremely positive impact on attraction. But if posting pay ranges should create transparency and clarity, why is there so much confusion?
The issue is that many employees don’t have the context to understand how pay is determined, how pay ranges are created, and how they can expect to move through the pay range. Without this context, it will continue to be a one-sided conversation, with employees remaining bewildered and searching for answers. Visibility into pay ranges is creating a ripple effect, with broader conversations needed to help employees to understand how they should be thinking about pay.
This is a serious problem for employers to tackle. Research suggests that when wages are more transparent, employees are motivated to work harder because they have visibility into what they can potentially earn and will put the effort in to achieve it. Perception matters. Additional research shows that when employees perceive their pay to be fair, it can reduce turnover versus the opposite effect when they perceive their pay to be unfair.
If companies want to attract and retain employees and increase workforce productivity, they will need to step up their game in driving a narrative that makes the pay ranges meaningful and useful to employees and candidates.
So how can companies address this gap?
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Explain what your company defines as the “market.”Market is a term that is often used broadly, but it is actually unique to each company, and defining that market is critical in ensuring that employees and companies are speaking the same language. For example, Company A considers its market to be other manufacturing companies and targets pay at the median of their market, where Company B defines its market to be a peer group of 15 tech companies and targets pay at the 75th percentile of their market. Market doesn’t mean the same thing for Company A versus Company B. If there isn’t a common understanding of how the market is defined, the conversation can’t even begin.
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Be less secretive—share the approach and be forthright about how salary ranges are created.This doesn’t mean getting into technical compensation design jargon that will go over employee’s heads, but it’s more about sharing enough information so that an employee can feel convinced that the pay range presented is representative of the market. It needs to be logical and clear for employees to buy into how you got to these numbers. And posting too wide ranges creates ambiguity and more questions, such as if this doesn’t seem like a reasonable market range, then it’s difficult to take it seriously. The job may be less desirable to candidates if they can’t make sense of how they would fit in this range.
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Get specific about why an employee is paid where they are in the range and explain how they can progress in their pay range.What matters to employees is understanding where they are paid relative to their salary range and why. For example, explain “your salary is X because of these factors”, and then get concrete about how they can get to salary Y. What factors are considered at your company when differentiating pay and are any more heavily weighted than others? For example, such factors can include tenure, experience, performance ratings, job criticality, or high potential status.
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Know employees will do their own “sense check.”Once pay ranges are posted, companies should expect that employees will hold them accountable to how they say compensation works at their company. Employees will ask themselves, “does what I’m being paid make sense and match the narrative my company is giving me?”