Quick: Name three reasons companies should keep compensation information hidden from their employees.
Perhaps you came up with the reason that keeping such information private is safer. Or that employees will be able to demand higher levels of pay, or that companies won’t be able to explain why some people are paid so much more than others.
There are many reasons why companies might want to keep pay hidden. But what if companies have to make pay transparent? What should they do then? And how much should they be worried about the outcome?
The reality is that pay information is becoming more visible. This is driven, in part, by employees having access to salary information from sites like Glassdoor and Indeed. Many countries are also enacting regulations forcing pay transparency. But, most importantly of all, employees are increasingly expecting to have this information available to them. In a recent survey of HR, business and IT leaders from SAP customer organizations, “transparency around compensation processes” was rated as the one of the three most relevant challenges facing companies today. Fifty-eight percent of companies report planning to become more transparent than in the past, yet only 24 percent of employees agree that pay processes are transparent where they work.
It can be challenging to increase transparency around a topic that has historically and intentionally been kept very private. But is the anxiety and fear people have about sharing pay information justified? Are organizations’ fears about the risks of transparency founded? Not necessarily, research suggests.
Here are three common myths about pay transparency — and the reasons organizations should embrace it rather than fear it.
Reality: Learning that you are paid less than a colleague could certainly be cause for concern — particularly with mounting evidence suggesting that members of underrepresented groups may get paid less simply for being part of those groups. However, most employees are willing to accept the fact that not everyone will be paid the same as long as they understand the reasons why. Psychological research has shown that employees understanding how salaries are determined and believing that process is fair is more important to job satisfaction and trust in management than is the actual level of those salaries. Some studies have also found that job satisfaction actually tends to be higher when pay distribution is wider, and that being aware of others’ higher earnings provides information about employees’ own future prospects that can serve to outweigh any jealousy they might feel toward their colleagues. As one employee interviewed as part of our research study on next-generation compensation said, “I understand a number of factors go into compensation. I know I won’t be paid the same as everyone else. But it’s important to me that the same process in arriving to that number is applied to everyone.”
Increasing transparency can actually increase employee motivation provided that companies explain to employees, in a clear and thorough manner, how pay decisions that affect their lives are made, who in the organization is responsible for making these decisions, the criteria that is used to guide these decisions and how they can positively influence the outcome of these decisions in the future. This, of course, assumes that pay decisions are actually made in a fair, rational and consistent manner. If that is not the case, pay transparency may be the least of your company’s problems.
Reality: People tend not to be good at judging whether they are paid fairly compared with others. One study found that 64 percent of employees who were paid at market and 35 percent of people who were paid above market actually believed they were paid below market value. These inaccurate beliefs can result in employees feeling frustrated, demotivated and even lead to unnecessary turnover. Companies may assume that, if they pay below market value, bringing attention to this fact could only be to their disadvantage. But research has shown that the overwhelming majority (82 percent) of employees would still feel satisfied with their pay even if their employer paid lower than the market average for a position, so long as they understood the rationale behind this lower pay. As one compensation professional said, “So much of pay is about perception. An employee could be getting really great pay, but if they don’t believe that, it doesn’t really work.” Remember, it’s not knowing that they are paid less than others that frustrates employees. It’s not understanding why they are paid less that matters most.
Reality: Even when the outcomes of pay decisions are positive, employees want and expect decisions to be explained to them in an appropriate and timely manner. Several employees interviewed as part of this research study reported feeling frustrated when managers failed to inform them of a decision or the rationale behind that decision. As one employee described, “We’re blind [in terms of compensation decisions]. When it comes to bonuses or raises, the supervisors and managers in my organization are the ones responsible for communicating that. They don’t do it well. It’s very vague. I found out the day they were handing out the check, ‘Hey, here’s a bonus.’”
More pay does not necessarily mean more satisfaction. Employees must understand the processes and reasons behind pay decisions. In fact, research has shown that increasing the transparency and fairness associated with pay processes was 65 percent more effective at reducing employee turnover intentions than was paying employees more relative to the market. But having good conversations about pay is easier said than done. Ensuring that managers know how to communicate pay decisions in a sensitive and appropriate manner should be a primary component of manager compensation training.
In a recent article about pay transparency, Brian Kropp for Gartner/CEB said, “Executives wondering whether they should become more transparent about pay are already behind the curve.” It’s true: Pay transparency is already here, and will only increase in the future. So, rather than wait in fear of what might happen by letting employees “see behind the curtain,” organizations should embrace pay transparency and the advantages it offers.
Lauren Bidwell, Ph.D., is a research scientist at Human Capital Management Research at SAP SuccessFactors.