Making it clear

Eight states and New York City have recently implemented laws requiring some level of salary transparency in private hiring. Barbara Rau, professor of human resources at the University of Wisconsin Oshkosh, says she would stop short of describing pay transparency as a national movement, but it’s a hot issue for a variety of reasons.

“There is so much emphasis now on compensation; we know wages have been lagging for a very long time,” Rau says, adding that a thoughtful consideration of wages should emphasize equity.

But recent circumstances have muddied the waters when it comes to pay equity, according to Sharon Hulce, president and CEO of Appleton-based Employment Resource Group Inc. She says that in the wake of the post-pandemic labor shortage, employers have scrambled to fill roles and found themselves bidding high to land the talent they need.

“Job seekers, on average, were [compensated] 8 to 13% higher than people that have been on the job, the good soldiers, because that was what was needed to attract them,” explains Hulce, whose firm has invested in salary tools to help employers conduct pay equity analyses.

“The smart ones are doing something about it,” Hulce says, adding that retention problems loom for those who do not. When people find out their pay is out of alignment with colleagues, she says, they typically don’t ask for a correction. They just get angry and start hunting for a new opportunity.

Setting the tone

Rau says it’s best practice for employers to introduce the topic of salary early in the interview, if not the recruitment process, to save everyone involved time and money. But some employers that don’t have high salaries to offer may hang their hats on the belief they can win over prospects with non-financial incentives, she says. Furthermore, employers of all sizes — likely more than half nationally, according to data from the software firm PayScale — may intentionally shy away from transparency due to fear of impact on employee morale, concerns about privacy, fear of lawsuits and impact on the bottom line.

“Fair compensation systems are in some cases more expensive,” Rau says. “But we also know that fair compensation systems have some really great outcomes like lower turnover and higher productivity — so it depends on how you’re measuring the expense.”

As states and municipalities implement laws forbidding employers to request salary histories from job applicants, the days of corporate boards celebrating the concept of “hiring on the cheap” feel numbered.

“There are people who use it as a way to save money because a person is already undercompensated where they are, so they [feel] they don’t have to offer that much,” Hulce says. “That’s when it’s not fair.”

Shrinking the gap

Hulce adds that these transactions may feel like great ways for companies to save money in the near term, but they almost always result in long-term consequences — including problems with internal culture and retention. And since women are disproportionately affected by pay transparency issues, it also exacerbates the problem of the gender wage gap.

“From the research, we know women do not negotiate salaries that are comparable to their male counterparts on average,” Rau says. “The disparity over time adds two to three years to the working life of a female to retire at the same wealth level as a male.”

A 2020 PayScale study found that, in organizations committed to a transparent pay process, women earned $1.00 to $1.01 for every dollar made by men, effectively erasing the gender wage gap.

No perfect science

For all the research highlighting the pros of pay transparency, it remains a complex issue. Rau cautions that idiosyncratic methods of rewarding employees can also contribute to inequity. An employee may happen to work for a manager who is more generous and rewards employees in an ad hoc way, as opposed to through organizational HR strategy.

And many employees, Hulce says, earn more than their colleagues for good reason. A system that incentivizes outstanding performers strategically is good for business. In some cases, she adds, it could be wiser to “get creative” and reward those outstanding employees with bonuses or benefits instead of bumping their salaries.

“Even if you open up the whole ledger,” Hulce says, “it will never be a perfect science.”