Pay Transparency Laws: Act Now to Limit the Challenges, Consequences

In the U.S., 15 states and nine municipalities have passed pay transparency laws. Overseas, the European Union Pay Transparency Directive will take effect in the coming months. While the laws differ in various respects, one constant is nearly always maintained: Hiring employers must include salary ranges when posting jobs or upon the applicant’s request. The intent of these laws is to promote pay equity, countering the tendency that female or non-white candidates might have to underprice themselves relative to men and whites. (Note: A broader set of local laws precluding employers from asking about a candidate’s salary history serve a similar purpose, preventing prior pay discrepancies that might be due to discrimination from following an employee to his or her next workplace.)

However, the reality of these laws is their impact is blunted by unintended consequences. Notably, the tendency that many organizations have shown to post exceptionally broad pay ranges — to ensure compliance but not limit their discretion — can, ultimately, be associated with even larger disparities.

There are, indeed, some verified positive impacts of these laws:

• Pay equity often is seen to improve. Various studies show the gender pay gap falls following related law enactment.
• Employee productivity increases. Where the laws create greater equity, as perceived or actual, non-justified differences in pay between peers can fuel employee withdrawal behaviors.
• Visibility about the pay of “higher-ups,” noted as “vertical pay transparency,” can highlight the career opportunity offered by an organization and create greater workforce stability.

However, research also points to potential challenges. Notably, to the extent employers represent broad salary ranges:

• The tendency that women, in particular, have to represent modest salary demands can be exacerbated.
• Women are disproportionately discouraged from even applying for these positions.

Another prominent negative from research also should be considered: While equity improves with transparency laws, wages generally fall. An article in the Cornell Journal of Law and Public Policy stated, “An employer’s ‘willingness to pay for labor falls’ because information about one worker’s pay increase is disclosed to others ‘who [themselves might] use that information to renegotiate.’” The effect can be sizeable, with one study showing a reduction of 2%.

Access a bonus Workspan Daily Plus+ article on this subject:

• Don’t Risk an Infinite Range: Install ‘Good Faith’ in Pay Transparency

Given the Potential Negative Impacts, What Can and Should Employers Do?

Employers striving to achieve pay equity, ensure access to the best talent and optimize employee productivity should consider taking the following eight steps:

1. Set realistic pay ranges. While it is important to allow for sufficient flexibility to recognize differences in employee experiences and credentials, it also is critical to ensure that no employee class undervalues itself in negotiations or is discouraged from applying.
2. Ensure recruiters and hiring managers are clear about how to set pay within those ranges. Again, employee experiences and credentials should set their positions in the range. Take care not to bargain too aggressively, as such negotiations can work against women and people of color.
3. Revisit the job architecture, if needed. Setting realistic pay ranges typically requires that roles and associated compensation benchmarks are well defined.
4. Limit the potential for long-term, downward pressure on pay rates by focusing employees on their appropriate positions in the range. Experience, credentials and (after hire) performance are all reasonable factors driving pay differences and should not create undue pressure to increase pay levels for those who aren’t comparable.
5. Limit negotiation on incentives and benefits, both of which should be tied to the position as opposed to an individual. Differences in such perks can significantly amplify inequities.
6. Provide pay ranges across the broad organizational footprint, regardless of local laws, to further build trust and limit hiring practice differences. Employees should not feel as though the employer’s equity priority is linked simply to regulations, and no employee should feel exposed to the risk of inequity.
7. Conduct regular, proactive pay equity reviews. Pay equity analysis can ensure differences that occur at the point of hire are fixed in a timely fashion. Further, the analysis itself can inform recruiters and managers about the factors that matter in the organization’s pay setting, reinforcing consistency in pay decisions and supporting credible communications.
8. Continue to focus on career equity. Improvements in career or opportunity equity should be expected, in the longer run, to come from greater “vertical pay transparency” and related, leveled-out bargaining positions for all groups. Focusing on equitable access to senior roles is a critical component of a complete equity strategy.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Equitable and Diverse Workplaces
• Employee Compensation
• Organizational Performance