How Compensation Leaders Can Seize the Pay Transparency Opportunity

The Colorado Equal Pay for Equal Work Act, which went into effect at the beginning of the year, mandated publication of pay ranges for new openings for all job positions in the state, including remote positions.

Similar legislation in New York City was due to go into effect in April but has been delayed until November. Many other states, including California, Connecticut, Maryland, New Jersey, Rhode Island, and Washington, along with several municipalities, have passed legislation that mandates disclosure of pay ranges either automatically or upon request from applicants or current employees. The trend is not restricted to the United States. In April, the EU Parliament passed a directive to negotiate with member countries to enact pay transparency legislation.

There is some debate on the effectiveness of transparency laws to close the gender pay gap, but that is a topic for a different article. Instead, let’s focus on the impact to compensation professionals in an environment where all employees have access to the pay ranges for their job, other jobs within their organization and jobs available outside of their organization. This is a radical shift for information that has largely been a closely guarded secret.

So far, my impression has been that the compensation community is largely ignoring the implications of this seemingly inevitable shift. Possibly to avoid publishing ranges, over 200 companies have excluded Colorado residents in their remote job postings.

In a recent discussion on the impending NYC law going into effect, an NYC employer told me that they “would be compliant with all laws, but we don’t intend to publish all of our ranges openly.” However, their employees, and employees at many other organizations, may do the legwork to publish something on their own.

It’s clear that younger employees view the sharing of salary information much differently from their older colleagues, and most legislation protects them from recrimination for sharing. All organizations must be prepared for salary structures and practices to be far more transparent, and this transparency is happening faster than most are ready for.

Pay transparency comes with some unique challenges for compensation professionals. Few organizations have achieved their aspirations in terms of their position relative to market or their internal consistency on the appropriate pay for each employee’s role and contribution. Many have pay ranges that won’t withstand scrutiny — one compensation professional shared with me they have a range for one position from $100,000 to $250,000. Try to explain that when ranges are published. Many senior leaders rose to their position in an environment where pay was quite secretive, and they are resistant to changes that the compensation team wishes to make.

Despite the challenges, pay transparency represents a wonderful opportunity for compensation professionals to increase their impact on their organization’s culture, performance, and results.

Most employees feel they are underpaid, but a study from Salary.com found that 73% of organizations believe they pay their employees fairly. Closing this perception gap can reduce turnover, increase employee engagement and create incentives for employee development.

At compensation review time, instead of managers saying, “I wanted to pay you more, but HR wouldn’t let me,” we can drive the discussion toward “I want to pay you more — here’s how you can develop skills, increase your impact and reap the rewards.”

So, how can compensation leaders take advantage of pay transparency? It comes down to driving progress along seven vectors.

Strategy

Is your compensation strategy clearly stated and committed to by senior leadership? Do you know where you want to pay relative to market, and why? How much pay is fixed versus variable and why? For variable pay, which are the parameters to guide higher or lower payouts, and do they create the right incentives for organizational performance?

How much do you want to differentiate pay for different levels of performance? How will you pay remote workers with different local cost of labor rates in the same position? If the answers to these questions are not clear, or the answers differ based on the view of different leaders, it will be very difficult to thrive in a transparent environment.

Structure

Do you have a job architecture that fits the needs of the organization? Are career ladders formalized, with a job leveling approach that fosters internal mobility between functions? Most large organizations have well developed structures, but mid-sized organizations are often behind in defining job roles with enough specificity to guide compensation.

Data

Do you have a regular process to access high quality benchmarking data and normalize the market data to your internal job roles? Too many organizations view benchmarking as a periodic project, rather than an ongoing process. Sourcing the best data for each labor market you’re in, and keeping it constantly updated will be more critical than ever as we grapple simultaneously with inflationary pressure and growth challenges.

Flexibility

How much does your pay strategy support personalization? Can you optimize the mix of base pay, short-term incentives and long-term incentives for different employees in the same position based on what motivates them? A one-size-fits-all compensation and benefits package will cost more and deliver less optimal results than one that treats each employee as an individual.

Managers

How much are first-level managers involved in compensation decisions for their direct reports? Do you share market and internal ranges, guidelines driven by a robust merit matrix and budget parameters to empower managers to make tradeoffs for their team? Are your managers exposed to analytics indicating gender or racial bias?

We all know that a key driver of retention is the manager-employee relationship. If a manager has no agency in the compensation decision, it will be much harder for that manager to explain it in the context of an employee’s contributions. I hear from many compensation professionals that they lack faith in the ability of their managers to engage in the compensation process. The reality is that managers are involved and it’s critical they are equipped and empowered to participate in and communicate compensation decisions.

Communication

Communication is without question the highest priority and biggest gap for compensation professionals. All the elements listed above require robust communication strategies, because it is almost worthless to make good decisions based on a sound strategy and good data if the results are perceived as arbitrary or unfair.

I often hear that employees will never believe they are paid enough, but one thing is certain: If an organization can’t or doesn’t explain how and why an employee’s compensation was determined, the employee will not assume that it was fairly driven by their skills and contributions. Even if your story is less than ideal, consistent and open communication is better than leaving a void to be fueled by speculation.

Transparency isn’t just about the what (whether that’s pay ranges or other data), it’s about the how and why.

Systems and Tools

Many very large organizations have sophisticated tools to drive the compensation review process, but it’s shocking how many mid-sized organizations continue to use spreadsheets or similarly limited and clumsy tools to make compensation decisions.

Payroll represents 30% or more of most organizations’ total expenses, and it increases by approximately 3% annually. Few other financial decisions this large are made with less precision than a traditional compensation review. One reason for this is that the most sophisticated tools can be expensive, complex and difficult to implement. Modern tools, like compensation planning software, are far more suited for the mid-market. Organizations should ensure their tools integrate all the data required to make a good compensation decision at an individual level for each employee.

They should foster collaboration between the compensation team, HR business partners, managers, and leadership. They should easily highlight potential inequities — within teams, within functions, within the market and of course within different gender or racial groupings. Potential bias or inequity should be flagged throughout the process, not just at the end. Finally, systems should make it easy to communicate both the “what” and “why” of compensation decisions.

Of the many compensation professionals I’ve met, all are tirelessly working to ensure their employees are paid fairly, and their organizations acquire and retain the best talent to create outstanding results. Too often, their efforts have been subject to an unfair level of skepticism by employees, managers, and leadership.

While the trend toward mandatory pay transparency represents a significant challenge, it will also bring the efforts and results of compensation teams fully out of the shadows. Transparency will hopefully address longstanding issues of gender and racial bias, and it will also foster more realistic expectations and equitable pay for all employees.

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