We’re quickly approaching a world in which pay transparency will be the norm.
Several governments are already legislating these changes:
- In the United States, a handful of states now have laws that require employers to post salary ranges and/or ban employers from asking candidates about their salary histories.
- In the European Union, the Pay Transparency Directive, set to take effect in 2024, will give candidates the right to request information about pay levels from their employers, and it will create new gender-pay reporting responsibilities for companies with headcounts above 100.
- In Japan, companies with more than 301 employees must disclose gender pay gaps.
If your company isn’t yet impacted by such legislation, it likely will be soon.
Here’s what finance executives need to know so they can help lead their organizations through these changes.
CFOs need access to payroll data
In order to be able to provide salary information upfront to candidates and pay-gap analyses to regulators, finance executives need real-time payroll data.
This alone is a stumbling block for many international organizations, which struggle with manual payroll workflows, siloed and spreadsheet-based data management, and a lack of visibility or pay control.
Further, many businesses aren’t quite ready to reveal the details of their pay structures. That’s why a useful first step for many companies would be to conduct a pay equity audit, as Kevin MacNeill and Preston Brasch of Norton Rose Fulbright Canada write. “Employers can utilize pay equity audits to analyze and coordinate what they will need to do to shore up any pay discrepancies within their organizations.
“In addition to being the right thing to do, addressing pay inequity will help companies ensure they do not face penalties, inquiries, or public scrutiny, or that they will be ready with a plan in place to address any inequities that may exist.”
The opportunities and risks that pay transparency creates
Pay transparency regulations certainly come from a good place.
As Elaine S. Povich at Stateline reports, the combination of salary transparency and laws forbidding employers from asking applicants about historical pay helps narrow gender pay gaps.
“If companies must advertise salaries for open positions, and current employees can freely discuss pay, applicants are less likely to receive or accept lowball offers,” Povich writes. “Studies show that women and minority candidates are most likely to receive such offers.”
But implementing transparent-pay policies creates a number of challenges that businesses must anticipate:
Salaries can flatten (and sometimes fall)
This is both a benefit and a challenge. In theory, it’s good that people’s salaries converge, especially when staff are at the same level.
But this flattening has unintended consequences. As researchers Leon Lam, Bonnie Hayden Cheng, Peter Bamberger and Man-Nok Wong write at Harvard Business Review, when a company institutes a policy of pay transparency, the work of actually executing that policy falls on employees’ immediate supervisors.
“They’re the ones responsible for providing disgruntled employees with the justification for visible pay differentials and responding to their requests for raises in order to address them,” Lam et al. write.
To save themselves from tough conversations — that perhaps they feel unsupported in — those managers often nudge everyone toward the same salary number, one that’s often on the lower end of an acceptable range.
Reward negotiation takes on new dimensions
A ripple effect from salary convergence: If everyone’s salary is more or less the same, then how do high performers get rewarded?
Lam et al. write how this question can lead employees to negotiate personalized rewards with their immediate supervisors. This has the ironic effect of moving salary discussions into obscuring negotiations around total reward.
Other factors start to influence reward negotiation, too. For example: When two people do the same job but from locations with different costs of living, should publicly available salaries reflect that difference?
Writing in The Financial Times, Sophia Smith highlights two companies, Buffer and ChartHop, that say no. “[Buffer and ChartHop] have taken the position that pay is given for the value of the work rather than a reflection of physical location, and so have committed to universal pay bands,” Smith writes.
Not every company will feel this way, however, and ultimately it’s up to those companies to communicate the nuances of their transparent-pay policies.
Public salary figures can stir up resentment
Think about what motivates someone to negotiate a personalized reward structure. It could be that they feel their performance is worthier of reward than that of their colleagues.
In such cases, that’s a recipe for resentment.
“In environments where performance is difficult to precisely measure and isn’t observable to everyone, everyone believes they’re above average in terms of their contributions or performance,” university professor and consultant Todd Zenger tells Time. “Broadcasting everyone’s individual pay triggers a process of social comparison.”
The tech investments needed to make pay transparency a reality
As regulatory pressures, demands from employees and demands from candidates mount, the costs of remaining opaque about pay decisions will continue to rise.
For companies that haven’t yet taken steps to enact pay transparency policies, now is a good time to act. It will require a tech investment to create the processes and infrastructure necessary to be transparent about pay decisions, but those investments today will look like a bargain compared to the costs of noncompliance in the coming months and years.
The first step toward meeting compliance is with a global payroll tool that can provide granular insight and localized reporting If your organization has a cloud-based global payroll control platform with detailed reporting, you can drill down into payroll data and generate specific reports that can be filtered via employee, job title and specific pay data elements.
How to lead a move toward greater pay transparency
Most organizations already have a compensation strategy in place. This is how HR determines how work gets remunerated.
If your organization doesn’t have a clear strategy for defining how people get paid for each role, then SHRM’s guide to establishing salary ranges and NetSuite’s guide to salary benchmarking are excellent places to start.
Becoming transparent means revealing aspects of those strategies to employees, applicants, regulators and other stakeholders. It also means managing how that information gets revealed.
It’s worth looking at examples of how other organizations explain their pay policies. The public sector is a good place to start. For example, UNESCO’s staff compensation booklet describes how compensation is calculated based on a base salary plus adjustments. The EU has a similar document for its staff.
Or, take a look at how private-sector organizations like the software company Buffer make their salary information transparent. Caryn Hubbard, who was the company’s VP of finance until 2022 and is now CFO at Curaytor, outlined Buffer’s policy in 2021:
- Buffer uses external data to benchmark pay for each role based on what someone in the 50th percentile in San Francisco would get paid.
- It multiplies that number by a cost-of-living factor (100 percent for people in expensive cities like New York or San Francisco, down to 75 percent for people in lower-cost-of-living cities like Bangalore or Wroclaw).
Whatever your compensation strategy, communicate it clearly — not just to employees and potential candidates, but to the managers who have to enforce the policy.
“Make sure that the company's managers and human resources staff have the resources they need to answer tough questions from employees, as well as applicants,” attorneys Mark Goldstein and Mariah McGrogan write.
“Ensuring that managers understand how compensation decisions are made at the company can help address tensions within your current staff. Many employers should consider whether additional training is needed to prepare managers to have these discussions.”
Finally, ensure total reward structures leave room to recognize ambitious employees. As Lam et al. write, formalizing non-monetary rewards into these structures preempts any attempts by employees to negotiate personalized bonuses or individual privilege.
Before you calculate cost-of-living modifiers or revise your total reward structures, you need reliable, real-time global payroll data. We built the Payslip platform to deliver this level of detailed reporting. Payslip Global Reporter gives finance leaders the tools to run detailed, comprehensive reports on things like payroll costs, payroll trends and payroll variances across countries.
To learn more, book a platform tour today.