Salary transparency is on the move, but it’s multi-faceted and not everyone is convinced of its merits. But the evidence is there to support it and, with any luck, the Government pilot announced on International Women’s Day is just the beginning.
What is salary transparency?
When you applied for your current job, did you know what your salary would be? Do you know how much your boss makes? Do you know how the salary of your co-workers is calculated? These might seem personal questions, but they are all pieces of the salary transparency game, and if you don’t know the answers now, you may be able to soon.
Salary transparency is the practice of being open about how much people are paid. What precisely it entails depends on where an organisation sits on the transparency continuum. At the more basic end is including salary information on a job advertisement, with greater levels extending to publishing individual salaries of all employees on a public forum. Pay transparency can also exist through methods such as pay gap reporting, establishing pay scales, allowing employees to request compensation details of an equivalent role and explaining how salaries are calculated. In all its formats, there is a belief that salary transparency can help to reduce internal pay gaps. For that reason, on 8th of March, Minister for Women Baroness Stedman-Scott announced a voluntary pilot to put transparency into practice. Companies who sign up will commit to posting salaries on their job advertisements and will stop asking applicants about their salary history. The pilot will also include government assistance in developing salary scales within an organisation, so that they do not rely on applicants’ previous salary as a guide of what to pay them next.
Are any other governments promoting pay transparency?
While the UK pilot is entirely voluntary, some jurisdictions have taken a stronger stance and started to legislate for mandatory salary transparency, often with the aim of reducing gender and ethnicity pay gaps. The EU is considering a directive which would require employers to either post the salary (or salary range) on the job vacancy notice, or disclose it early in the interview process as well as prohibiting questions about salary history. Other measures include creating a right for employees to ask about their pay level and average pay levels in the company. While some of these measures already exist in some member states, adoption of the directive would make these measures mandatory across the union. In New York City, the city council has approved legislation that means from November this year, any company with more than four employees will have to list the salary range for the role on the job vacancy. A number of other cities and states across in the US have current or incoming transparency laws of some description, or are considering their introduction.
Does this type of transparency work?
While research on the subject is still limited, the existing evidence suggests that transparency in general does reduce the gender pay gap. A recent study looking at the effect of Canadian salary disclosure laws on university salaries found that the laws can reduce the gender pay gap by 20-40%. In some countries gender pay gap reporting must be accompanied by an action plan on how the company plans to address the gap. Requiring salary information on job postings is relatively new legislation, however prior research into behaviour of job applicants provides promising indicators that even small transparency efforts can help to reduce pay gaps. An experiment which looked at the behaviour of over 2 million job seekers found that when seekers have more information about a role the search cost is lower and search effort increases. Additionally, analysis of information networks has suggested that greater transparency also means that applicants do not have to rely on their own networks for salary or role information, which broadens opportunities for those who may not have a personal network connecting them to a role. This is especially important when it comes to women or ethnic minorities breaking into a space which is traditionally male or White-dominated. When asked by the online employment agency Reed, employers reported that advertisements which include a salary or salary range receive more relevant applications. However, the data is less clear on whether the increase in applications directly translates to differences in numbers of women invited to interview and subsequently hired.
When women are interviewed and hired, listing salary information can help to tackle pay inequality from the start of a role and prevent wage inequality from compounding over the course of a career. Women tend to be less comfortable in salary negotiations than male counterparts and as such, their salaries can suffer from a negotiation gap. This can have long-lasting effects on future salaries, as some workers who start off underpaid never catch up to their fairly paid peers, and the pay gap continues. That said, a trial using genuine job seekers found that this gap essentially disappears when women are explicitly told of the option to negotiate. Providing a salary or a salary scale gives a foundation from which negotiation can more easily begin.
Anecdotal evidence from companies who have opted for policies of pay transparency have seen the positive effects indicated in experiments and trials. After publishing salaries Buffer found that there was an increase in the number and quality of applications they received, and have a 94% retention rate on staff. Similarly low turnover rates have been found at SumAll, where increased collaboration and greater productivity has followed greater transparency. In the UK GrantTree have been transparent about pay since their founding in 2010, tech firm Verve has found that pay transparency has helped them maintain a diverse workforce of 50% women and has streamlined their hiring process. Since 2018, publishers Hachette UK have been adding to their salary transparency measures and in that time have seen a 28% reduction in their gender pay gap. Reducing the pay gap is not only beneficial from an equality perspective but it also makes a difference to the bottom line; customers value pay equality and are less likely to buy a product from a company with a larger pay gap, rewarding instead those with a smaller gap.
What about risks?
Some employers are wary of publishing salaries for fear of causing upset among current employees, or driving them to seek a better compensation package elsewhere. There are also concerns that full salary transparency could demotivate employees who earn less and affect their performance.
Rather than being a cause for concern, in these instances, salary transparency can actually help. While feeling underpaid can be a cause of low morale and affect work performance, many employees that feel underpaid overestimate what their co-workers earn. Revealing salaries can show that they are on a much more similar wage to co-workers than they may have expected. There can of course still be stark differences in who is paid what. When an experiment at the University in California provided randomly chosen staff with a link to published details of their co-workers pay (with no information on pay calculation) lower-paid employees were found to be less satisfied and may consider looking for work elsewhere. However, when a similar experiment was conducted in a German firm, it found that when information on wages is included alongside productivity metrics, there can actually be an increase in productivity. Combined with salary scales, understanding how salaries are calculated is an important reference point for employees to relate how their work equates to wages. Providing objective criteria can be especially helpful where factors such as productivity are more difficult to quantify. They could help in explaining why a colleague in the same role may earn more, as well as showing why such an earnings gap may not be at all justified, and could be used to argue for a pay rise. Providing this information on how performance is assessed and pay is calculated is advocated for, even by those who do not favour disclosing actual salaries.
What should the UK do?
The pilot is a welcome step towards pay transparency and tackling the gender pay gap in the UK, but it is small step, a starting point rather than a destination. If the Government truly wants to address pay gap issues, transparency will need to move beyond this minimum level. Current employees also deserve to know if they are being paid fairly and would benefit from internal transparency and the ability to see if their salary compares equally to their counterparts. Salary scales as used in many parts of the public sector could go some way to addressing this but as use of salary scales are not universal, an enforceable “Right to Know” act, as suggested by the Fawcett Society, would facilitate this. While the Equal Pay (Information and Claims) Bill sponsored by Stella Creasy MP would have included this provision, since it did not make its way through Parliament before the end of the 2019-21 session, it never came to pass.
For now though, I want to know what is next, what the plan is for after the pilot has finished. While the pilot itself is voluntary, we do not know how many companies have decided to participate and how long they themselves plan to run the pilot for. I believe that government should announce a clear cut-off date for voluntary participation, with the potential for mandatory participation for companies over a certain size (say 250, to match those with mandatory GPG reporting) if not enough companies sign up to the pilot. I also think participating employers should be asked to report on whether including salaries effects application rates and the demographics. Doing so will be a valuable addition to data on the effects of transparency, and could bolster the argument for making inclusion of salary information on job advertisements mandatory.
There is also a question for ESG investors on how committed they are to the “social” part of their mission. Investors should be asking themselves if their interest in executive pay ought not to also extend to questions of pay transparency across company levels. In dedication to their ESG mission, we would expect investors to be interested in fair and equal pay. As pay transparency and pay equality is a social issue that is gaining more traction, perhaps these factors should be taken in to account of an organisation’s ESG rating.
With pay transparency apparently back on the agenda, we can only hope that the Government is considering more ambitious measures like these ones, which can help make a bigger dent in the gender pay gap.