How to Turn Pay Secrecy Obstacles Into Pay Transparency Opportunities

I’ve been thinking about the impact of snap decisions a lot lately. Having just finished the book Blink by Malcolm Gladwell, I have a new interest in the role of the subconscious on action and performance. Gladwell presents mounds of evidence supporting the idea that instinct shouldn’t be discounted relative to more involved decision-making processes. Essentially, gut counts for something.

Just as recently, I learned about the passage of a new employment law in the state of Massachusetts that bans employers from inquiring about an applicant’s salary history prior to offering the individual a job. It is slated to be effective in July of 2018. The intent behind the law is to prevent future pay inequity obstacles for women and minorities, as it makes it impossible for an applicant’s prior history (of being potentially underpaid) to follow them around to future employers. It gave me pause because while, especially as a female with a recruiting/HR background, I have never consciously been a part of a decision to underpay a new hire, what if my peers and I have unintentionally perpetuated pay inequity simply because I’ve been privy to applicants’ salary history in the past? How many times have you had two great final candidates with similar experience, but chose the one that had a history of making less money at previous employers because you could get a great deal on talent?

Reconciling Individual Rights & Employer Interests

It’s an interesting topic because as an HR professional you must act on behalf of the best interests of your employer. Those interests should include what is best for the employer in the long run; not just the short term benefits of a metaphorical fire sale on talent. Massachusetts isn’t alone, as other states have passed similar laws and proposed similar legislation aimed at promoting pay transparency in general. Many hope that these state-championed movements will lend more support to federal action to pass the Paycheck Fairness Act which, in part, makes it illegal for employers to prohibit employees from disclosing their wages to other employees or retaliate against them for doing so. The inability for employees to freely discuss pay information with one another has arguably prevented some individuals from taking advantage of federal protections available under the Equal Pay Act of 1963 and the Lily Ledbetter Fair Pay Act of 2009 in the past.

This practice of pay secrecy has undoubtedly perpetuated the pay inequity that exists in our country today. According to this Huffington Post article by key representatives of the EEOC:

“Today, 57 percent of women work outside the home, but the typical woman working full-time full-year still makes 21 percent less than the typical man working full-time full-year. And the pay gap is significantly greater for women of color: the typical black non-Hispanic woman made only 60 percent of a typical white non-Hispanic man’s earnings, while the typical Hispanic woman earned only 55 percent.”

Working to Minimize Pay Inequity

Despite the aggregate inequity that exists in pay practices today, there are changes being made that aim to minimize the pay gap:

The OFCCP prevents federal contractors from discharging or discriminating against employees who inquire about, discuss or disclose pay with a few exceptions.
The National Labor Relations Board has ruled that companies can’t bar workers from discussing their pay.
Union members tend to have a smaller pay gap relative to non-union employees simply because the culture of unions includes a focus on pay transparency.
The EEOC announced a proposed revision to the EEO-1 report (applicable to employers with 100+ employees), effective September ‘17, that incorporates a new data requirement of including pay ranges and hours worked for individuals.

And while eliminating instances of pay inequity is the right direction in which to head, it doesn’t come without short-term hardship for some employers. Moving from a pay secrecy mindset where the employer often traditionally came out on top, to a pay transparency mode which stands to expose some unsavory disparities, is challenging. However, if organizations approach the process with not only economic and compliance pressure as the motivation, but also a motivation to fulfill a yet unlocked potential in its employees with new opportunities, the process will run more smoothly and be much more sustainable.

In fact, let’s examine some of the obstacles this transition could present to organizations, and reframe each of them to suggest an opportunity that will benefit the employer in the long-term.

Obstacle #1 – Compliance burden for multi-state employers

Organizations that have employees in more than one state should be aware of how the law differs across their covered geographic areas. For example, if a company has a plant in Massachusetts then it will have to adjust its existing employment application to ensure that it no longer asks applicants for salary history from previous employers. However, if the same organization has a distribution facility in another state, the same requirement regarding pay history may not apply.

Opportunity – Efficiency through technology

While managing differences between states can be onerous, organizations have an opportunity to embrace an attitude that supports pay equity by adopting the requirements imposed by the strictest state/city in their employment realm for all of their locations. Alternatively, to ease the administrative burden, an employer may partner with an applicant tracking system that allows the employer access to multiple versions of an online job application which can be implemented at the job listing level.

Obstacle #2 – Time & money required to get better market pay data

In terms of both the money required to pay fees for compensation software, as well as the investment of time in mining the data to incorporate it into internal pay decisions, being more transparent about pay requires an employer to be solid in how it determines the going rate for different positions.

Opportunity – Develop pay grades that reflect current market pay, among other factors

While creating accurate pay grades isn’t something you whip up in a week, it is an exercise that can be motivating for employees in that it conveys potential to them for growth through a job category and/or into other management positions. Additionally, it gives organizations that may be reluctant to disclose individual pay an opportunity to at least convey ranges of information for each role so that individuals better understand where they stand with regards to their runway for future earnings. It helps your organization more effectively compete for talent by ensuring that you regularly evaluate the system to ensure it is still reflective of market pay.

Obstacle #3 – Training staff to have the right expectations about pay differences

When moving away from a culture of pay secrecy, organizations open themselves up to the new-found need to better explain differences in pay across job categories. While much of this may be attributed to market demand for various position types, depending on the organization, a fair amount of internal equity among positions may factor into the organization’s overall valuation for each role. Without a clear purpose or mission, as well as defined values, explaining the motivation for different internal equity factors may be more challenging.

Opportunity – Evaluate the impact of internal equity & reward the most critical players disproportionately

A shift toward the pay transparency side of the spectrum necessitates more work spent on defining the factors that determine individual pay decisions, and especially starting pay for new employees. Use this as an opportunity to explore whether certain job categories merit paying above market based on a potentially disproportionate impact of the department’s work on the organization’s mission/productivity. Additionally, use this exercise as an opportunity to train hiring managers on how to confidently and correctly explain the pay factors to individuals employed with the organization.

The tech company, Buffer, has taken this to one extreme by incorporating a compensation calculator available for public use on their corporate website and publishing the salaries of all of its employees. While this approach isn’t for every corporation, it was an important move for Buffer since one of its core values is to default to transparency. But think about the opportunity this has brought the organization, including the chance for managers to not only explicitly explain pay factors to employees, but to blog about it publicly and contribute to the media exposure that has arguably made Buffer one of the darlings of the corporate culture world. For a less extreme approach, consider the company PayScale, which falls closer to the mid-section of the pay transparency spectrum. It doesn’t share every employee’s individual salary, but rather shares the median salary for each job category.

Obstacle #4 – The cost to increase pay for underpaid employees

For employers who are willing to take the proactive plunge toward being more open about pay differences, the cost to actually correct inequity can’t be discounted. So how do you make the most of that exposure and turn a vulnerability into a positive?

Opportunity – Communicate the action taken as a result of the lesson learned

Nobody loves being wrong or having their error paraded about town; however, there’s something to be said for the credibility and goodwill gained from admitting one’s mistake and taking action to ensure that it doesn’t happen again. Take tech software giant, Salesforce, for example. CEO Marc Benioff was approached by two female employees about exploring potential pay gaps between employees of different genders. He didn’t expect to find an issue, but conducted an internal audit that would later find six percent of employees needed a salary adjustment. So, the organization spent three million dollars to eliminate statistically significant differences in pay. While it did cost the company money that probably wasn’t forecasted for that period, it has brought tremendously positive attention because the organization has been so open about it with employees, and has leveraged its actions with media exposure that will undoubtedly help it attract top, diverse talent down the road.

Obstacle #5 – It’s just uncomfortable to talk about potential pay differences

Cultural norms may suggest that it’s taboo to talk about what people make, and especially difficult if there’s an unfair disparity between what people who do similar work make. So even if employment law continues to progress to the point that encouraging pay secrecy is completely prohibited, employers and employees may be slow to embrace the concept of openness.

Opportunity – Focus on the “why” behind the transition

Different organizations will adopt varying degrees of transparency when it comes to compensation. While full disclosure may work for companies like Buffer and Whole Foods, a more conservative approach, like disclosing only the factors that contribute to pay decisions, may be more appropriate for others. The common denominator for success, regardless of the approach, seems to be process transparency, or a focus on the “why” according to this Fortune article.

By frequently discussing the reasons behind decisions, the motivation for employees to understand and engage with them improves. Conscientious communication around how pay decisions will help reduce long-term turnover, minimize office politics and support core values (especially if they relate to fairness, trust, respect) is an essential component of a smooth transition toward pay transparency.

In addition to the opportunities presented above, employers can capitalize on a commitment to improve communication about pay decisions by emphasizing employees’ total compensation packages. Whereas some organizations may not choose to pay at or above market for salaries for various roles, the relevancy and strength of their benefit offerings may serve as an effective counterbalance. It will be interesting to watch employment law in this area in the coming years, and especially after this year’s presidential election comes to a close.