Compensation

Debunking 3 Myths About Compensation Transparency

Compensation transparency has become a hot topic in recent years, and for good reason. Employees want more transparency around how — and how much — they’re paid. According to Lattice’s recent compensation survey, which surveyed over 3,000 US- and UK-based workers, the majority of employees (67% in the US and 64% in the UK) want more transparency from their companies when it comes to pay practices.

But compensation transparency is a complex issue, and there are a lot of misconceptions about what it is, how to implement it, and how it impacts teams and organizations. Below, we’ll take a closer look at compensation transparency, its benefits, and some of the most common misconceptions you need to know (and avoid) to ensure your approach to compensation transparency has a positive impact on your organization.

Compensation transparency provides employees with insights into how your organization approaches compensation — insights many feel that they’re lacking.

What Is Compensation Transparency?

“[Compensation transparency, or] pay transparency is a term that describes a company’s policy of providing salary information for each position,” said Bryan J. Driscoll, JD, a lawyer and HR consultant.

In addition to providing transparency into compensation structures within an organization, “compensation transparency [also offers] insight into how an employee’s compensation is determined,” explained Aaron Olman, cofounder of HR consultancy People On Point — for example, what metrics or goals the company uses to determine the compensation for each role.

Compensation transparency is about not only giving your employees information regarding compensation structures within your organization, but also about how those structures are set. Depending on an organization’s level of compensation transparency, the company may choose to be fully transparent, giving all employees access to all salary information, or offer more limited transparency, like giving employees access to the salary range for their specific role, for instance.

Compensation transparency provides employees with insights into how your organization approaches compensation — insights many feel that they’re lacking. According to Lattice’s compensation survey, more than 30% of US employees said they didn’t understand how the decision-making around promotions and raises worked at their company.

“It is important for employees to understand the basic principles of their company’s compensation philosophy and the process [involved in] meeting that overall philosophy,” Olman said. “What is the company’s goal? Is it to pay employees at market, or to be a market leader? How does the company ensure they are reaching their goal [regarding compensation]? These should be questions an average employee should be able to answer.”

Knowing their company’s approach to compensation can also help employees better understand their own compensation packages and why they’re paid the way they are. “Transparency is not only understanding what the company’s strategy and philosophy is, but how their individual compensation is determined,” said Olman. “Is it based solely on market [rate]? Or does it consider experience, skill level, performance, or even tenure?” 

Benefits of Compensation Transparency

Compensation transparency is beneficial to employees because it allows them to better understand why their current compensation is structured the way it is, and gives them clear information about if and how they can increase their pay.

“If [employees] do not like where their compensation is, then they know the steps to take in order to increase their compensation,” Olman noted.

Since compensation transparency sets clear expectations for employees around future income potential, it can aid in their career planning. “Transparency allows employees to better understand their current and desired salaries as they advance their careers,” said Diane Dooley, Chief Human Resources Officer at World Insurance, where she oversees compensation and payroll for both corporate employees and external employees at more than 145 insurance agencies. “Employees who [want] to earn higher wages may be able to make early career decisions if they understand the salary component to their roles.”

Finally, compensation transparency can benefit employees who are historically paid less than their counterparts, like women, people of color, and other marginalized groups. “Knowing where they fall in their pay [grade] — and what everyone else’s pay [grade] is — lets them know they’re being paid fairly and without discrimination,” Driscoll said.

And if certain people or groups are not being paid fairly, compensation transparency gives them the data they need to advocate for higher salaries. “With a greater understanding of pay disparities, employees can advocate for themselves and each other to ensure that everyone is being fairly compensated for their work,” said Jennifer Hartman, a Human Resources professional and HR staff writer for small business resource Fit Small Business.

But compensation transparency doesn’t just benefit employees; it also benefits organizations.

“[Compensation transparency can help] employees trust their employers,” Driscoll pointed out. ”This serves as a benefit to the company, increasing employee engagement and productivity.”

Many people are under the impression that compensation transparency is strictly about making all pay rates and salaries public. But it’s more than that.

3 Common Misconceptions About Compensation Transparency

Compensation transparency can offer significant benefits, both from an employee and an organizational perspective. But it’s a complex issue, and in order to make the right decisions around compensation transparency — both for your organization and your employees — it’s crucial to understand some misconceptions. Here are a few of the most common:

1. Compensation transparency is right for all organizations.

While compensation transparency can be beneficial, that doesn’t mean that it’s 100% beneficial, 100% of the time. There are situations where compensation transparency — or, at the very least, total compensation transparency — is not the right move.

“Embracing full compensation transparency for every company is not sustainable — and could negatively impact morale and employee engagement,” Dooley cautioned.

For example, if you recognize that there are some discrepancies in salary ranges at your organization, but haven’t yet developed a strategy to address those discrepancies, compensation transparency might do more immediate harm than good. Instead, you might consider working toward more equitable pay for your employees before you release salary information; otherwise, you might find yourself with some (justifiably) upset employees, which could lead to issues with employee engagement and retention.

2. Compensation transparency is strictly about making pay rates and salary ranges public.

Many people are under the impression that compensation transparency is strictly about making all pay rates and salaries public. But it’s more than that.

The truth is, there’s a range when it comes to compensation transparency. In an article in First Round Review, a business website and resource for startups, bethanye McKinney Blount, founder of compensation platform Compaas, said that compensation transparency occurs on a spectrum. 

According to the article, on one end of the spectrum is the most opaque approach to compensation, where “pay is secretive and flexible.” On the other end of the spectrum is complete compensation transparency, where every employee knows exactly how much every other employee at the company makes.

But, McKinney Blount said, there are plenty of ways to approach compensation transparency that fall between those two extremes, including:

  • Giving employees information about the salary range for their own level/role
  • Giving employees information about salary ranges for the level/role above them
  • Giving employees information about salary ranges for all levels in the organization

Furthermore, embracing more compensation transparency may not involve making pay rates or salary information public at all. For example, your organization might move toward offering more transparency into your processes for determining compensation, instead of offering more transparency into the numbers themselves.

“If a company is on the fence about whether to provide pay transparency, it’s important to remember that it’s not an all-or-nothing thing,” Driscoll noted. You don’t have to publish every pay grade and salary range in order to create more transparency within your company. Instead, you can evaluate what level of transparency would be the best fit for your organization, and then act accordingly.

3. Compensation transparency will lead to conflict with employees.

Another misconception about compensation transparency is that it will lead to conflict with employees, and that when they get more insights into how and how much they’re paid — particularly in comparison to their peers — things might get heated. And while that certainly could be true, it doesn’t have to be.

For instance, managers might worry that employees will see what their peers make and feel like their own compensation is lacking, leading to hurt feelings and disengagement. But if your approach to compensation transparency includes clarity around not only what people make, but why (for example, tenure and market value), and how to make the jump to a higher compensation level (e.g., by hitting certain benchmarks or getting a specific certification), that added clarity can actually eliminate the need for awkward or uncomfortable conversations around compensation; employees will understand how their pay is determined with objective criteria, and exactly what they need to do to get to a higher compensation level.

Instead of leading to more difficult conversations with employees, compensation transparency “can help employees feel more fairly compensated, improve work relationships, and increase employee engagement,” said Hartman — all of which leads to less conflict.

How to Create a Compensation Transparency Strategy That Works for Your Organization and Employees

Here are some best practices for creating a strategy around compensation transparency that benefits both your employees and your organization.

1. Define what you want to achieve through your compensation transparency strategy.

Compensation transparency in and of itself isn’t going to accomplish much. If you want your strategy to benefit both your organization and your employees, you need to define exactly what you’re trying to accomplish through compensation transparency.

In the First Round Review article, McKinney Blount said that compensation transparency typically exists to further one of four objectives: recruiting, retention, branding, or compliance. Before you start crafting your strategy, you’ll want to define which objective (or objectives) you’re aiming to serve, as that will give you key insights into how to proceed.

For example, are you looking to leverage compensation transparency to improve your recruiting efforts and attract more top talent to your company? Then part of your strategy might involve including salary ranges in your job descriptions. On the other hand, if your main goal with compensation transparency is compliance, then you’ll want to do your research around what you need to do to comply with any applicable pay transparency laws. (At the time of writing, 17 states in the US have started to roll out such laws, and the UK has been considering following suit.) 

You can’t build a strategy around compensation transparency if you don’t know what you’re trying to accomplish, so take the time to define your goals from the get-go.

2. Assess your company’s readiness for compensation transparency.

Another important element of creating and implementing successful compensation transparency is assessing where you are now, and whether your organization is ready to move forward with more transparency. For example, if you can’t explain exactly how you’ve developed your compensation structures, making them public is going to bring up questions you can’t answer, like, “Why is this role paid more than mine?” or “Why does this person make more than I do when I’ve been here for a year longer than they have?” In this scenario, compensation transparency can backfire, potentially causing morale, engagement, and retention to take a nosedive.

Before you make any changes to compensation transparency at your company, look at where you are now. If you decide to offer more transparency into your compensation structures, do you have clear guidelines, data, and explanations to back them up? If not, that’s likely where you’ll need to start.

3. Focus on the “how.”

Compensation transparency may include making pay grades and salary ranges public — or it may not. Regardless of which direction you decide on, you’ll need to share how you developed your compensation structures. You want your employees to understand how your compensation programs work, whether that’s how you determine bonuses or how employees are evaluated for a salary increase.

When developing your strategy around compensation transparency, make sure that you focus on creating clarity about how employees are compensated, and how they can increase their compensation if they’d like. This will lay the foundation for a more successful implementation of your strategy, whether you choose to publish pay grades and salary ranges or not.

4. Be prepared for conversations about compensation.

If you decide to offer employees more transparency into the way you approach compensation within your organization or how much employees are being compensated (or both), it’s inevitably going to lead to questions and conversations. Foster those conversations and address your employees’ questions and concerns. Recognize that compensation can be deeply tied to people’s emotions, and that your employees will almost certainly have feelings about the new compensation-related information. As an organization, it’s your responsibility to approach compensation transparency in a way that creates space for and allows those feelings and reactions to exist.

“Each change in [compensation] transparency is its own little mini-shock to the system, so as you push toward new heights of transparency, always remember that your organization is a collection of human beings at the end of the day,” advised McKinney Blount in the First Round Review article.

When it comes to compensation transparency, there’s no one-size-fits-all solution. The best approach to compensation transparency will depend on a variety of factors, from what you’re trying to achieve to your organization’s readiness to offer more transparency. Following the best practices highlighted here — and avoiding the pitfalls and misconceptions — will help you approach compensation transparency in a way that’s best for your employees and your business.

Need more insights into how to create a compensation strategy that works for your organization? Read HR’s Guide to Setting a Compensation Strategy.