Compensation

How to Be Transparent About Compensation

June 1, 2022
June 23, 2022
  —  
By 
Catherine Tansey
Lattice Team

Employees’ biggest complaints about compensation aren’t necessarily related to their salaries; the frustration lies in confusion about how pay is determined. In other words, compensation and clarity seldom go hand-in-hand.

But increasingly, we must ask ourselves why this is. Especially when research suggests that opting for greater transparency makes your workforce more productive, and is crucial to combating racial and gender pay gaps and inequities. 

While sharing salaries publicly may be favored by companies like Whole Foods and Buffer, it’s not the only way to be transparent about compensation. Rather, pay transparency refers to the approach companies take in communicating their compensation philosophy both internally and externally, and it exists along a spectrum, from a very closed model to a more open one. 

Below, we’ll cover some of the key points to keep in mind when rethinking pay transparency at your organization. 

5 Key Tenets of Compensation Transparency

1. A well-defined compensation strategy and structure are essential to pay transparency.

Companies need to have clear, objective pay strategies in place, period. But this is even more essential when we consider pay transparency. 

“There are benefits and consequences of salary transparency, and one consequence is that [businesses] will be challenged by employees more regularly and aggressively about differences in pay and pay equity,” said Robert Bird, JD, MBA, Professor of Business Law at the School of Business at University of Connecticut. “An organization needs to be able to explain clearly and objectively why a person is paid a certain way based upon certain criteria.” 

Yet clearly articulated and easily communicated compensation strategies are rare. In one 2016 survey, HR professionals were asked to rate how well they believed employees understood their compensation philosophies. Here were their responses:

  • Virtually no employees understand it (11%)
  • Most do not understand it (42%)
  • About half of employees understand it (27%)
  • Most employees understand it (19%)
  • Virtually all employees understand it (3%)

By designing and articulating a well-defined compensation strategy, organizations reap several benefits. First of all, “it helps keep a company accountable to fair compensation practices within the organization by ensuring that the same criteria is used employee to employee in determining pay,” said Cassandra Faurote, SPHR, SHRM-SCP, President and founder of Total Reward Solutions, an HR consultancy specializing in compensation and rewards.

Secondly, a well-defined compensation strategy allows an organization to pay people differently. Transparency shows that there is a process for determining why a person is paid a certain way, and that the organization is comfortable communicating that because there’s no secrecy, favoritism, or ambiguity involved. 

Third, compensation strategies help protect against discrimination claims. When employees are clear about how compensation is determined, there’s less room for misinterpretation and speculation. Yet, “when employees don’t understand pay and don’t feel comfortable asking about it, misinformation will spread, and employees will tend to [assume reasons] that are illegal, presuming it’s their gender or race that’s the cause of the disparity, for example,” Bird said. 

And lastly, organizations with more transparent salary practices can benefit from better talent attraction and retention. “Pay transparency signals a willingness to be open about compensation, which helps a company attract better talent,” Bird noted. In firms where employees are culturally discouraged from discussing pay or are in the dark about the processes surrounding it, employees may seek higher wages elsewhere. “If people are unsatisfied, instead of asking to renegotiate, because they believe they don't have the right information, they'll just leave,” he said. 

2. Meaningful transparency hinges on informing and educating your workforce.

Paying employees differently based on their experience, education, performance, geographically determined cost of living, or other legitimate reasons is perfectly acceptable, but the way pay is determined must be communicated to employees. 

“Transparency can fall flat if there’s no education around it,” said Kynnee Golder, PHR, SHRM-CP, CEO and principal consultant of Maryland-based HR consultancy Global HR Business Solutions. “Communicating the processes used to determine base pay and salary increases helps employees understand [their pay], but also empowers the employee to better manage their performance,” she said. 

HR should work with managers to educate employees on the benchmarks used to define salary bands, or ‍the minimum and maximum amount a company is willing to pay someone within a job level. “Employees almost always believe they should be paid more,” Faurote said. “But by pairing [this type of compensation] education with transparency you can mitigate that.” Faurote said it’s common for employees to expect they should be at the midpoint of a salary band, but that’s not always the case. Factors like level of education, previous experience, time in the job, and performance affect where someone falls in a given salary band. 

Compensation education is essential across the employee lifecycle, but there are key moments to emphasize it. “HR should be focused on education every time they do a [compensation] market study, which is often every two years,” Faurote said. “Refresh your managers on the process you use and [the companies] you compare with, and do so at a high level of detail.” Since managers are the first ones employees will go to with compensation concerns, it’s important for them to be able to speak knowledgeably about the data used to determine payscales. 

The hiring and onboarding processes are also important times for education, and candidates will be sussing out the organization's ethos on pay before they sign on and immediately after. “If compensation information is opaque during the interview and onboarding process, it’s a good sign that it’s going to be opaque during a person’s tenure there,” said Bird.

3. Employees should have access to their own salary band, at minimum.

Companies may be hesitant to share salary bands or ranges, misguided by the erroneous belief that employees will complain if they are not a top earner within their salary band. Again, this highlights how important education is; employees are more likely to accept the situation when they understand how pay is determined.

“Salary ranges are established so you can reward employees for their education, the previous experience they’re bringing to the job, the time they’ve been in the job, and their performance, among other factors,” Faurote said. She believes that employees should have access to their own salary range, at a minimum. “And if there’s a job they’re interested in applying for, they should be able to access that salary range as well,” she added. 

Golder, a business owner and employer, is in favor of sharing salary ranges in job postings, and does so for every open position at her company. “It incentivizes employees when they understand how much growth they can have within the company from a financial standpoint,” she said. 

Deciding exactly who will have access to salary bands is part of determining your level of salary transparency. Some companies choose to post salary bands publicly, while refraining from sharing actual salaries. Others opt to limit access to salary bands to the HR and finance departments. These are decisions that will be informed by the level of transparency you want at your organization, but keep in mind that the trend is heading toward more transparency. 

4. Salary transparency is a tool for achieving pay equity. 

When conversations about pay are shrouded in secrecy, it’s easy for discrimination and bias to seep into compensation decisions. Closing the wage gap means sharing the processes behind pay determinations more openly. 

“Being more transparent about pay helps ensure pay is truly objective and is not a hidden vector for discrimination, which still happens far too often,” Bird said. 

But working to end pay inequities doesn’t stop at transparency. To further support pay equity, companies need to audit internal compensation data to spot — and correct — discrepancies. “Every company should do a [compensation] discrimination analysis once a year with an outside council,” advised Faurote. 

When conducting a pay equity audit (PEA), be sure to look at the US Equal Employment Opportunity Commission's (EEOC) protected classes, the demographic groups of workers employers are legally barred from discriminating against (race, color, religion, sex, national origin, age, and disability), and compare pay across job titles and by pay grade. Pay grade is a method some companies use to cluster jobs together by weighing their value to an organization. For example, members of the C-suite may be in the same pay grade despite having different skills and expertise. 

Comparing pay by pay grade broadens a company’s ability to spot potential discrimination. “You may not have a pay equity issue within a job, but you might have it within a particular pay grade,” noted Faurote. “And if we cluster these jobs together because of similar value in the market, why wouldn’t we compensate them accordingly?” 

While completing a pay equity analysis, companies should be comparing the salaries of new hires to those of existing employees to avoid issues of wage compression, a phenomenon that occurs when newly hired, less experienced employees earn close to what current employees make — an especially timely issue as salaries have risen alongside inflation and in the candidate’s market we are currently experiencing. 

5. Compensation-related complaints must be addressed promptly and thoughtfully.

Because compensation is tied so closely to our personal value and worth, pay differences between coworkers can really sting. While well-defined compensation strategies mitigate the chance for litigation and employee education will help prevent complaints in general, companies need a documented process for handling employee grievances related to compensation when they arise.

“If you do a good job educating people, you’re not going to have many grievances come up,” Faurote said. “But you still need to train managers on how to handle these because it will likely be the manager receiving the complaint.”

Managers should take the employee’s concerns seriously, and inform the employee that they will bring the concern to HR. Communicate to the employee that you’re looking into the situation, advised Faurote, and give them a time frame, such as one or two weeks, when you’ll get back to them. 

Remember that it’s perfectly acceptable for your philosophy on salary transparency not to include sharing other employees’ salaries publicly. Even so, HR and managers need to be able to explain to an employee why they’re paid what they’re paid. “A well-defined compensation strategy protects you from grievances because you can say, ‘These are the criteria you were evaluated on. Here are your past annual reviews and this is how you resulted from a B to a C. But we don’t make comments on other people’s salaries,’” Bird said. 

And to identify systemic issues, organizations should keep detailed records of all compensation-related complaints as well as the managers’ responses, and look for patterns that may indicate larger inequities and require corrective action.

— 

The trend toward transparency around compensation and pay practices needn’t frighten organizations — it’s a good thing. More often than complaints about an employee’s actual salary are complaints about the confusing or seemingly ambiguous nature of compensation decisions. And when companies educate employees about how these decisions are made and with what information, they empower the workforce with the information they need to command higher wages. 

What’s more, as we work toward equal pay for equal work, salary transparency is key to holding organizations accountable in closing the wage gap. “If we would just educate and open up that pay transparency door a little bit we would have a lot less issues around pay and [we’d be supporting] fair and equitable pay,” Faurote said. 

Lattice’s newest product, Lattice Compensation, can help your business do just that. With compensation guidelines using performance ratings, compensation ratios, and more, Lattice Compensation brings clarity and consistency across the entire organization to make company decisions more transparent and equitable for all. 

To learn more about this topic, download Lattice’s eBook HR’s Guide to Setting a Compensation Strategy for actionable advice on all things pay related, from developing your approach to transparency to total rewards and beyond.