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Pay transparency: What you should know

pay-transparency

Fueled by a combination of legislative reforms, employee advocacy, and a broader societal emphasis on equity, the concept of pay transparency has been gaining momentum across the United States. With an ever-growing number of states passing legislation in support of this movement, it’s clear these practices are more than just a passing trend — they’re here to stay.

Even if your state hasn’t yet adopted formal pay transparency laws, it’s important to understand what’s involved to stay ahead of the curve. Keep reading for an overview of pay transparency – what it means, why it matters, current regulations and tips for implementation.

What is pay transparency?

To put it simply, pay transparency refers to the disclosure of pay information to employees and job candidates. This can include identifying salary ranges in job postings, providing the pay scale for an employee’s position upon request or implementing formal policies around internal pay transparency within the organization.

The level of mandated disclosure differs across states. Some laws require salary ranges to be posted publicly, while others only require employers to provide wage information upon request or to internal employees. The information to be shared also varies – from providing salary ranges to sharing detailed compensation data. For this reason, employers need to be aware of the requirements that apply to them.

Why is pay transparency important?

Pay transparency has been shown to provide benefits for both employees and employers. According to a Society for Human Resource Management (SHRM) report, pay transparency can significantly increase job seeker interest and application rates.

The SHRM research found that 82% of U.S. workers are more likely to apply for positions that list a pay range in the job posting. Additionally, 74% said they’re less interested in jobs that don’t share salary information upfront.

Pay transparency also generates greater trust among candidates. The study found that 73% of workers have more trust in companies that are transparent with pay ranges versus those that aren’t.

From an employer perspective, pay transparency can improve applicant quality and quantity. According to the same report, 70% of businesses found that posting salaries led to more job applicants, and 66% said it increased the quality of applicants they received.

Pay transparency helps attract top talent by signaling an organization’s trustworthiness and competitiveness. Both job seekers and businesses can benefit from more open compensation practices.

Pay transparency pros and cons

While pay transparency has many benefits, there are also potential downsides.

Pros

  • Increases trust and morale among employees
  • Attracts more qualified candidates
  • Can improve talent retention
  • Allows employees to understand pay evaluation criteria and how to grow compensation
  • Fosters open communication around pay philosophy

All this adds up to a better overall employee experience.

Cons

  • Risk of wage compression (when pay differences across roles shrink too much)
  • Lower application rates if posted salaries are not competitive
  • Employee dissatisfaction if the pay structure is inconsistent or not explained well
  • Increased risk of lawsuits, if pay rationale can’t be justified

However, many of the downsides can be mitigated with proper pay transparency implementation. When executed strategically, pay transparency pros outweigh the cons for most businesses.

The key is to develop a structured compensation philosophy, set competitive salaries, and communicate pay practices openly and transparently.

Current pay transparency legislation

A growing number of cities and states have passed laws mandating pay transparency. This list, which is continually expanding, includes:

Pay transparency legislation has also been passed in Illinois for employers with 15 or more employees, but the effective date isn’t until Jan. 1, 2025.

Additionally, remote employers who hire employees that can perform the job from any location must comply with the most generous state’s compensation disclosure requirements. This impacts employers offering positions that can be performed remotely from anywhere in the country.

As you can see from the list above, individual cities such as New York City, Cincinnati and Toledo have also passed local pay transparency ordinances. These laws typically apply to employers above a certain size threshold posting jobs that could be performed in that jurisdiction.

In addition to mandated job posting disclosures, some states grant employees the right to request or discuss wage information. Examples include California, Maryland and Washington.

While specifics vary, the general trend shows more states and cities enacting pay transparency reforms each year. Employers must monitor local requirements to ensure their hiring practices and compensation policies comply with relevant regulations.

Tips for embracing pay transparency

Pay transparency regulations are expanding, but organizations don’t have to take a reactive approach. Adopting pay transparency can benefit your business even if your state lacks formal laws. Here are some tips for implementation:

Create a compensation philosophy

The first step in pay transparency is defining your compensation philosophy. This outlines the principles that guide your pay strategies and decision-making.

To develop a philosophy, determine the factors most important in your pay administration. Common considerations include:

  • Competitiveness: Do you aim to lead, match or lag the market?
  • Performance: Is pay strongly tied to performance ratings and metrics?
  • Equity: How will you ensure equitable pay across employees?
  • Budget: What pay spend can you afford?
  • Incentives: Will you emphasize base pay or variable compensation?
  • Criteria: What specific factors determine pay levels?

Document how these elements align with your business goals and culture. A clear philosophy provides a framework for setting pay ranges, making hiring offers, conducting reviews and communicating pay practices. It brings consistency and structure to compensation programs – building a solid foundation for pay transparency.

Create a clear pay transparency policy

Once you establish a compensation philosophy, the next step is outlining a formal pay transparency policy. This provides guidelines for handling pay communications and inquiries.

When drafting your policy, consider:

  • Pay-setting factors: Specify what bona fide factors determine pay, such as experience, education, certifications and performance ratings.
  • Pay structures: Note what pay ranges and levels exist, along with how ranges are set.
  • Compensation elements: Explain the forms of pay, benefits and variable incentives included.
  • Performance links: Describe how pay connects to performance assessments.
  • Review schedules: State how often pay is reviewed and adjusted.
  • Decision roles: Identify who makes pay determinations and how the rationale is shared.

Documenting these details in a policy sets clear expectations for pay transparency. It also equips managers to have informed discussions about compensation.

Communicate pay transparency practices

Starting with providing talking points to managers, clearly communicate pay policies and practices to all employees to build trust and understanding, and remain consistent. Provide education on how pay decisions are made and be open about salary benchmarking analysis. Honesty and transparency in ongoing communication are essential.

Use a reputable competitor survey

Leverage quality market data from a reputable survey vendor. Scope benchmarks specific to your industry, organization size, locations and job roles. Use data and your compensation philosophy to shape internally aligned pay ranges. Market alignment provides context for transparent conversations about pay practices.

Develop competitive pay ranges

When setting pay ranges, analyze competitive data. Build well-defined ranges that are aligned with your compensation philosophy and market anchors.

Foster a culture of transparency

Look for ways to progressively build pay transparency into your culture. Determine your transparency philosophy and work toward processes that promote openness companywide. Pay transparency is most effective when aligned with broader transparency goals.

Summing it all up

Pay transparency is becoming the new normal, with a growing number of states and cities enacting regulations around compensation disclosure. While specific requirements vary, the overarching themes are consistent – providing pay range details to candidates and empowering employees with pay information. For organizations, this shift calls for establishing structured compensation philosophies, benchmarking against the market and communicating pay strategies openly.

Pay transparency can strengthen talent recruitment, employee relations and compliance when implemented strategically. It represents the future of compensation – one centered on fairness, equity and communication. Despite mandates, businesses can get ahead by proactively adopting pay transparency best practices. A thoughtful approach today will set up your organization for success as rising expectations around pay openness continue to evolve.

How can you get the scoop on employment laws that apply to your business? Download our free e-book, HR outsourcing: A step-by-step guide to professional employer organizations (PEOs).



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