Pay Secrecy v. Transparency: What Is the Right Balance?
The current tsunami of regulations, laws and mandates that force employers to disclose information on their pay levels may serve a purpose but are potentially dysfunctional.
Public sector organizations in the U.S. cannot keep very much hidden about their pay levels. The information has been considered public information for decades. Pay structures, pay administration policies and procedures and even individual pay rates are accessible to all.
Those in favor of total openness cite the proposition that “sunshine kills a lot of viruses.” However, those who believe legislators lacking even fundamental knowledge of the principles underlying fair pay systems should not be grandstanding by passing laws that intrude into areas of managerial discretion in the private sector. It is puzzling that legislators believe they will banish inequitable pay by passing the type of laws now being created. If they understood the realities, it would be apparent the specific mandates are “one size fits all” actions in a “it depends” world.
Potential dangers
Forcing disclosure of information often results in misinterpretation by those lacking knowledge of pay management principles. For example, mandating the disclosure of a hiring range for any job advertised forces employers to decide what to provide. Hiring ranges can vary widely, depending on the type of candidate being sought. Many employers will post their full pay range for the job, while others vary the range based on the specific candidate qualifications they are seeking. An Engineer with ten years of experience doing the work that will be performed will almost certainly require a higher start rate than a recent graduate still learning the basics. The range to be posted may be very wide if the employer is open to considering candidates with varying qualifications. When a candidate receives an offer that is in the low end of the posted range the immediate reaction is that it is inadequate, since cognitive bias leads to over-estimation of one’s capabilities. What might have been an acceptable offer may now be rejected, all due to the requirement to post a hiring range.
In addition to requiring pay ranges there have also been laws prohibiting asking a candidate what they currently earn. Since candidates are not required to be truthful and employers have virtually no chance of convincing a current employer to disclose pay rate the requirement is useless. Since they lack knowledge of what causes pay inequities and what can be done to remedy them regulators keep passing laws hoping something might help reduce discrimination. At the least they hope everyone will notice they are trying to right wrongs, or at least lessen things that irritate voters and fire up activists.
What should employers disclose?
Once someone becomes an employee they must decide if their pay rate and subsequent pay actions are equitable, competitive and appropriate. Employers must invest in educating employees on how pay is administered if they are to gain acceptance.
“Your pay rate and pay actions will depend on three things:
1. The value (internal and external) of the job you occupy,
2. Your competence relative to the job requirements, and
3. Your contribution level relative to performance standards. Personal characteristics are not a consideration when administering pay.”
The value of roles is the basis for classifying roles into grades (based on relative internal value) and assigning pay ranges (based on market value). The competence of an incumbent should reflect where the pay rate within the range. The contribution level should impact pay actions.
Adopting and communicating a policy like the above can inform employees how pay administration is done in the organization. It must be made believable by adhering to these principles. By including policy information in orientation programs for new employees, followed by periodic recommunication, a dialogue can be initiated. This can enable those questioning whether actions align with policy to make their concerns known and seek resolution.
Pay secrecy can have undesirable consequences. Behavioral research has shown that if employees do not know what others are paid relative to them, they will make things worse than they are. They will guess that peers and subordinates make more relative to them and that superiors are not paid that much more. The distortion contributes to dissatisfaction that is not warranted. Although the organization may elect to keep individual rates a matter between the employee and the employer it is critical to ensure there is a clear understanding as to how pay is administered. If employees elect to share their pay rates it may create challenges, but if there are legitimate (and legal) reasons for differences this should not be a problem. If the challenges are reconciled, employee faith in the system increases.
What has motivated legislators and regulators to attempt to deal with pay inequities?
The charitable answer if that they feel people should be treated “fairly.” A more cynical answer is that they can demonstrate their concern and competence by passing laws, even those with little chance of making any impact.
One of the major problems related to pay equity is that misinformation creates a perception that inequities are rampant and huge. The federal government periodically publishes aggregated statistics like “males are paid 15% more than females nationally.” Regrettably this makes it clear those responsible do not understand this number is a measure of pay parity and says nothing about pay equity. A recent McKinsey analysis shows that 80% of the “pay gap” disappears if occupational differences are controlled for. Aggregated statistics also compare employees having different levels of competence and contributing at different levels.
There has been discrimination in the past, making those who have suffered from it skeptical that equity can ever be achieved. Laws like the Equal Pay Act, Title VII of the Civil Rights Act, the Age Discrimination in Employment Act and other more specific regulations have addressed violations of the equity principle. However, there is likely to be residual bias at a personal level, which management must address and remedy. Our beliefs are the product of our socialization, but it must be made clear that an employer’s policies trump individual biases and preferences.
The Bottom Line
Unnecessary and ineffective laws and regulations can have a negative impact on the willingness of management to comply with their provisions. Even though well-intentioned, those wishing to deal with illegal and immoral pay inequity should not attempt to do so using the wrong methods. Laws and regulations continue to increase in number, often creating duplications and conflicts. Those that are wrongheaded or ineffective in dealing with the issue they are supposed to address foster cynicism on the part of those required to adhere to their provisions. Publishing inaccurate and/or misleading statistics can lead people to believe there is more discrimination than there is. Emotional reactions to these claims foster cynicism and perceptions of unfair treatment.
When discrimination is identified using sound assessments actions should be taken to remedy violations of laws, regulations and social mores. Equitable treatment is a right that applies to everyone.
About the Author:
Dr. Robert J. Greene is an expert in human resource management, serving as the CEO of Reward Systems, Inc., Consulting Principal at Pontifex, and faculty member for DePaul University’s MSHR and MBA programs. A well-respected global speaker and educator, Greene has a passion for empowering organizations to thrive by unlocking the full potential of their people. He has authored four books and hundreds of influential articles and is an advocate of using scientifically valid research to make the business literature more responsible and less tainted by opinions that are only speculative and that encourage fad adoption.
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