The pitfalls of making pay ‘transparent’

October 9, 2014, 3:49 PM UTC
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Photo by Atanas Bezov—Getty Images/iStockphoto

Dear Annie: You might have heard that the U.S. Department of Labor has proposed regulations that would prohibit “pay secrecy” at federal contractors, meaning we will have to reveal the size of everyone’s paycheck to everyone else. The company where I’m a group manager gets about half its annual revenues from federal contracts, so there’s no doubt that this will apply to us.

The problem is, although we have a sensible compensation strategy now, we started 25 years ago as a family-owned business where employees were paid more or less according to the (former) patriarch’s personal whims. And some of those people are still here, at salaries that are out of whack with what the market would dictate. I’m already dreading the discussions people are going to want to have about this whole thing. Your thoughts, please? — Just Mike

Dear J.M.: Hard as it may be to believe, some companies embrace pay transparency voluntarily. It’s especially popular in Silicon Valley, where “radical transparency” means treating employees like partners by keeping them up-to-date on details of the company’s finances. “There is a cultural advantage that comes along with transparency, because it fosters trust,” notes Tim Low, a vice president at compensation data firm PayScale. “But a lot of headaches come with it, too.”

The purpose of making pay information available to everyone in a company, the Department of Labor says, is to help narrow the wage gap between men and women, and among different racial groups, by exposing pay differences that might be discriminatory. Openness about compensation can also “make workers aware of their value to the organization,” the DOL memo says, as well as “their potential value, based on information they receive about the salaries of longer-tenured employees or employees in higher-wage positions.”

That’s fine and dandy for the roughly 35 million employees of federal contractors, and some observers think that, simply by making more information available to more employees and job seekers, transparency could make the labor market as a whole more efficient. But for employers, transparency has lots of drawbacks. One of them, says Low, is that “it does take away some flexibility. For example, it’s harder to use compensation as a competitive tool, to win over a candidate you really want by offering him or her more money” than other people earn who are currently doing the same job.

Revealing everyone’s pay to their colleagues can also, as you anticipate, lead to some awkward conversations. Low has a few suggestions on handling those.

Consider your culture. In some organizations, transparency may not be that big of a deal. “If you have a lot of salespeople who are used to working on commission, being paid according to what they produce, and who are used to talking openly about money, it’s not as a big a leap as in a place where everyone is on a salary that, until now, has been a closely guarded secret,” Low says. In the latter case, it may help to give everyone plenty of advance notice that transparency is coming, so that people have a chance to adjust to the idea ahead of time.

Generational differences matter, too. Millennials tend to care less about the dividing line between private and public information than Baby Boomers do—which, Low notes, may help explain why startups made up mostly of Millennials have been on the cutting edge of this trend. “You may have to approach conversations with people of different ages differently.”

Identify your outliers. “The reality is, there are going to be salaries at some positions in almost any company that will raise eyebrows,” says Low. “An administrative assistant who has been in the job for decades and is indispensable may be making more than a highly trained professional who just joined.” Likewise, he adds, “’purple squirrels’—people in jobs that require really hard-to-find skills, or combinations of skills—may be more highly paid than other people in jobs that look similar on the surface. So you have to be prepared to explain why.”

This also applies to the people who have been at your company since a previous regime, when pay was decided much differently. “Focus the conversation on how compensation is decided under the current system,” Low suggests, with emphasis on any opportunities to earn bonuses or raises. “Give people as much information as you can about how the company rewards performance now.”

Stay cool. Money, and who makes how much compared to others, can be an emotional hot spot. “Transparency often causes really highly charged reactions, because some people see the dollar amount they’re paid as a reflection of their self-worth or an indicator of how much the company values them relative to coworkers, or both,” Low observes. For you as a manager, the hardest part could be accepting the emotional side effects of transparency, and staying calm yourself. Aim to keep your cool, focus on the facts, and let your subordinates vent if they have to. Good luck.

Talkback: If pay isn’t transparent where you work, do you wish it were? Why or why not? Leave a comment below.

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