There are widely differing opinions and research about the role compensation plays in employee engagement as opposed to non-monetary, intrinsic factors. Many believe the common mantra that “employees don’t leave jobs, they leave managers.” There’s much truth to that, but we know that, for the majority of workers, appropriate compensation is a significant element.

Still, many workers aren’t paid equitably or fairly. Pay disparity still impacts women and people of color. The gap lessens a bit each year, but movement is glacially slow. A 2021 report by Payscale confirms that women, on average, make as little as 82ȼ for every $1 that a man earns across all job types, and only 98ȼ in the same job category.

Compensation Transparency

So, at first glance, it would seem that compensation transparency could address a variety of issues as we’ve discussed on our blog:

  • Equity and fairness in pay for all employees.
  • Increased employee engagement and trust.
  • Increased visibility in job postings equals more candidates.
  • Additional reporting functionality.
  • Customized total reward statements.

It Only Sounded Like a Good Idea

For companies that are truly concerned about providing a culture of honesty and open communication, compensation transparency sounds like an easy fix. If everyone can see what everyone else is paid, there are no secrets and so, therefore, no issues. Right?

Not exactly. Unfortunately, complex issues usually don’t have simple solutions and compensation issues are highly complex.

Proponents of compensation transparency may not account for the fact that there are real people involved, not abstract numbers or widgets. And people generally feel pretty strongly about their pay and title.

Employees also frequently have a more favorable opinion about their value to the organization or their level of performance than management does. When they have access to their co-workers’ pay details, especially the co-workers they feel don’t contribute as much as they do, they often receive an unpleasant surprise.

7 Common Pitfalls to Compensation Transparency

It’s usually considered rude to ask someone how much money they make, even though employees frequently disclose their pay to coworkers. However, it’s a protected right for non-management employees under the National Labor Relations Act. So what could go wrong? Turns out – several things.

An article in the Harvard Business Review outlines a number of issues that employers may not consider when trying to solve compensation issues. It turns out that compensation transparency demoralizes some employees as much as it motivates others.

The issues start as early as the job-offer stage and continue throughout employment since both candidates and employees are prone to overestimating their contributions and relative value.

Candidate Expectations

Candidates frequently expect to be offered the highest advertised pay, regardless of their qualifications. In the current recruiting climate, which is difficult to say the least, candidates are highly selective in choosing the companies they want to work for and will reject offers that don’t meet their expectations. Or, they’ll accept an offer but resign during the onboarding phase.

Employee Expectations

Since compensation is a necessity versus a benefit, employees want to earn as much as they can. Without the proper framework and planning to address employee concerns (and perhaps even with it), it’s inevitable that many will become dissatisfied and distrustful because of any perceived unfairness in pay.

Employee Engagement

A lack of engagement and trust equals lower productivity, teamwork and profits. In this period of “The Great Resignation” and unprecedented demand for workers, attrition is a problem to prevent at all costs.

Performance Assessment

Ensuring that each worker is paid appropriately compared to co-workers necessitates thorough assessments of individual performance. It can be a valuable tool in understanding a team’s or department’s efficiency. At the same time, it’s difficult to compare the relative worth of individuals in teams or larger companies. It’s time-intensive and can rely on subjective results if not measured carefully.

Unforeseen Results

Even though some employees may welcome transparency, its impact may be more far-reaching and problematic than a company anticipates. Depending on the information presented, internal and external stakeholders – including the public at large – may react negatively and question the company’s integrity, financial stability and commitment to equity.

Invasion of Privacy

Many employees and stakeholders will feel sharing their compensation data is an invasion of their privacy.

Legal Issues

The HBR acknowledges that some companies may use compensation transparency as a way to facilitate resignations and “right size” their workforce. However, doing so can open the company up to a variety of legal claims, such as constructive discharge (when employees resign because their working conditions have become intolerable) or discrimination in pay of a protected class (such as age, race, color or sex).

Easy Alternatives to Company-Wide Compensation Transparency

It’s understandable that companies want to rectify significant issues, like pay disparity, quickly and completely. However, they need to be cautious: The fix can sometimes be worse than the problem. Fortunately, there are simple alternatives that any business can implement to create a culture of honesty and open communication about pay.

  • Communicate pay ranges, grades or average compensation rates rather than individual pay.
  • Ensure that employees understand how their pay is determined by taking the mystery out of it.
  • Ensure that managers have been thoroughly trained on assessing and communicating performance management results.
  • Thoroughly involve employees in their own self-evaluations, job design and team and business objectives.
  • Educate employees about their right to discuss their pay and their responsibility regarding use of that information.

It’s natural that business leaders want to simplify issues in order to efficiently implement solutions. And, in many cases, that is the best way forward.

However, when faced with issues that are so deeply personal, and vital, to employees as compensation is, it’s crucial to involve your people teams. Elicit their input about potential obstacles and strategies that will be perceived as a win-win for management and employees alike.

Dan Roche

Dan Roche is the Director of Marketing at Decusoft and has spent nearly 25 years marketing SaaS technologies. Decusoft, through their Compose software, is helping firms simplify and manage their complex compensation programs.