Don’t Be Afraid of the Light: Dispelling Myths and Embracing Pay Transparency

Quick; name three reasons companies should keep compensation information hidden from their employees.

Perhaps you came up with reasons such as, “keeping this information private is safer,” “companies don’t want to deal with complaints from employees who feel they are not being paid enough,” “employees will be able to demand higher levels of pay,” or “companies will not be able to explain why some people are paid so much more than others.”

There are many reasons why companies might want to keep pay hidden. But what if companies have to make pay transparent? What should they do then? And how much should they be worried about the outcome?

The reality is that pay information is becoming more visible, driven in part by employees having access to salary information from sites like Glassdoor or Indeed. Many countries are also enacting regulations forcing pay transparency. But most important of all, employees are increasingly expecting to have this information available to them. In a recent survey of HR, business, and IT leaders from SAP customer organizations, “Transparency around compensation processes” was rated as the third-most relevant challenge facing companies today. Fifty-eight percent of companies report planning to become more transparent than in the past, yet only 24 percent of employees agree their company’s pay processes are transparent.

It can be challenging to increase transparency around a topic that has historically and intentionally been kept very private. But is the anxiety and fear people have about sharing pay information justified? Are organizations’ fears about the risks of transparency founded? Research suggests not necessarily. Here are three common myths about pay transparency and the reason organizations should embrace it rather than fear it.

Myth #1: If employees learn they are paid less than others, it will cause jealousy and demotivation.

Reality: Learning you are paid less than a colleague could certainly be cause for concern. Particularly with mounting evidence suggesting that members of underrepresented groups may get paid less simply for being part of those groups. However, most employees are willing to accept the fact that not everyone will be paid the same as long as they understand the reasons why.

Psychological research has shown that employees understanding how salaries are determined and believing that process is fair is more important to job satisfaction and trust in management than is the actual level of those salaries. Some studies have also found that job satisfaction actually tends to be higher when pay distribution is wider, and that being aware of others’ (higher) earnings provides information about employees’ own future prospects that can serve to outweigh any jealousy employees might feel toward their colleagues.

As one employee interviewed as part of our research study on next-generation compensation described, “I understand a number of factors go into compensation. I know I won’t be paid the same as everyone else. But it’s important to me that the same process in arriving to that number is applied to everyone.”

Increasing transparency can actually increase employee motivation provided companies explain to employees, in a clear and thorough manner, how pay decisions that affect their lives are made, who in the organization is responsible for making these decisions, the criteria that is used to guide these decisions, and how they can positively influence the outcome of these decisions in the future. This of course assumes that pay decisions are made in a fair, rational and consistent manner. If that is not the case, pay transparency may be the least of your company’s problems.

Myth #2: Employees already know how their pay compares with others; confirming this belief won’t do any good.

Reality: People tend not to be good at judging whether they are paid fairly compared to others. One study found that 64 percent of employees who were paid at market and 35 percent of people who were paid above market actually believed they were paid below market value. These inaccurate beliefs can result in employees feeling frustrated, demotivated and even lead to unnecessary turnover. Companies may assume that if they pay below market value, bringing attention to this fact could only be to their disadvantage. But research has shown that the overwhelming majority (82 percent) of employees would still feel satisfied with their pay, even if their employer paid lower than market average for a position, so long as they understood the rationale behind this lower pay.

As one compensation professional described, “So much of pay is about perception. An employee could be getting really great pay, but if they don’t believe that, it doesn’t really work.” Remember, it is not knowing they are paid less than others that frustrates employees. It is not understanding why they are paid less that matters the most.

Myth #3: Pay people more and they’ll be happy, regardless of transparency.

Reality: Even when the outcome of pay decisions are positive, employees want and expect decisions to be explained to them in an appropriate and timely manner. Several employees interviewed as part of this research study reported feeling frustrated when managers failed to inform them of a decision or the rationale behind that decision.

As one employee described, “We’re blind [in terms of compensation decisions]. When it comes to bonuses or raises, the supervisors and managers in my organization are the ones responsible for communicating that. They don’t do it well, it’s very vague. I found out the day they were handing out the check, ‘hey, here’s a bonus.’”

More pay does not necessarily mean more satisfaction. Employees must understand the processes and reasons behind pay decisions. In fact, research has shown that increasing the transparency and fairness associated with pay processes was 65 percent more effective at reducing employee turnover intentions than was paying employees more relative to the market. But having good conversations about pay is easier said than done. Ensuring managers know how to communicate pay decisions in a sensitive and appropriate manner should be a primary component of manager compensation training.

In a recent article about pay transparency, Brian Kropp for Gartner/CEB stated, “Executives wondering whether they should become more transparent about pay are already behind the curve.”

It’s true: Pay transparency is already here and will only increase in the future. So rather than wait in fear of what might happen by letting employees “see behind the curtain,” organizations should embrace pay transparency and the advantages it offers.

With the consumerism of rewards and the increase of employee requests for visibility into their rewards, the need for compensation transparency is at an all-time high. To learn more, join me on October 18 for a webinar on “Growing Transparency and Engagement with Manager Communication.” During this conversation, we will provide practical recommendations and advice that you can share with managers to help with this need for transparency.

Lauren Bidwell, Ph.D., is a research scientist for Human Capital Management Research at SAP SuccessFactors.