Starting January 1, 2023, employers in California with more than 15 employees will be required by law to include pay ranges in job ads and report wages for current employees based on gender, race and role. The new law for pay transparency aims to detect and mitigate discriminatory pay patterns.
Pay transparency benefits workers because it provides a clear understanding of the value of skills in the labor market. Additionally, it enables job seekers to manage their expectations in an informed way during the hiring process.
Employers also benefit from a culture of improved transparency, said organizational psychologist Dr. Lauren Park, human resources (HR) research scientist on the SAP SuccessFactors Growth and Insights team. Park’s team has published research on transformations in compensation practices and best practices for compensation discussions with employees.
“It’s beneficial for organizations if pay processes are transparent and employees are aware of the value of their skills,” she said. “That has good implications for employee retention and employee engagement. It’s one of those indicators of a culture that is honest and supportive of its employees.”
Thinking More Broadly About Compensation
As pay transparency laws like the one in California become more commonplace, employers also have an opportunity to think broadly about compensation and consider practices that align with employee expectations for job flexibility, remote work and skills development. During the Great Resignation, workers were adamant in their demands for an improved experience in the workplace. Park said these pressures are carrying over into discussions of compensation.
“What we’re seeing in today’s labor market, with drastic changes in employees’ expectations, is that the idea of compensation is bigger than it has been in the past,” she said, highlighting an often overlooked benefit to employers and employees. “In a world of pay transparency, where pay is more fixed and less able to be negotiated, compensation can look different and can be a bit more creative with additional perks like growth opportunities and flexibility. We see that as an overall consideration when employees are thinking about their satisfaction with their pay and experience with the organization.”
These compensation practices may seem like pragmatic solutions today, however, they are part of a larger trend that may soon become standard practice. “What is new, and what we might be seeing more of in the future, is a formalization of these non-monetary rewards in compensation structures. Managers in organizations with increased pay transparency may not have as much flexibility in salary negotiation discussions. Organizations can formalize opportunities for development and other benefits to reward exceptional performance while still adhering to pay ranges,” she said. “I think we’ll see that happening more in the future as an additional tool for overall rewards, but organizations need to take caution that the bias they are hoping to avoid with pay transparency doesn’t persist in the provision of these new rewards as well.”
Addressing Perceptions of Pay Inequity
In practice, what passes as pay transparency at many organizations may look more like broad pay bands instead of precise salary ranges that link to clearly defined job roles. In other words, employees may still feel like it is difficult to understand how their salary is calculated. Park believes that this lack of communication can smolder into a flashpoint for employee dissatisfaction, resulting in what organizational psychologists call perceived “distributive injustice,” or an employee’s perception that the way their company distributes resources and rewards is not fair.
The term is based on the organizational psychology concepts of “distributive justice,” which is justice and fairness around who receives resources, and “procedural justice,” which is justice and fairness around the application of policies.
“In the face of perceived distributive injustice, there’s a lot that can be done in terms of promoting procedural justice — communicating the procedures and processes that arrived at that [salary] number,” said Park. “If organizations really take time to justify and communicate their procedures for pay structures and different levels of compensation, of course there might be negativity, but [what is important for the employee is] that knowing the process that went into developing that number, and knowing that the same process is applied to everyone equally.”
Knowing the Value of Your Skills
Employers that prefer not to openly address compensation matters need not worry about what their employees think their skills are worth; they’ll find out elsewhere.
“In a world where pay transparency looks more like broad pay ranges rather than concrete numbers, employees still have areas to negotiate and still need to know the value of their skills in the market,” Park said. “Sites like Glassdoor will be a real source of information for that and they will continue to be valuable for understanding an organization’s culture. I see that as being a continued benefit of these sites.”