Pay Transparency: Why it is Important to be Thoughtful and Strategic

Abstract

Pay transparency is quickly ascending to the forefront of human resources compensation issues. Employees—especially younger employees—at organizations and society in general are seeking fairer outcomes and more transparency with compensation falls in line with those expectations. Governments are responding by drafting and passing new pay transparency legislation. Based on the research conducted, pay transparency can yield benefits such as helping to close pay gaps, reducing employee turnover, and elevating trust with management and others, but can also create confusion and negative outcomes. This article provides a summary of what pay transparency is, why it is gaining in importance, how it impacts organizations and where the trend may be heading. A list of strategic recommendations is offered for organizational leaders to consider when navigating through an environment with greater pay transparency.

Variable Pay Transparency in Organizations: When are Organizations More Likely to Open Up About Pay?

“…Consequently, in line with our argumentation, not all organizations decide to be transparent about payrelated issues or to allow employees to discuss pay, presumably for what they perceive as good reasons related to the characteristics of their pay system. Our research confirms what has been postulated in the literature that organizations approach the goal of moving toward greater transparency with caution (Heisler, 2021;Schnaufer et al, 2022) and, at least partially, in a strategic way (Avdul et al, 2023). Specifically, our research provides some of the first indications of which pay system characteristics relate to pay transparency dimensions and thus may constitute a basis for revising variable pay systems to fit the intended transparency level.…”

“…In light of growing internal and external pressures to increase pay transparency, organizations are confronting the need to open up about pay (Heisler, 2021). Strategic HRM and pay transparency literature posits that organizations benefit from aligning certain HRM practices such as pay system characteristics and pay transparency (Avdul et al, 2023;Jackson et al, 2014). Consequently, in line with our argumentation, not all organizations decide to be transparent about payrelated issues or to allow employees to discuss pay, presumably for what they perceive as good reasons related to the characteristics of their pay system.…”

“…Research thus far has explored either contextual external (macrolevel, e.g., social norms or legislation) factors determining when organizations introduce pay transparency (Brown et al, 2022;Scott et al, 2020) or focused on the employee perspective and investigated consequences of pay transparency for individuals (Bamberger & Belogolovsky, 2017;Belogolovsky & Bamberger, 2014Day, 2012;Scheller & Harrison, 2018;Scott et al, 2020;Shaw & Gupta, 2007). However, recent conceptual reviews also indicate within-organizational level factors, such as pay system characteristics, that constitute an important motive for higher or lower levels of pay transparency in organizations (Avdul et al, 2023;Brown et al, 2022;Stofberg et al, 2022). For example, it has been suggested that pay system characteristics likely play an important role in pay transparency decisions given that under some pay system conditions (e.g., lower pay dispersion) pay transparency may be less risky for managers (e.g., fewer potential conflicts, negotiations; Brown et al, 2022;Wong et al, 2023).…”

“…These arguments for and against pay transparency in the literature are derived from different theoretical perspectives but reflect well organizations' reality in balancing pros and cons of pay transparency and deciding what to reveal and to whom (Tse, 2022). Consequently, organizations' pay transparency decisions are characterized by tensions and more research is needed to understand how organizations tend to resolve these tensions (Avdul et al, 2023;Heisler, 2021).…”

“…As recent review of the literature indicates (Brown et al, 2022) organizations may wish to provide a lower level of pay transparency to avoid conflict among employees, ensure employee privacy or maintain competitive advantage. In contrast, organizations may strive for higher pay transparency to foster internal labor markets or improve employer branding (Avdul et al, 2023;Brown et al, 2022;Sharkey et al, 2022). These arguments for and against pay transparency in the literature are derived from different theoretical perspectives, but often ignore one important consideration-the nature of the underlying pay system itself.…”