Pay transparency is coming. Here's what that is going to mean for you

Activists, legislators, employees and recruiters are pressuring companies into becoming more transparent about their compensation.
Written by Jada Jones, Associate Editor
Image: Getty Images

During the past two years, power over the labor market has significantly shifted toward workers. Skilled employees, particularly those in tech, have experienced increased pay, more flexibility, better benefits and more choice in the job market then perhaps ever before.

But an aspect of job hunting that's remained relatively unchanged is salary transparency. Being left in the dark about how much a job will pay continues to be a top frustration of jobseekers and employees trying to negotiate a better salary.

In response to this frustration, New York City recently passed a new law that requires all companies with at least four employees to disclose how much they will pay an employee.

Such legislation and conversations about salary transparency can encourage more people to talk about an issue that's gone unspoken for so long. Job hunters spend hours revamping their resumes, typing cover letters, and completing extensive applications, and to do so only to find out a role is paying far under your earning expectations is a major bummer.

Cloak and dagger

According to a study of 2,000 US workers by Adzuna, 54% of job applicants declined a job offer after learning about the position's salary. The same study says that 33% of job applicants would not attend an interview before knowing how much the job would pay.

So, why do companies keep such vital information to themselves? And how can they be more honest with applicants about their compensational intentions?

According to Paul Lewis, Adzuna's chief customer officer, companies wait until the last minute to disclose an open position's salary because they think it will result in more applications. 

Also: When it comes to tackling retention, employers are overlooking their biggest problem

But Lewis says this way of thinking is not necessarily accurate. An influx of applicants who will eventually decline the offer leads to more work for recruiters and hiring managers. Plus, data suggests that job ads with a salary range receive six times more applications than ads without a salary range.

"Employers need to accept that jobseekers are ultimately going to find out about their salaries and delaying the news until the end is not going to make jobseekers, who usually have already made up their mind about their salary expectations, reverse their decision," Lewis tells ZDNET.

According to Lewis, most current practices around keeping salary expectations under wraps give companies a financial advantage over applicants. He says that companies want to maintain flexibility over how much they pay a candidate based on their location, seniority, and ability to negotiate their wages.

But those advantages are slowly being eroded by workers demanding more equality and their propensity to find another opportunity, should it arise. "Financially speaking, this can be an advantage for the employer. But we're living in a world where equality and fairness matter, and employee experience has become companies' priority," Lewis says. 

"Employers should not backtrack on the progress in making their workplace a better and fairer place."

Tim Grimes, a co-founder of WorkYourWay, says some companies withhold their salary ranges from the public so as not to anger current employees and to keep competitors at bay. But he tells ZDNET that pay transparency is beneficial for applicants and the company alike.

Salary transparency saves applicants time applying to jobs they won't accept once they know the job's pay. Grimes says that when companies are upfront about their compensation, they can expect a decrease in cost per placement and extra work for HR employees. 

"It's a real problem, where candidates apply, interview, only for them to find out the job isn't financially viable for them," he says. "Transparency helps candidates avoid unnecessary applications, which in turn avoids wasted travel time, childcare, and all other costs attributed to searching for your roles."

Salary transparency as a means to achieving equality

Salary transparency has always been a touchy subject, grouped with politics and religion as off-limits for water cooler conversations. It's something older generations say they wouldn't discuss with their coworkers, but the tide is turning on this narrative.

And as Millenials and now Gen Z grow up and enter the workforce, they're having open conversations about their salaries in the name of solidarity. The conversations happen in the office and online on platforms such as TikTok, where entire accounts are dedicated to pay transparency in the name of equity and diversity.

Compared to only 47% of Gen X, 81% of Gen Z workers believe that disclosing their salaries will lead to more pay equality, according to a LinkedIn survey.

And according to research, younger people have the right idea. Disclosing pay to your coworkers gives them the information to determine if your employer is underpaying them. This is especially true if, out of two people with the same position, one is paid more than the other.

It's not atypical for women, particularly women of color, to be paid less than their male counterparts for working the same job at the same company. And proponents of companies being more transparent about their salaries say that this openness will help close the wage gap. 

Being crystal clear about salary expectations can lead to an increase in women submitting applications and help a company achieve its diversity goals, according to Grimes.

"Businesses that are forthcoming with salaries also attract more diverse talent, and have access to a much wider pool, ultimately creating a more equitable workplace," he says.

Janet Lenaghan, dean of the Frank G. Zarb School of Business at Hofstra University, says pay transparency policies aim to close this wage gap. 

"When you think about pay transparency policies, they're aimed at promoting wage equity for groups who, historically, have received lower compensation, such as women and people of color," Lenaghan tells ZDNET.

But to make real change, companies should broaden their definition of transparency and take a total-rewards perspective in their job postings, especially in a competitive labor market.

Lenaghan suggests a total-rewards perspective includes all perks, values, and cultural aspects a business can offer a potential employee. These rewards include flexible work hours or paid childcare, and they can be helpful to mention for companies that can't compete monetarily with larger firms.

"Small businesses or nonprofits may not be able to compete with Fortune 500 companies in terms of salary, but when you expand total rewards, and you look at all the other unique characteristics and benefits of their organizational culture, in fact, they can compete quite well," she says.

Be crystal clear. Your employees will appreciate it

For companies, research suggests that salary transparency can positively impact employees' sense of trust and fairness at work. When companies are upfront about their compensation and benefits, employees feel they know everything they need to know about the company.

But without total transparency, employees feel a sense of deception and untrustworthiness from an employer, according to Lenaghan. Adzuna's data supports this: 32% of applicants think a company is hiding something when they keep salaries a secret.   

Also: Less is more: Why the four-day is rocking the world of work

"In the absence of [transparency], employees will start to question how the company values employees," Lenaghan says. 

"The truth is, they're going to perceive that secrecy as a mechanism for hiding unfair practices. Employees value transparency in organizations."

However, if done incorrectly, salary transparency can lead to pay compression, according to Lenaghan. Pay compression happens when there's little to no pay difference between new and tenured employees.

"As organizations go out and want to be competitive in the market and don't attend to their current employees and understand their value, in terms of length of tenure, skills, and expertise and knowledge, versus the new employee coming on, what you can have is the gap between new employees and tenured employees narrowing," Lenaghan says.

If a new employee in an entry-level position is making as much as a tenured, mid-level employee, it can cause some problems. Companies subjecting their employees to pay compression could risk increasing employee turnover and making them unhappy and less productive.

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