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.

Keywords

pay transparency effects of pay transparency on organizations driving forces pay transparency pay transparency pros and cons recommendations for incorporating pay transparency

Introduction

Pay transparency is quickly becoming one of the most prevalent topics in the field of human resources (Nacinovic & Kuvac, 2022; Scheller & Harrison, 2018; Stofberg et al., 2022). It is garnering interest for a variety of reasons including its impact on the employee–employer relationship (Stofberg et al., 2022), associated organizational outcomes (Alterman et al., 2021), and the overall cost/benefit for organizations (Colella et al., 2007; Heisler, 2021; Marasi & Bennett, 2016; Moriarty, 2018; Trotter et al., 2017). But mostly pay transparency is seen as a tool to help reduce pay inequity and pay inequality (Oblog & Zenger, 2022) related to gender (Baker, et al., 2019; Bennedsen, et al., 2022) and race in the workplace (Trotter et al., 2017).

To date, pay transparency has shown to elicit positive changes in organizations, but also challenges and confusion. It is still a relatively new construct and understudied (Alterman, et al., 2021), and overall, there is a lack of consensus on the effects of pay transparency measures (Brutt & Yuan, 2022). But there is little doubt the degree to which an organization shares and openly discusses pay practices and/or employee pay levels involves a cultural shift (Sanchez-Mira, et al., 2022; Ramachandran, 2011) and affects employee behavior (Cullen & Perez-Truglia, 2018). Therefore, as the momentum for pay transparency likely continues, it will be important for organizational leaders to approach it in a thoughtful, intentional and strategic way. This is meant to inform compensation practitioners when making decisions about pay transparency.

We begin by first defining pay transparency and explaining - based on existing research—why the topic is gaining in importance in the United States and across the globe. Second, we detail recent empirical findings with pay transparency, how it impacts organizations and where the trend may be heading. We conclude by offering a series of practical recommendations for compensation practitioners and managers as well as research recommendations for academicians to consider to help them navigate through an environment with greater pay transparency.

What is Pay Transparency?

There is no consensus definition for pay transparency in the literature. We rely upon the definition by Percy (2022) who defines pay transparency as the degree to which employers choose to disclose how they determine and manage employee pay (Percy, 2022). This includes an organization’s compensation practices, such as their overall compensation philosophy, job evaluation techniques, benchmarking practices, salary ranges and related policies (Christie, 2022; Payscale, 2019). It also represents the level of transparency around sharing employees’ compensation, including how much employees are paid and how they are paid compared to others, including any associated pay gaps. Full transparency of employees’ compensation is rare, even though the practice is viewed positively by others (Nacinovic & Kuvac, 2022). Most organizations employ some level of pay secrecy, which restricts the amount of information employees are provided (Trotter et al., 2017).

Pay transparency laws are quickly becoming commonplace in the United States (US) (Sharkey et al., 2022; Strofberg et al., 2022). Most laws in the U.S. involve banning organizations from asking candidates about their salary histories and providing company pay ranges for open positions, measures which have made it relatively easy for employers to comply up to this point (Bloom et al., 2022; Starner, 2022). Illinois and California require companies to report some pay data to the state (Lamb & Passoff, 2023). Currently, there is no legal requirement for employers to disclose their pay transparency efforts or results (Agovino, 2022a). Additionally, there is no restriction on sharing pay practices or employee pay levels. Moreover, employers can voluntarily choose to disclose all organizational pay practices and employees’ compensation or none at all, as long as they comply with local, state and federal legislation. From an employee perspective, pay transparency is ambiguous. Employees typically view it as the ability to discover and openly discuss pay levels of coworkers; however, many employees lack clarity about what pay transparency actually means and/or have diverse understanding about the topic and how it may impact them (Strofberg et al., 2022).

As pay transparency evolves, we expect many employers to resist for a variety of reasons. First, they may conclude compensation is too personal of a topic to discuss openly with employees and will avoid discussions and disclosure if they can (Bierman & Gely, 2004; Colella et al., 2007). More transparency will undoubtedly be accompanied by inquiries and potentially difficult conversations and negotiations with employees (Stofberg et al., 2022). Second, there is no universal or accepted way to measure, report and share compensation data related to pay transparency in the United States (Agovino, 2022b). Without such structure, employers are not likely to be confident in what they can share or with whom they should share it. Third, more pay transparency increases exposure and thus the potential of legal action by disgruntled employees (Kral & Kubisova, 2021; Mercer, 2022; SimanTov-Nachlieli & Bamberger, 2021). Employers have historically resisted pay transparency to avoid perceptions of injustice and to reduce costly discrimination claims related to pay (Scheller & Harrison, 2018; Trotter et al., 2017). But perhaps hesitancy towards pay transparency is not surprising in the United States. Historically, social norms and privacy concerns have discouraged the open discussion of pay, even designating the topic as taboo (Scheller & Harrison, 2018). Although not our focus here, future investigations ought to examine pay differences in different national cultures (Smit & Montag-Smit, 2019).

Driving Forces Toward Greater Transparency

The push for greater pay transparency can be attributed to several factors. The first is an ethical/moral push for organizational justice, and in the wake of social movements such as #MeToo and Black Lives Matter, employees are seeking fairer outcomes (Wang et al., 2021). Research has shown that women, ethnic minorities and employees not born in the United States receive lower monetary rewards overall, even in cases where they have the same manager, work unit, human capital characteristics and earn the same performance evaluation scores (Castilla, 2015). The pay gap for women in the United States once stood at $0.59 for every $1.00 men earned but has since shrunk to $0.82 (Okereke, 2020; Wisniewski, 2022). The pay gap for Black and Hispanic/Latino employees in the United States is $0.76 and $0.73, respectively. The pay gap for women of color is even wider. Black women are paid $0.64 and Hispanic women are paid $0.57 for every $1.00 white non-Hispanic men are paid (Glynn & Boesch, 2022). Those in favor of greater pay transparency argue that more open policies and practices will reduce inequities as employees can better monitor and address pay inequity issues and dissuade employers from making unjustified or discriminatory pay decisions (Strofberg et al., 2022). Studies show that pay gaps do decrease once organizational accountability and pay transparency are introduced (Castilla, 2015).

Second, pay transparency is building momentum as diversity, equity and inclusion (DEI) initiatives gather steam. Pay transparency and DEI go hand-in-hand. Employers who embrace pay transparency may do so to seek higher levels of trust with their employees, attempting to make them feel at ease they are not being paid and/or treated differently because of their race, gender or sexual orientation (Peralta, 2021). The underrepresentation of women and minorities, especially in management positions, often contributes to an organization’s pay differences and ultimately pay gaps (Dinkin, 2020). Organizations are coupling diversity efforts and transparency with pay to demonstrate to employees and job candidates that the organization is committed to a fair and inclusive workplace (Karakhan et al., 2021; Del Pino-Jones et al., 2021).

A third driving force around the pay transparency trend is the attitudes of younger workers around pay. Younger employees are far more supportive of pay transparency and are more willing to openly discuss compensation issues than seasoned employees. According to a recent LinkedIn survey, 81% of respondents ages 25 or younger agreed that pay transparency leads to more pay equality with 75% of millennials (ages 26–41) supporting the idea. By comparison, only 47% of Gen X workers (ages 42–57) and 28% of baby boomers (ages 58–76) agreed. Each generation noted different opinions on who they felt comfortable sharing pay information with, but it was clear that younger workers—the leaders of the future—are more supportive of pay transparency initiatives (Advisory Board, 2022). It is important to note that technology has played a role in the popularity of pay transparency with younger workers. Websites like Glassdoor and Salary.com allow workers to post salary information, making once-guarded salary data readily available to anyone with internet access. For younger employees, this experience is expected, even commonplace. Transparency of salary data is not viewed as competitive, hostile, or intrusive, but rather “shared among friends” to help colleagues prosper and advance (Trotter et al., 2017).

Fourth, an increasing number of shareholders are putting pressure on leaders to publicly disclose their policies, analyses and goals as it relates to compensation and closing pay gaps (Ell, 2021; Lamb & Passoff, 2023). Over the last 9 years, shareholders have filed at least 158 shareholder proposals for additional disclosure around pay at more than 90 companies (Lamb & Passoff, 2023). The topic is seeing greater engagement through shareholder dialogs and at shareholder meetings. Also, recent rules issued by the Securities and Exchange Commission (SEC) have paved the way for additional shareholder involvement. The pay ratio rule affords shareholders more rights to analyze and vote for executive pay (although the votes are not binding) and to review median pay rates between executives and “regular” employees (Crawford et al., 2021).

Finally, legislation is being enacted to support greater pay transparency. City and state governments have responded more quickly to the push for pay transparency than the federal government in the United States. For instance, the Colorado Equal Work Act, which took effect at the beginning of 2022, mandated publication of salary ranges for all new job openings (Agovino, 2022a). Employers with four or more employees in the state of New York must include the minimum and maximum annual salary or hourly range when communicating about a job opening, promotion, or transfer. Violators are subject to civil fines (Paychex, 2023). California, Connecticut, Maryland, Nevada, Rhode Island and Washington all have pay transparency laws in-place. In Rhode Island, employers must provide a salary range for a job opening upon request (Bloom et al., 2022). The Maryland law prohibits employers from asking job candidates about their previous salary history (Scharge 2022). Currently, the cities of Cincinnati, New York City and Jersey City have enacted pay transparency laws, and the list is growing quickly (ADP, 2023). But the legislative movement for pay transparency is not limited to the United States. Seventy-one percent of Organization for Economic Co-operation and Development (OECD) countries have passed pay transparency legislation since 2003 (Cullen, 2023). More recently, the European Commission reached an agreement on pay transparency measures, which includes more pay transparency for job seekers, more visibility on pay gender gaps that may exist at organizations, and better access to justice for victims of pay discrimination (European Commission Press Release, 2022).

How Pay Transparency Impacts Organizations

Associated Positive Outcomes

There is emerging empirical evidence suggesting pay transparency helps to reduce pay gaps between men and women. A study from Canada examined public sector salary disclosure laws on university faculty and found that the regulation helped reduce the gender gap by 20–40 percent (Baker et al., 2019). A separate study in Denmark examined the effects of legislation mandating that firms provide gender-disaggregated wage statistics and other related administrative data and noted a 2% pay gap decline without affecting the firms’ profitability (Bennedsen et al., 2022). Payscale’s (2019) research report found that women felt that the gender wage gap closes at all levels when they agreed their organization engaged in transparent pay practices, a positive sentiment for greater transparency. One potential reason for this is that more salary information is available to applicants and employees, thus ensuring more equitable pay negotiations (Scheller & Harrison, 2018). Pay transparency appears to help move the needle towards pay equity by pressuring leaders to remedy pay inequities by granting larger increases to those deemed unfairly underpaid and make pay overall more equal (Obloj & Zenger, 2023). But not all research overwhelmingly supports the notion that pay transparency reduces pay gaps. A study conducted in Germany found that a transparency regulation that allowed employees to request wage information of comparable employees did not affect the gender wage gap in a significant way (Brutt & Yuan, 2022).

There is emerging empirical evidence that greater pay transparency plays a role in reducing employee turnover. Payscale (2019) found when organizations exhibit greater pay transparency it reduced employees’ intent to leave. Similar results were found by Strofberg and colleagues (2022), who found that perceptions of higher levels of pay transparency were associated with higher levels of perceived support, distributive and procedural justice and distributive justice mediation paths, which ultimately led to lower job turnover intentions. Their findings support the notion that pay transparency works more indirectly on firm-level outcomes like employee turnover. Finally, a global study conducted by Scott et al. (2020) showed that employees, regardless of country, are less likely to leave if employers have more pay communications and are more transparent about their pay practices. This noted “retention effect” comes not only from perception of fairness in employees’ current positions but also what future pay may entail, especially as it relates to advancement and promotion.

There is empirical evidence suggesting that pay transparency may affect employee motivation, albeit both positively and negatively. For instance, Cullen and Perez-Truglia (2018) found employees became more motivated to complete their day-to-day tasks upon learning how much their managers earned, but not if they learned their peers earned more than them. This is perhaps not surprising as employees may become de-motivated or disgruntled if they feel they are underpaid in relation to their peer group, but enlightened to learn what their future earnings potential may be. Perceived fairness also seems to be linked to motivation with pay transparency. Hartmann and Slapnicar (2012) found that salary transparency affected employee feelings on both distributive and procedural fairness and was important in predicting intrinsic motivation in employees. In this way, pay transparency appears to have a moderating effect on employee motivation.

Additional literature and studies support greater pay transparency for a variety of other reasons. Some researchers have found that greater pay transparency and openness has helped bring forward better job performance in employees, higher overall job satisfaction and greater affective commitment (Futtrell & Jenkins, 2018; Nacinovic & Kuvac, 2022; Scheller & Harrison, 2018). Also, pay transparency has been linked to greater trust in management (KnowledgePay, 2012).

Associated Risks

Although there is much positivity surrounding many effects of pay transparency, not all outcomes appear overwhelmingly positive. For instance, one study found more openness with pay caused employers to keep employee salaries relatively even and flat to avoid difficult conversations and potential salary renegotiations with employees (Lyons & Zhang, 2022). Managers appeared motivated to equalize employee pay to reduce dispersion and avoid employee inquiries and complaints (Lam et al., 2022). This finding may be troubling for employees and managers who expect pay differences and embrace pay for performance. Pay differences are reasonable and expected for employees in the same job if there is rationale and justification as to why one person is paid above or below someone else (e.g. tenure, location, better performance) (Dinkin, 2020).

Along the same lines of flatter pay with greater transparency is a potential reduced link of pay to performance. This weakened relationship can lead to lower employee productivity—an outcome that seems to depend on what pay transparency reveals and to whom (Obloj & Zenger, 2023). For instance, when pay transparency reveals that employees are underpaid or feel discriminated against, their productivity declines. Conversely, if pay transparency reveals inequitable overpayment, said employees elevated their productivity, perhaps to justify their higher pay to others (Obloj & Zenger, 2023). Based on these findings, it is reasonable to assume that performance in these cases is not being driven by expected future outcomes or pay but instead by their current situation—that is, pay level and its relation to others. Also, as discussed previously, motivation is impacted by greater pay transparency, and if employees become de-motivated their performance declines (Cullen & Perez-Truglia, 2018).

A final point worth noting with pay transparency concerns a study brought forward by Bamberger & Belogolovsky (2017), who found that pay transparency increased episodic envy toward higher paid colleagues, and as a result negatively impacted the helping of others. Empirically their study provided some of the first evidence that pay transparency may damage esprit de corps and peer cooperation. The findings suggest that in environments which demand more intensive cooperation and teamwork, pay transparency should be approached cautiously and thoughtfully. Leaders in these environments should consider ways to incorporate teamwork and/or helping others as a way to mitigate this effect, such as making it a compensable item in a bonus program or incorporate within a performance appraisal program (Bamberger & Belogolovsky, 2017).

Where the Trend May Be Heading

With the increase in pay transparency laws, guidelines will need to be developed. It is likely that pay transparency laws will become more comprehensive, both in the United States and across the globe. We expect more states to require employers to post salary ranges for open positions (both on job boards and/or in job descriptions). Some are advocating for transparency laws to expand, including covering federal contractor pay. Canales (2017) argues it would allow contractors to gain access to information to help them protect themselves against compensation discrimination and ensure that taxpayer money is not being directed towards discriminatory companies. Others are advocating for employers to report specific compensation data to state or federal officials, a practice that is more prevalent in European countries. For instance, relevant employers with 250 or more employees in the United Kingdom must report data relating to pay gaps and bonuses paid to the government (Grabham, 2023). In Germany, employees have a right to review compensation procedures relating to wage-setting to help them compare their remuneration with equivalent colleagues (Zimmermann, 2017). Perhaps the most stringent guidelines for pay equity are in-place in Iceland. Employers with 25 or more employees in that country are required annually to obtain a pay equality “certificate” that demonstrates pay equality between men and women based on certain guidelines (Morgan, 2020). We expect that similar types of disclosure may eventually become more commonplace in some cities and states in the United States.

Second, we expect the momentum for pay transparency to force more employers to place focus on their existing compensation practices and programs. Depending on where an organization stands with the development and refinement of their compensation practices, pay transparency is likely to be welcomed or resisted. Organizations will be more successful with pay transparency if they have defined compensation strategies, structure, systems and tools and flexibility (Davis, 2022). Those without such programs will likely need to invest in them or risk exposure and employee pushback that they are failing to manage employee compensation competently and fairly. Communication should be a focus with effectively managing pay transparency. We foresee members of human resources staff being tasked with handling additional employee relations requests relating to perceptions of unfair pay and explaining how the organization’s compensation policies are trustworthy and fair (Kalser, 2022). Managers are likely to be challenged with inquiries and may not be able to answer them competently. Greater pay transparency will likely lead to questions from employees along with requests for pay adjustments. A study conducted by Lam and colleagues (2022) confirmed this, and indicated managers are likely to grant compensation adjustments as they feel pressured to maximize team performance and retain key talent. Their research also found that pay transparency prompted employees to negotiate more personalized rewards such as additional training and supplementary benefits.

Third, we see some organizations accelerating their pay transparency and pay equity efforts to remedy pay gaps and to get ahead of the curve. Such activity not only corrects inequities but also brands firms as best-of-breed while mitigating regulatory and reputational risks. While we certainly do not expect this to be the case at all organizations, there is evidence some organizations are already taking action. For instance, Pfizer recently confirmed they compensate their female employees at a rate of 99.4% of what male colleagues are paid, with 100% pay equity between minorities and non-minorities in the United States (Pfizer, 2022). JustCapital ranked Bank of America first for supporting women in the workplace, by offering family-friendly benefits and conducting annual gender pay equity analyses and disclosing the results (JustCapital, 2023). Target recently earned an “A+,” a perfect score, on a Racial and Gender Pay Scorecard published by Arunja Capital, due to disclosing 100% equal unadjusted and adjusted racial and gender pay gaps and full disclosure of its methodology. Other high-profile companies such as Starbucks, Mastercard, Microsoft, Citigroup and American Express earned an “A” rating (Lamb & Passoff, 2023).

Practical Recommendations for Handling Pay Transparency

For most organizations working towards achieving pay transparency, a practical first step is to develop a strategic and thoughtful approach. Organizational leaders need to take an honest assessment of where the company currently falls on the pay transparency spectrum. Once this is accomplished, leaders can decide how to move forward with its pay transparency initiatives and what the next steps may be. This likely requires revision of the company’s compensation philosophy along with its other compensation programs and policies.

Revise Compensation Philosophy

Once a strategic direction is agreed upon for pay transparency, organizational leaders should revise its compensation philosophy accordingly. The philosophy should identify the organization’s pay programs and reward strategies, define an organization’s competitive market position, find ways to attract, motivate and retain employees and ensure equal pay for equal work (SHRM, 2023). The compensation philosophy should be aligned with the company’s business strategy and culture around compensation and should help managers explain to employees why they are paid at their current level and what they need to do to be paid more (Nordli, 2022). Ultimately, the strategic approach toward pay transparency will influence the amount and type of content that should be included in the philosophy.

A Proactive and Strategic Approach

Upon examining the organization’s current situation, leaders can then conceive and develop strategies necessary to attain the desired level of pay transparency. For organizations that do not have robust compensation tools or practices in place, they may want to start by simply complying with federal or state laws regarding pay transparency, such as posting salary ranges on job applications or refraining from asking potential hires about their salary histories. They should make an honest attempt at compliance and not “wink at the laws” by posting overly broad salary ranges or take other measures which may confuse candidates and cause the organization to appear less trustworthy (Mayer, 2022). Organizations need to be “mature” enough to handle transparency, which includes practicing supportive leadership, being aware of the interpersonal atmosphere to help predict the effects of pay transparency and using data and information to treat employees fairly Kral & Kubisova (2021). As the organization procures better resources and refines their techniques, they can expand their efforts and go above and beyond minimum requirements if they wish. The risk tolerance of an organization needs to be considered during this process. It is a good idea to involve in-house counsel and the organization should have a long-term plan moving forward.

Incorporate Pay Equity with Pay Transparency

A third recommendation when implementing pay transparency is to conduct a pay equity study. Pay equity studies, based on statistical regression, are comprehensive because their models take into consideration current pay levels of employees and account for differences based on legitimate factors such as experience, training, education, performance, and others. Pay equity consultants develop expected pay levels for positions, highlight employees who are shown to be paid inequitably as compared to their expected models, and provide options for remediation, which is vital to understand as compensation becomes more transparent (Buckman & Jackson, 2021). Pay equity studies are gaining in popularity but are far from ubiquitous. Payscale (2022) noted an increase of 20% of formal pay studies conducted from 2021 to 2022; but also found many leaders to be hesitant and skeptical. Reasons cited for skepticism include denying pay equity problems exist, lack of interest overall in addressing them, lack of clean human resources data, fear of results and fear of potential legal action (Barnard-Bahn, 2020; Peakman & Thomas, 2022).

Invest in Compensation Tools and Processes

With a push for pay equity and transparency, it is important that organizations invest in robust and reliable tools for managing employee compensation. Salary survey data and guidance is readily available from reputable consulting firms such as Mercer, Willis Towers Watson, Aon Hewitt and others. Having reliable data on-hand that can be “cut” to specific peer groups will enhance the credibility of salary analysis and benchmarking data and help ensure employees are paid competitively and fairly. Consultants can be called upon, when needed, to help develop or update compensation processes and programs and to help to standardize compensation programs and promote equity. This includes ensuring base pay structures, merit programs, bonus plans and performance evaluation programs are fair and unbiased, and that formal structures such as pay grades and ranges are in place (‘What can I do,’ 2022).

Communicate to Create the Desired Culture

Communication should be a high priority for members of human resources and other leaders to create the desired culture around pay and to build trust among employees. Research has shown that individuals form their own opinions and preconceived notions regarding their compensation, whether accurate or inaccurate (Morrell, 2011). Cragan and colleagues’ (2021) found communication around pay actually decreases when pay is perceived as being more fairly distributed. This is perhaps not surprising because said employees feel there may be no equity issues, creating a false positive and consequently lowering the overall communication and chance of correcting the false perceptions. Managers are more likely to hear from employees when they have perceptions of inequity.

In an ideal scenario, employees should feel comfortable asking questions about an organization’s compensation policies and programs without fear of retaliation. If a company has its house in-order with managing employee compensation and is comfortable sharing its practices, it may make sense to promote them on company websites, through policies and manuals, or in other ways. Employees who feel educated about the tools an organization uses for compensation administration are more likely to feel it is trustworthy (Christie, 2022)

Manager training is a key aspect of having robust and meaningful communication with employees. Managers should be trained on how to engage with employees (and job candidates) regarding pay issues and what they can share (Davis, 2022; Nordli, 2022). They should be able to demonstrate how factors such as budget and employee performance affect compensation (Christie, 2022). Employees need to understand the process is designed to be fair. While conversations with employees around transparency and equitable pay will likely be difficult, it can create a positive feedback loop and lead to more frequent and productive discussions (Agovino, 2022a).

Continue to Embrace Pay-for-Performance

While the desire for pay transparency may shift managers into a mindset of equality, employers should continue to embrace pay-for-performance to ensure equity. Higher performing employees should receive higher merit increases and more lucrative bonuses. A key element of fair pay-for-performance is ensuring the organization has an objective performance measurement and reward system in-place. Combining key metrics and results with continuous monitoring and dialog allows employees to understand how their work contributes to specific outcomes which ultimately affect their pay (Lam et al., 2022). It also takes the pressure off managers to evaluate, sometimes subjectively, employee performance. As stated previously, employee performance is a legitimate reason for differentiation of compensation among employees. Incorporating pay transparency and reducing the link to pay-for-performance is a mistake because it risks alienating and losing top performers who get results and thrive in a pay-for-performance culture.

Make the Shift by Strategically Managing Innovation and Change

When it comes to the strategic implementation of pay transparency, leaders will have to confront the challenges often associated with innovation and change. Designing compensation to reflect the sociocultural and legal pay transparency trends is fundamentally an innovative activity. Organizational innovation is a planned change to bring to life something new in an organization to increase performance (The Organization for Economic Co-operation and Development, 2005). As such, any recommendations impacting compensation philosophy, pay structures and pay equity, not to mention communication and culture, fundamentally must embrace a strategic change management perspective.

Putting pay transparency into action, as previously indicated, may involve some pushback. Undoubtedly, there are individuals and groups within any organization that perceive themselves as benefiting from the status quo and are primed to question and even resist any initiative that may result in a loss, whether real or perceived. As such, compensation professionals may benefit from utilizing certain strategic approaches to managing change. One proposition is to consider using Kurt Lewin’s classic three-step model (1947). Lewin argued that successful change in organizations should follow three specific steps: unfreezing, moving and refreezing. During the three-step process, elements related to philosophy, people, policy, process, technology and culture will need to be deleted, modified and added. During and after this turbulent period, there will likely be resistance and even some ambivalence among the change sponsors and change facilitators. These restraining forces must be decreased or at a minimum, outnumbered by driving forces toward the desired change to move the parties away from the current quasi-stationary equilibrium (Burnes, 2020). Once a shift begins toward the desired change, it is important to keep the momentum going in the moving or change step. The refreezing step then seeks to embed these changes into new rituals within the organization and create lasting change based upon the aims of the pay transparency initiative. While it is beyond the scope of our paper to focus on the effects of loss aversion (Kahneman & Tversky, 1979) when redesigning compensation strategies, it is recommended that compensation professionals view the change from two perspectives—potential benefits and potential losses.

Research Recommendations for Academicians Examining Pay Transparency

The recommendations described above can also inform researchers who may want to conduct survey research and case research to determine how organizations are responding to pay transparency as well as how compensation practitioners frame the positive outcomes/benefits and the risks. A mixed methods approach may be warranted to not only address the dearth of scholarly investigations given that pay transparency is still a relatively new construct, but also to inform practice, thereby seeking to balance rigor and relevance.

To date, there is a dearth of theoretical research involving pay transparency (Fahn & Zanarone, 2022). Yet, pay transparency is informed by the pay communication literature (Holtzen, 2022), the pay information disclosure literature (Brown et al., 2022), and the principle/agent literature (Tse, 2022; Fahn & Zanarone, 2022). Pay transparency could also potentially benefit from future research involving the components of organizational justice (Scheller & Harrison, 2018), motivation (e.g. content-based theories, process-based theories, cognitive theories), the psychological contract literature, and leadership to create a more holistic understanding of the contributing factors associated with the effective implementation of pay transparency.

While the extant empirical research on pay transparency appears to be mixed regarding associated outcomes, Fahn and Zanarone’s (2022) hope that future research will focus on the “yet understudied topic of when and how transparency benefits organizations” (p. 1068). Fahn and Zanarone’s (2022) further argue that relational contracting “holds the promise to inform managers on when to pursue transparency, and how to optimally implement it” (p. 1068).

Conclusion

Pay transparency efforts are at its initial stages in the United States, but momentum is growing. There will likely be additional laws passed and/or existing laws revised as the topic evolves, forcing employers to adapt and comply. Many organizations are already taking proactive measures. Research thus far indicates that pay transparency can yield benefits, such as reducing employee turnover, increasing employee motivation, job satisfaction and affective commitment, and perhaps most importantly closing wage gaps. But not all research outcomes are positive or conclusive and pay transparency may cause unintended consequences. Examples include a reduced link of pay to performance, flatter salaries overall—when leveling may not be justified—and negative morale, including reducing cooperation and helping others.

Employers should therefore approach pay transparency in a thoughtful, intentional and strategic way. Employees’ compensation is, and likely always will be a personal and sensitive topic. Going forward we foresee the need for employers to balance their need for compliance with a strategic approach toward pay transparency. Those who engage proactively and thoughtfully are much more likely to reap some of the benefits that have become evident thus far.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iDs

David N. Avdul

William Marty Martin

Yvette P. Lopez

Author Biographies

David Avdul is the Vice President of Human Resources and an Adjunct Professor at DePaul University.

Marty Martin is a Professor in the Department of Management & Entrepreneurship in the Driehaus College of Business at DePaul University.

Yvette Lopez is an Associate Professor in the Department of Management & Entrepreneurship in the Driehaus College of Business at DePaul University.

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