Pay Transparency Causing Major Impacts in Reward Strategies: New Research from Reward Leaders

Organizations in a Holding Pattern

Organizations find it challenging to approach pay transparency due to its far-reaching effects, uncertainty and varying regulatory requirements. Relative to the regulatory environment in the U.S., certain jurisdictions mandate disclosing salary ranges after a job interview or upon an applicant’s request, whereas others require posting ranges in job posting documents (Beppel, 2023). There is also confusion regarding how to treat remote workers, as regulations often differ. Moreover, organizations have varying interpretations of “pay transparency” because the information shared and the recipients can vary significantly. Complexity and ambiguity surrounding pay transparency can cause organizations to take a more cautionary and reactive approach—or inaction altogether—to this changing environment, leading to unclear, confusing or ineffective communication.

Despite the increased attention and scrutiny organizational pay practices are getting, Korn Ferry’s survey of HR and Total Reward leaders found that relatively few organizations have taken action on pay range transparency. In Figure 1, few organizations have taken the step to develop principles or implement a strategy around pay transparency, with 45% of global organizations (37% U.S.) adopting a wait-and-see approach and 29% actively reviewing their programs (33% U.S.) as the regulatory environment unfolds.OPEN IN VIEWER

Korn Ferry’s survey finds that U.S. companies are more likely to have acted on pay transparency than other countries, quite likely due to the country’s more active regulatory environment. These findings also suggest that an organization’s size and resources affect its adoption and maturity in implementing pay transparency. The survey found that 44% of U.S. employers with 5000 or fewer employees are waiting to act on pay transparency. In comparison, 23% of U.S. employers with over 20,000 employees are waiting to act on pay transparency.

The Benefits of Pay Transparency

A strong majority of respondents in the Korn Ferry survey view pay transparency as a positive development resulting in positive outcomes for key stakeholders. Specifically, respondents agree that the measures will most benefit applicants (82% agreed), followed by current employees (65% agreed), and the organization’s mission and vision (63% agreed). Furthermore, a large percentage of global respondents—84%—said that increased pay range transparency would reduce pay inequities across gender, race, ethnicity and other employee characteristics.

Other research studies have noted additional benefits of pay transparency. According to a survey by Indeed, job seekers are more likely to apply for jobs that disclose pay ranges in their job postings (Threlkeld, 2021). Additionally, a recent study by PayScale concluded that pay communication and transparency has a marked impact on employee satisfaction and intent to stay with an organization (Zhao, 2018).

Pay Transparency to Shift Rewards Communication Strategies

As mentioned, a strong majority of respondents to the Korn Ferry survey believe pay transparency will reduce pay inequities (84%) across gender, race and other employee groups. However, half of organizations (50%) are concerned that pay transparency will disrupt the perceptions of pay equity among existing employees. This presents a paradox between the long-term positive benefits and short-term pain of implementing pay transparency, making it difficult for companies to take action.

While more consistent and equitable pay outcomes are desirable, management may find it easier to handle exceptions and disparities with less transparent practices. Consequently, many organizations may hold off on increasing salary range and pay program transparency until new regulations force them to do so, as they fear it might limit their flexibility and agility in compensation administration. Recognizing this tradeoff, 61% of organizations in the Korn Ferry survey say pay transparency will cause them to rethink the existing balance between manager discretion and process and structure as HR takes a more influential role in making pay decisions.

These new salary range transparency laws have also forced organizations to open up and communicate broader aspects of their reward programs, such as their overarching compensation philosophy, methodologies for market pricing and job grading, and compensation administration frameworks that may have historically been kept secret from managers and employees. Another reason organizations are likely holding off on implementing pay transparency strategies is that they fear that revealing more details about their pay practices could lead to difficult questions from employees that managers may not be able to answer convincingly. A survey by Willis Towers Watson found that the most cited reason for holding back on communicating about pay was the possible employee reactions to pay transparency (WTW, 2022). Pay transparency decisions also have a significant impact on employer branding efforts and may differentiate the organization’s appeal to candidates and employees depending on what and how information is shared. As a result, it may take some time to clarify strategies, align leaders, equip managers and effectively communicate with employees.

Reward Strategies to be Reshaped

Open and candid conversations about pay will be a significant cultural shift in many organizations. Many managers are woefully under-supported and uncomfortable in having compensation discussions with their employees. Many employees are also uncomfortable around this topic. As recently as 2020, an Indeed survey found that 21% of workers feel uncomfortable discussing their pay, and 14% are afraid of being punished by their superiors, even though under the National Labor Relations Act (NLRA), most workers are protected and allowed to discuss their terms and conditions of employment, such as their actual compensation (Threlkeld, 2021). Talking about pay has been taboo in many workplace—particularly with older workforce generations—that transparency likely has to start at the top with leadership skilled and knowledgeable to provide the psychological safety required to have conversations about pay.

The good news is that most respondents to the Korn Ferry survey (72%) plan to overhaul their reward communications strategies around pay transparency, with manager training (70% of organizations) and employee education (66% of organizations) as the primary areas of focus (Figure 2). Managers play a critical role as the first line of communication with employees on their team, and organizations recognize that a significant upskilling effort will be needed to enable them to communicate effectively about pay decisions.OPEN IN VIEWER

Considerations for Successful Implementation

Before an organization can be transparent about its pay programs, it needs to ensure that a reasonable strategy and foundation is in place. Said another way—before an organization can tell a good story about its pay program, it needs a good story to tell. Organizations may find themselves unsure of how to start down the path toward greater transparency as they navigate a patchwork of regulations and grapple with understanding its unknown and far-reaching impacts across talent initiatives. Employers also wrestle with the paradox that for pay transparency to impact pay practices, they will likely experience discomfort in the short-term as they acknowledge and address disparities across their organizations. We recommend that organizations consider the following approach in implementing improved transparency in pay.

Clarify a Pay Transparency Strategy

Leaders must first decide what pay transparency means for their organization. Pay transparency can be an ambiguous term encompassing different elements of pay depending on the organization and the jurisdiction. A pay transparency strategy should include what information gets shared, key messages, messengers, mediums and who will have access to the information. It should connect pay transparency efforts with key talent outcomes. Key questions to resolve include:

• Do we comply only with minimum requirements in jurisdictions that require transparency, or do we establish a broader and more consistent organization-wide strategy?

Assess Current Practices

Next, organizations will be well served to review their current reward programs to understand what is working well and what can be improved as they prepare to provide more transparency into pay decisions. Multiple key stakeholder views should be considered including the business, managers, employees and candidates. This work includes qualitative analysis done through policy review and stakeholder interviews and quantitative data analysis.

An analysis that identifies gaps between current and desired practices as well as differences between current practice and industry leading practices is a good place to initiate discussions with senior leaders on potential areas of change. This is a good opportunity to introduce standard administrative guidelines for pay decisions that reign in discretion and exceptions to stated pay policies which create unjustified variances in pay.

A statistical pay equity analysis can help identify pay disparities between employees performing substantially similar work while controlling for variables that would justify pay differences such as performance, experience and job level.

Improve Compensation Programs

Moreover, a pay equity process assessment can help identify gaps in pay equity management principles, design and compensation administration processes. The change focus may also span from strategy to design to administration. This may include job leveling, market pricing, compensation structures, administration guidelines, governance processes, communications and the like.

Job architecture and leveling help identify roles that are comparable in terms of scope and internal value to the organization. A compensation structure aligned to job architecture and job levels promotes pay transparency by providing clarity and a fair and consistent method in how pay structures are determined.

Organizations will have to ensure that all aspects of the employee lifecycle and talent management are considered through the lens of pay transparency. Organizations will want to asses some of the following areas:

• How is the employer brand impacted by posting pay ranges on job ads?

Align Leaders

Understanding and addressing potential resistance and facilitating open conversations about compensation strategy, design and execution with senior leaders is key to ensure the organization is aware of, supportive and committed to the change effort. Moreover, getting leaders’ questions and concerns addressed up front will ensure a more effective implementation of change and communication with leaders and employees.

Invest in Communication and Training

Educating front-line managers and employees about the strategy, rationale and design of the pay program is key to successful pay transparency implementation and adoption. A strong narrative that links pay transparency initiatives with the overall people strategy (such as DEI and pay equity commitments) will align this work with the organization’s values.

Managers must be able to communicate the intent, value and details of various pay processes. They also need to credibly answer challenging employee questions about pay decisions. Organizations can equip managers with the tools and skills to effectively engage with the employees through trainings and FAQ documents that outline compensation policies and educate about how pay decisions are made.

When organizations are open about their pay decisions, they can build credibility, trust and improve engagement. Additionally, pay transparency empowers organizations to shape the conversation around pay equity and fairness. Businesses that are more transparent are often viewed as more fair and just in their practices and their leaders as more credible than their peers. In today’s environment, where attraction and retention is seen as the top internal C-suite (per the 2023 C-Suite Challenges survey), these are important areas of focus for organizations to consider in today’s market.

About the Korn Ferry Global Rewards Pulse Survey

This survey ran from December 2021 to January 2022 and it reflects responses from 5042 participants in 116 countries. Survey respondents are typically HR professionals, and their organizations cover a broad range of size, geography and ownership structure. Participants were sampled using an online opt-in survey form. Full survey results and list of questions can be accessed here: Global Rewards Pulse Survey.