Communicating Pay Ranges
Private sector organizations have always had the option to keep pay ranges confidential. Yet there is a considerable amount of credible research that suggests pay secrecy forces people to guess about the relationships between their pay and that of others and that these guesses are more unfavorable than what really exists. This cognitive bias argues in favor of more openness, including information about pay ranges, pay rates and how both are determined.?
On the other hand, making all pay ranges public opens the door for people to make judgements when they do not have the facts behind the reasons for them. Employees will tend to value their own jobs highly, since they are familiar with the challenges associated with discharging the assigned responsibilities. They might not appreciate the complexities associated with other jobs, particularly when they are not physically observable (e.g., Programmers often undervalued computer operator roles during the mainframe era since the observable part of their work seemed simple). This can lead to them challenging the relative internal values the employer assigns jobs. They may also be more familiar with the pay rates for their jobs/occupation in the labor markets than they are for other jobs/occupations.
Recent legislation in several states has mandated that employers make pay ranges available to candidates for employment. Given that these regulations are created by people with no knowledge of compensation management fundamentals it is difficult to push back with logical arguments when an initiative like this appears. Those making the decisions no doubt think they are making a major contribution to reducing bias and discrimination, when in fact they are not. Mandates like this impact recruitment and staffing processes and create significant challenges for employers. There had already been regulatory interventions that preclude asking candidates about their current and past pay rates. All this activity is supposedly aimed at making hiring rates more equitable, although it is not clear how it will accomplish that.?It is more likely that this will increase confusion and do little or nothing to benefit employment candidates.
Employers are not mandated by law to disclose the designs of their products or the technology and processes they use to gain a competitive advantage. Information that cannot be patented may be critical to the ability of an organization to compete and efforts to keep this information secret are allowed. Contending that employers must disclose their pay ranges seems to lengthen the reach of legislators and regulators beyond what is reasonable. Mandates like these go beyond the legitimate efforts of the government to ensure that employers do not violate the principles built into Title VII of the Civil Rights Act, the Equal Pay Act, ADA, ADEA and other laws that outlaw discrimination based on individual characteristics.?
The only three legitimate criteria for determining employee pay rates are:
1. The value of the role (internal and external) an employee plays,
2. The employee’s competence in the role, and
3. The employee’s contributions (performance) in that role.?
Bona fide seniority systems are also considered legitimate under the law. What people believe, what they look like and where they came from should not impact pay administration.?
Employers should be held accountable for ensuring these principles are the drivers when pay is administered. If there is evidence that unexplained and statistically significant adverse impact on protected classes exists employers should be required to investigate the causes and remedy unlawful discrimination. It is in their best interest to do so, since inequitable treatment can mar the organization’s employer brand and create angst among the members of the workforce. Besides, it is the right thing to do.
Despite the mandate to disclose pay ranges organizations are not legally required to establish formal pay ranges. The current regulatory intervention does not change that. It only requires telling candidates something. This forces the organization to either make something up or to come up with a range to communicate. The organization may communicate the entire pay range or a hiring range. Yet many organizations do not have hiring ranges formally established either.
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The pay rate that is appropriate as a hiring rate may vary at the individual level. When setting a hiring range for an Engineering job it is necessary to evaluate a person’s qualifications against those required by the organization. National research labs might require outstanding academic achievements and a degree in a specialized field (e.g., Nuclear Engineering) from a highly rated university for candidates who will being doing basic research. Yet they may only require a degree in Engineering or related field for someone who will be performing less complex work. Even though there is a formal pay range and a formal hiring range for a job there may be a range specifically tied to a particular set of qualifications. The recent disclosure requirements open the door to candidates comparing the hiring ranges communicated to them, creating confusion and the potential for people assuming there is some form of discrimination in setting the ranges.
If the pay range for a job is $60,000 – 90,000 even current employees may not know how that was determined. Although it is common for employers to openly state they base the economic value of a job on internal equity and external competitiveness how they do that is often not fully understood. If the employer is a hospital and the job is a Senior Programmer, the pay range may be similar or very different than the ranges established by other employers for that job, even hospitals in the immediate area. Differences may be due to the organizations using different surveys of prevailing market rates to determine what is competitive. It could also be that this hospital outsources major IT projects to contractors, and as a result, the job does not require the level of competence it might in other organizations, even other hospitals. Additionally, some organizations attempt to hire fully competent people rather than those who will require training to “grow into the job.” They are likely to have a higher range because they expect more.
Base pay ranges can differ between organizations because an organization offers much better benefits than other employers and that is considered when their base pay ranges are set. One organization may also use variable pay to augment base pay while another does not. Sales personnel might have 100% of their total direct compensation in the form of base pay in company A while those in company B have no base pay and all variable pay. In this instance it is necessary to explain the design of the variable pay system, which might be considered confidential. Since organizations are free to design their pay systems the way they wish, and are free to have different pay programs for different jobs, it may make providing a base pay range a meaningless action. Candidates will differ in what they value the most – a high base pay rate or rich benefits or the potential for variable pay.? Learning what the base pay range being offered is leaves them without the information necessary to make a good selection of an employer.
The reality is that candidates are less worried about the pay range for the job being applied for than the pay rate offered by the employer. If three potential employers all communicate comparable pay ranges but the starting pay rates they offer differ it is likely the rate will be the deciding factor. Even if the pay range for one employer is lower a higher start rate may be enough to attract the candidate.?
Deciding what starting rate to offer candidates can be a complex process for an employer. One person might have more years of experience, but not in the industry the employer works in. Another might have more formal education yet less experience. All these factors should be considered when arriving at the rate to offer. If a candidate also knows the pay range, it is natural to question the relationship between the offer rate and the range. If the offer is in the lower part of the pay range how should that be viewed? Is it the good news, since there is a lot of room for increased pay in the future? Or is it an insult, since it suggests the candidate is only marginally qualified? Unfortunately, there may be an emotional reaction that is unwarranted. The range disclosure mandate in fact provides little or no relevant information to the candidate and places the employer in the position of trying to explain a complex administrative process to someone without the knowledge required to appropriately judge the offer.
Conclusion
Although the intention of legislators and governmental agencies when issuing the recent series of mandates may be to preclude pay discrimination the mandates are unlikely to have much impact. Mandating that candidates cannot be asked about what they are currently earning was another useless intrusion, since past or current earnings would be of little interest to a competent recruiting professional anyway. There is no law requiring the candidate be truthful and it is unlikely the last employer would verify the information provided. What the employee expects to earn is a more relevant piece of information, since it is useful in deciding whether a candidate is likely to receive an offer. Assuming the candidate’s expectations and the potential employer’s value proposition are aligned information about the pay range for the job is not useful and should be information that is under the control of the organization. Once someone is hired it is prudent to provide information about how the employer administers pay. How much someone can earn in a job may be of interest over time, since it can impact career decisions, but since both pay rates and pay ranges move the answer if given upon hire can be speculation.
In the future legislators and regulators should understand the implications of implementing laws and regulations… on both individuals and on employers. Forcing the disclosure of pay ranges will accomplish little to address illegal pay discrimination.? Organizations are free to function without formal pay ranges and this does not violate any laws or regulations. After spending decades consulting with organizations and encouraging the use of carefully crafted pay structures I recognize that each is free to do what fits their culture and management philosophy. Forcing them to provide ranges will in some cases involve the creation of hypothetical ranges that may have little to do with reality. It is unlikely that regulators will be able to police the quality of the information provided.
About the Author:?Robert Greene, PhD, is CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene?speaks and teaches globally?on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.