Pay Transparency, Employee Engagement – What’s the Link?

By Brad Federman, M.Ed. and Jennifer Blake, CCP, PerformancePoint LLC

Pay transparency is being mandated by more and more states and municipalities. Regardless of the compliance component a strong case can be made that pay transparency is a “best practice” worthy of consideration by most employers.

For employees to understand their company’s compensation plan, they need to know what the plan is. Keeping pay ranges or promotional opportunities a secret invites guesswork and employees tend to fill information voids with their own assumptions. A good compensation plan that is well communicated enhances employee engagement.

Why? An appropriate level of pay transparency builds trust between employers and employees. When employees feel that pay decisions are fair and equitable trust grows. On the other hand, perceived “smoke and mirrors” has the opposite effect. Fair pay is one way in which employees are recognized and recognition boosts self-esteem and employee competence.

Employee engagement is defined in a number of different ways but almost always refers to the level of enthusiasm for one’s work or the strength of emotional connection employees feel toward their workplaces. Engaged employees are typically productive employees committed to the mission of the company. On the frontline their performance promotes outstanding customer service. Engaged employees are naturally easier to retain and are effective spokespeople for the company.

While employee engagement is built around a number of sound practices, the purpose of this article is to articulate how pay transparency helps build engagement.

The Way to Transparency

As in most things the way forward looks different for everyone. If your company doesn’t have a defined compensation plan where jobs are grouped in some type of hierarchy and pay levels are intentionally tied to the market, you’ll be starting at ground zero.

Jobs Structure

Employers in states where pay transparency in recruitment is mandated have had no choice but to build some type of pay structure even if they previously had none. Even small employers should review (or write) their job descriptions, compare their jobs to the competitive market, and determine a reasonable going rate of pay for their jobs.

Pay Ranges

An employer with a number (let’s say 15 or more) of different jobs will probably want to establish market-based pay ranges to which each unique job is assigned. A pay range typically has a minimum, midpoint, and maximum.

Communication

Employees should know the pay range of their own job at the very least. Communicating this to employees can be a first step toward more transparency in pay and should be done before advertising open positions with pay ranges to the external market. Employees deserve to know things about their organization before the rest of the world finds out!

A legitimate concern often voiced about communicating pay ranges internally and externally is that job candidates will aim for the highest pay rate advertised. One approach is to post only the hiring pay range, which is often the range of pay from the minimum to midpoint. Let candidates know their pay will be based on their qualifications including experience.

Education

Besides sharing pay ranges, employers need to share how the pay ranges are derived. This includes explaining to employees the competitive salary market, which may be different from one job to another. It means ensuring each employee understands how his or her salary is determined within a specific pay range. Keeping in mind that employees expect fairness in pay, it’s essential they are able to determine for themselves that their pay rate makes sense within the context of the company’s pay plan.

One Step Further

In general, employees want opportunities to grow professionally and financially. Sharing the organization’s full pay structure, including what all other jobs pay, arms employees with information they can use to consider their future career moves. Informed employees are likely to remain engaged employees, which translates to employees who stay.

Full Disclosure

Workers in the public sector are accustomed to knowing what their coworkers earn, including their supervisors and managers. But the idea of private employers openly sharing employee pay rates seems outlandish to many of us! If considering going full-blown transparent on pay, make sure your organizational culture is ready for it.

So how does this tie back employee engagement?

When we lack information, we lack wisdom. Without the full picture, we create our own stories—scripts based on assumptions, filling in the gaps with whatever limited knowledge we have. This tends to happen when we’re stressed or frustrated, leading us to conclusions that may be far from reality.

One example comes from a private firm struggling with morale and turnover issues. The owner reached out to us, desperate to understand what was driving the negativity. After interviewing the employees, a common theme emerged: everyone believed the owner was greedy, pocketing vast amounts of money while refusing to reinvest in the company. The workers felt they were enriching him at the expense of the company’s future and their own well-being.

Curious about where this narrative came from, we asked how they arrived at this conclusion. Their answer was both fascinating and concerning: they knew the company’s revenue targets and had calculated the total income, assuming it was a massive figure. However, they didn’t have access to the company’s expenses, leading them to underestimate costs significantly.

When we approached the owner with this, he was adamant about keeping the financial details private. “If I share the expenses, they’ll figure out how much I make,” he said. What he didn’t realize was that his employees had already done the math—incorrectly—and were convinced he was making four to five times more than he actually was. The owner was stunned when we told him this.

The lesson here is simple: when people don’t have the right information, they’ll create their own version of the truth. This often leads to resentment, gossip, and disengagement. Employees will search for reasons behind unmet expectations, like not receiving a raise or promotion, and without clarity, they’ll fill in the blanks with hearsay or incorrect assumptions.

By embracing transparency and sharing more information, leaders can prevent these inaccurate stories from taking hold. It reduces gossip, fosters trust, encourages teamwork, and creates a more engaged, collaborative environment. Instead of letting rumors spread, take control of the narrative by offering the truth upfront.