Pay Transparency: A Primer

By David Wohlreich and Tristan Orford

What’s this?

Two total rewards folks share an overview of pay transparency. Our hope is that it will provide a foundation and helpful framing for HR and business professionals to approach the topic. We definitely don’t have all the answers here, so we’re also looking forward to engaging with you all to hear your point of view!

The usual disclaimer

While we may allude to legal considerations, we are not lawyers, and any professional is advised to consult an experienced employment or labor attorney prior to engaging any area with a lot of complexity - like pay. Similarly, while both authors are employed as total rewards professionals, these words are our own and are informed by as broad a review of the space as we’re capable of. They do not necessarily represent the views or actions of our current or any past employers. While both authors have experience in global rewards, we are both Americans and recognize our frame of reference is anchored in American employment. We also work in primarily pay for performance environments and so probably are also anchored in that perspective.

Why talk about pay transparency?

Pay Transparency is hot. Super hot. Every other week, there’s a high-profile news story about a company’s secret salary sharing spreadsheet. Organized labor and social justice activists clamor for open salary information as a way to balance the power between employers and employees. Governments at the local and regional level are passing laws requiring disclosure of salary bands for new hires or current employees. Popular internet sites aggregate user-submitted salary information and well-populated jobs have hundreds or thousands of data points to compare pay. Discussing salary, once overwhelmingly taboo and explicitly forbidden by employers, is increasingly normal for many workers. Even if management or HR teams are not talking about pay transparency, we can be assured that employees are.

A quick note on “pay”

In the field of compensation, “pay” can mean many things. It’s salary or hourly rate, certainly. But it can also mean bonus target or actual payment, equity grant or value, commission structure, and more. For the purposes of this piece, we’re primarily going to focus on base pay (salary or hourly rate), but sometimes will need to discuss variable elements of pay (bonus) as it affects pay-for-performance programs.

The purpose of pay transparency

Few matters are as opaque and yet central in daily life as how much we are paid. Pay determines our standard of living, our cushion from economic shocks, what kind of activities we can pursue, and where we live. Pay is also important, not just as it relates to our ability to meet basic needs or improve our lifestyle, but as a signal of value. What are my labors worth? And, to some extent (healthily or otherwise), what am I worth? Yet as with many elements of the employment relationship, pay is a remarkably asymmetric matter. Our employers not only determine our pay, they own and control the process of determining pay (for us and everyone we work with), and all related rituals and elements -  like the default ways in which pay is presented to a candidate or when and how adjustments are considered. What’s more, employers have no obligation to discuss the engine of that determination with their employees. In fact, there can be very good reasons why they don’t or can’t share some of it.

This, then, is the tension at the heart of compensation, and it is the impetus behind the discussion of pay transparency. The discussion of pay transparency is actually a discussion about fairness and about the balance of power between employees and employers. A discussion of pay transparency is not just a discussion of ranges, of numbers and compa-ratios. The discussion of pay transparency is the discussion of procedural justice.

Imagine standing in court. All judges, witnesses, and barristers are behind dark, sound-dampening walls. You don’t know who’s behind the walls, and you don’t know what’s said. Finally, after waiting some time in silence, a single figure walks out and pronounces your sentence. How could you have faith in the verdict if you have no visibility into the process, the evidence, or even the participants? Yet this is effectively what we ask employees to do every time we extend an offer or run a merit cycle without any attendant communication.

A note on legal risk and litigation

It is generally acceptable to pay different people different amounts; a physician with twenty years of experience does and should earn more than a first-time call center operator. It is not ok (and often illegal) to pay people differently based on characteristics not related to their work; pay equity lawsuits and fines are common if companies are found to have paid people differently based on their gender, nationality, disability, age, or other personal characteristics. This risk of financial and brand damage due to pay inequity is often the initial force driving conversations around pay transparency. However, while legal risk mitigation is certainly critical, pay transparency also has cultural and human capital implications which should be given their due.

The pay transparency continuum

When we talk about “pay transparency” with leaders and colleagues, it’s often framed as a single thing to do. “We should have pay transparency” or “pay transparency isn’t right for our company.” But it’s not one thing, it’s not a state, and it’s not a light switch. Pay transparency is a continuum, with different elements and expressions. By defining the elements involved, we can provide a common language and framework to have the discussion and give a starting point to determining what choices are most effective for a particular organization. Most importantly, we can explore how choices made for one element impact the choices of the other.

For the purposes of our discussion, we frame pay transparency as a continuum with two factors: position & structure and process.

Position & structure transparency

What is an element of pay and where is it in relationship to structures or peers?

This is what most people refer to as “pay transparency.” What are your pay bands, where does a particular employee fit in relation to the bands, even what do employees in other roles at the same company make? When struggling with pressure from employees about transparency of process (discussed below), employers and employees often immediately push towards transparency of structure. Also, this is often what pay transparency regulation tends to focus on, as it’s the most straightforward to assess and it most resembles what many government organizations themselves look like, as we’ll explore below. While transparency of position & structure can help address concerns, it is not a replacement for transparency of process.

Popular examples of structural pay transparency include Netflix (which granted some visibility to compensation to director-level and above people managers a few years ago), Buffer’s salary spreadsheet, services like Glassdoor and Levels.fyi, and even the DIY salary spreadsheets employees periodically pass around in particular companies or industries. In an era of salary history legislation, more employers are being called to share salary ranges to qualified candidates or even current employees, forcing the issue of structural pay transparency. Many jurisdictions like California now require some disclosure of this information if an employee or candidate requests it.

Process transparency

How is an element of pay determined and why is a given element of pay what it is?

This is both the more fundamental and the more complex element of pay transparency. It is also the element that we believe is no longer optional as it can be extremely effective at building trust, if done right. More than ever, employers are being asked to explain not just what pay is, but where it comes from. How did you determine this salary, this bonus, this equity award? Why is the outcome what it is? And if you don’t have a robust answer, or it’s not an answer you can share at scale and across your diverse employee populations, it’s going to be very challenging to assure those employees of the fairness of their pay. In an era of increased focus on this topic, a failure here can also lead to escalation, which is what we typically see when the topic appears in the news.

Popular examples of process pay transparency include Gitlab’s compensation calculator, Management by objectives-based bonus schemes (if communicated thoroughly), and algorithm-based pay grades.

A note on simplification & purity

It’s of course worth noting this is all something of an over-simplification. There is no perfect dividing line between the two elements of transparency, and many choices can have an impact on both. 

In this piece, our focus is purely pay, but all talent management decisions and processes have implications for pay. The role someone is hired into, whether they are considered for another role, the manner in which performance is evaluated, the way that the organization is structured; all of these elements can affect pay and all are subject to the same questions of rigor, transparency of process, and outcomes. Incredible work goes into making these determinations, and much of it is difficult (probably impossible) to completely quantify or make transparent. Therefore, while interesting as a theoretical construct, “pure” pay transparency is likely not possible to produce, even if we wanted to.

The costs of transparency

As alluded to above, each of these dimensions of pay comes with different benefits and costs that need to be weighed at the organizational level before taking action to increase (or reduce) elements of pay transparency. 

Costs of position & structure transparency

Increasing position and structure transparency is rarely beneficial if not also accompanied by increased process transparency. Providing a salary range to an employee, for example, or even universal pay transparency, doesn’t in itself grant peace of mind. If a manager tells an employee that they’re at a compa-ratio of .95 (meaning they’re at 95% of the midpoint of the pay range for that role), the employee has no greater understanding or certainty of how their pay was determined, nor any way to judge if their pay position is fair. At the extreme, sharing the pay of every employee globally (universal transparency) may reassure someone that they’re not the lowest paid or confirm they’re near the middle of their peers, but it introduces a host of complications as well as two very specific costs - privacy and coaching.

Privacy

Many employees don’t want to share their salaries. Even more have reservations about sharing their performance feedback or scores. Yet in a pay-for-performance model, sharing individual pay is inherently a communication of performance and other factors that are baked into pay. By contrast, nearly everyone is comfortable discussing the process by which their individual pay is determined. 

This is not to say that companies cannot pursue universal position & structure transparency. Some organizations have embraced open-book management to such an extent for their very specific cultures that they’ve granted visibility to performance or to pay - but rarely to both. We suspect this is why you tend to see position & structure transparency almost exclusively in organizations which overtly do not have a pay for performance philosophy.

Coaching

Nearly everyone (at least in the U.S., where both of your authors are employed) believes that they are above average. Unsurprisingly, no one likes confronting that this is untrue - your authors very much included. Yet being granted transparency of position & structure directly tells 49% of your workforce that they are below the average. This is a cost in itself (ego bruises are still painful), but raises the deeper and broader organizational cost of distraction.

If a manager tells an employee they’re at the midpoint of the range for their job, the employee’s first question will almost certainly be, “why?” If the CEO posts the salaries of the entire company on the internet, every manager will be spending the next few months fielding questions and arguments about pay positioning. Transparency of structure and position without first building transparency of process creates incredible organizational churn as line managers, HR, and business leaders spend a great deal of time fielding questions on the topic (in addition to their regular workload). Contrast this with the lower impact of sharing position and structure transparency with senior management or HR professionals, where they have the deep context and are in fact expected to manage the complexities of pay information as part of their role.

Limitations of data

Both of your authors have quantitative backgrounds and spend a great deal of their time in Excel and Google Sheets. But we’re still human, and humans are not great at intuitively understanding non-linear relationships. The multiple variables and inputs that interact to determine pay (role, experience, performance, geography, etc.) are incredibly complex, and interpreting the results (pay) without the inputs is only remotely possible if process transparency has already been provided. Expecting employees to back into the inputs leaves too much room for misinterpretation or error (and will often default to an assumption of error or ill intent), not to mention it’s simply unkind to those same employees. Even if a few employees did manage to back into the model in full and run a complete multivariate regression analysis (which would be impressive), it’s unlikely this would be an endeavor worthy of those employees’ time. It would be better to provide assurance that they’re fairly paid in a less demanding manner, freeing up their capacity for building awesome products (or even, heaven forbid, rest and recovery).

A phrase we’ve liked in this space is “perfect knowledge without perfect context can be toxic.” If people don’t have the required context, engaging with the raw data will be unproductive and even trust-diminishing. And providing the totality of context to all employees is often impossible, undesirable, and/or would require the totality of the time of your entire management team.

Costs of process transparency

Increasing process transparency requires work and does have points of diminishing returns, but this is the area where we feel there’s usually the most opportunity for organizations to build trust. The costs here are discipline and time.

Discipline

To have transparency of process, an organization of course needs process - and not just any process, but a robust, rigorous, and repeatable process. An organization wanting to grant transparency into its processes must have: 

• Clear principles, including those ensuring equitable treatment.
• Integrate data and audits to ensure those principles are actually what is showing up in reality.
• Checks and balances. This means that decision-making is subject to calibration from multiple sources. In other words, the manager may influence an employee’s pay but doesn’t have the final or only say on how it’s set. We would argue this is for the best (more on this likely in a future piece), but it does require real commitment at all levels and no organization should underestimate the change management that could be involved here if this isn’t a current practice.

Time

The other major cost of process transparency is time, that most precious of organizational resources. To share a process, an organization needs to have it well-documented and then invest the time teaching participants how to engage with it. When it comes to processes which are not fully quantifiable (such as most types of performance management), this requires even greater education, calibration, and context to function. Every participant in the process needs training, and any recipient of the outcome of that process needs coaching to understand the process. 

This is often where we see proponents of pay transparency in general try to “skip ahead.” It’s much, much tactically easier to simply share everyone’s salaries than to help every employee understand all that goes into making pay decisions, and why. While tempting, we’d recommend against this urge to “skip ahead,” as it does not lead to the clarity we all desire. Instead, as mentioned above, organizations taking that course sign up for doing little more than arguing unproductively about pay. That is time we feel is much better invested in preparing the organization for pay process transparency - and it’s a far less toxic undertaking.

The cost of doing nothing

You may have read the previous sections and concluded that providing any form of pay transparency sounds like a lot of work and is best avoided. However, keep in mind that there are costs of having too little transparency. When no context is provided, people are left to fill in their own narrative. They may give their manager and organization the benefit of the doubt, or they may not. Often, this choice will be dependent on many other factors, i.e. whether they like their manager or organization generally, or even their own personal general disposition. Of course liking your organization is nice, but it’s even better if you have objective grounds to trust the process of how your pay is determined regardless of your opinion of other aspects of your organization. And, given other companies are also grappling with questions of transparency and equity, those organizations which neglect this area may find themselves at a competitive disadvantage when working to attract, retain, or motivate workers. Therefore, it’s probably worth providing some level of pay transparency to your people, the question then becomes how much and how to get there.

So what’s right for my org?

The cliché is, as is so often the case, a cliché for a reason: “it depends.” Really. But we’ll try to do a little better than that. While the effort/reward trade-off of going to “pure transparency,” particularly for transparency of position & structure, likely won’t make sense for most organizations, there are almost certainly opportunities to take meaningful steps in order to improve perceptions of procedural justice. And this process, like so many in the human capital space, begins with a robust and honest assessment.

To know where to go, we need to know where we are

Ask the CEO, the head of HR, a line manager, and a junior-level employee how rewards are determined at a given organization, and one would likely be surprised at just how much the answers differ. While much of the work and decision-making we describe in this piece is owned by business and HR leadership, it’s important to keep a pulse on how knowledge cascades through an organization. An incredibly intensive process that employees don’t understand doesn’t actually move the company closer to a perception of procedural justice.

Any assessment of the current state of an organization should begin with understanding how performance is assessed and translated into rewards. How much is invested into audits and controls to assure equitable outcomes? What is communicated about performance and rewards, to what levels and segments of the organization, and how well is it truly understood?

Assessments in this context should focus on observable and objective inputs and outputs accompanied by robust documentation. While human dialogue and nuance are important, without a firm grounding in evidence and concrete artifacts, misunderstanding are nearly guaranteed. This is not an indictment of the professionals involved; people, even with the best intentions, are subject to a host of biases that may require some form of correction. People are the engine of a business, but they are not unerring machines.

In addition to elements directly related to rewards, an organizational assessment should also include documenting and codifying (and validating) an organization’s context and values. Context recognizes the non-rewards organizational forces and circumstances which may impact rewards. For example, if a company is public, there is already some greater level of comfort around some dimensions of sharing and talking about compensation: individual executive compensation and overall equity practices are disclosed in financial statements. If a company is private, this may not be the case and there may be no history and less tolerance of discussing these topics. 

Like context, values explain how a company sees itself, how it makes decisions, and how it measures trade-offs. No company is a monolithic and pure embodiment of specific values (organizations being composites of people who are unique and different), but the best way to understand a company’s ingrained values is to view its history and how it has leaned into or steered away from embodying specific values. No CEO statement or workshopped values acronym provides as convincing evidence of the values of an organization as its past decisions. A company may say it values autonomy and empowerment, but if most decisions are still made by the CEO in their office, that is simply not true - or at least, it’s aspirational rather than actual. 

Particular areas of focus for this demonstrated values assessment include equity and transparency. Is the company willing to make exceptions from established practice or process for “top talent” regularly, or is this an area where leaders hold the line? Does the company share financial information and non-financial performance metrics or are these held at the highest levels? It’s critical to be objective here, even if results are counter to stated or desired values. Equity and transparency can be seen as moral imperatives, but these are non-binary (not either/or) values and there are trade-offs that need to be weighed. No one pays every employee in the company the exact same amount, nor would anyone likely argue they should. When assessing actual values for the purposes of pay transparency, it’s worth focusing on the particulars related to rewards (and pay). General company behavior regarding transparency is less relevant than specific behavior related to rewards and pay transparency. Similarly, general company action around equity externally is less relevant (to this topic) than behavior related to talent and rewards equity.

Gap assessment

After an honest evaluation of an organization's current position, an organization will determine the distance or gap between where the organization currently is and where it would like to be. In terms of people and pay programs, we find there is usually a “sweet spot” for the vast majority of companies that includes 1. broad transparency and understanding on the process side and 2. some limited transparency on the structural side, e.g., pay ranges and job structures. Note, this requires both on-the-ground, micro-level work (building bands and architecture, slotting jobs, analyzing and correcting inequities) and often investment in values and perspective change, work requiring deep influencing and change management. While this kind of work is beyond the scope of our piece, we recognize that this is a serious investment of time, organizational capacity, and effort by those leading the change and those being changed, and should not be underestimated. 

Based on the gap assessment, an organization can begin identifying the actions required to close the gap between desired organizational pay transparency and the current state. This will involve identifying trade-offs against other priorities (a permanent and expected feature of any business decision) and the recognition that all parties involved, including executives, HR, managers, and employees, have limited time, limited capacity, and other tasks to attend to (many of these existentially important to the organization). That said, even incremental progress is progress, and we’ve seen few organizations where even a small investment of resources can’t translate into meaningful pay transparency gains.

How to begin making progress for procedural justice

Depending on an organization’s capacity for change, there are a couple of specific actions which can likely fit into this plan. Note that taking these steps in sequence is important, as otherwise an organization can risk eroding trust rather than building it.

1. Invest in people process

a. Lightweight is ok (likely even desirable); nonexistent is not.

b. As “people process” covers broad ground, it’s worth focusing for these purposes on the major decision points that feed into an individual employee compensation outcome:

i. How are roles created? Is it ad-hoc or is there a coherent mechanism to make these decisions?

ii. What structure exists to determine pay for roles? Is there a means of grouping like roles? Are structures in place to provide guidance to managers, recruiters, and HR folks in how pay should be set and managed for people in the organization?

iii. How are people selected for roles (hiring, promotions, transfers)? What evaluation is done, by whom, and how is it documented? What variability is present in these processes across the organization and how can it be standardized (or where is standardization not desirable)? What risks related to role selection exist, and what errors are more important to avoid (is hiring someone or promoting someone who’s not ready riskier than failing to hire or failing to promote someone)?

iv. How is performance measured, calibrated, recorded, and reported? Are there formal performance scales or criteria and how are people trained to use them? What variability is present in these processes across the organization and how can it be standardized (or where is standardization not desirable)? What risks related to performance evaluation exist, and what errors are more important to avoid (is evaluating someone as a top performer falsely or failing to recognize a top performer riskier, is missing a struggling performer riskier than identifying someone as a performance problem incorrectly)?

v. How is pay determined, calibrated, recorded, reviewed, and modified? What structures and rigor lead to new hire pay decisions or employee pay changes (increases, bonus payments, equity grants), who is involved, and where does final decision-making authority reside? What variability is present in these processes across the organization and how can it be standardized (or where is standardization not desirable)? What risks related to pay decisions exist, and what errors are more important to avoid?

c. For all of these areas of focus, regular audit, correction, and iteration are necessary to achieve equity and ensure inputs and outcomes are appropriately linked. 

d. If an organization has some processes in place which are accompanied by a coherent narrative, and leaders and managers can explain this narrative to employees, it’s often a sign that things are in good shape. If the “process” is more like “we make decisions on a case-by-base basis” or “we know it when we see it,” then it’s likely that there has been insufficient investment in these areas.

e. Calibration, documentation, and formal checks and balances, while they may be a source of friction with business leaders seeking freedom to optimize for specific outcomes, are some of the most effective tools in an organization’s toolbox to bake in equity and engender a sense of procedural justice. These are trade-offs, and their costs shouldn’t be underestimated, but ensuring equitable and defensible outcomes across the organization’s pay practices is nearly always worth giving up some measure of autonomy and leadership’s time.

2. Leverage data

a. Data can not only improve an organization’s processes but also its ability to communicate confidently about these processes. This is true even if an organization chooses not to share raw figures. To evaluate a process, and ensure its outcomes are both aligned with the intention of the process and equitable, an organization must capture and analyze data - inputs, decisions, and outcomes. If an organization does this work, and shares both the process of this analysis and demonstrates that the outcomes are equitable, that’s a powerful message. 

b. Embedding more data in people processes leading to pay decisions also helps address the very personal concerns and sensitivity related to pay. As mentioned earlier, pay is a profoundly personal and emotional subject for most employees (as a signifier of value). Yet most talent management activities are conducted in a mostly subjective and data-light environment - interview notes, performance review discussions, top talent flags, most of which are not directly communicated to the employee. This then typically transitions in a sudden and jarring fashion to a compensation outcome for the employee, namely, numbers - a new hire salary, a % hourly rate increase, a number of shares. It should not be surprising that this transition from “soft” to “hard” can be disconcerting, jarring, or even alienating for those involved. Even if not shared with every participant in a process, embedding more data into the processes which lead up to compensation decisions can help ameliorate this sometimes painful situation.

c. Use technology to reduce effort. There’s always a tension of centralization vs. decentralization in any organization. While we won’t fully explore that here, if an organization has a lot of decentralized practices in today, there is often an opportunity to find a “common core” to leverage technology to deliver at scale. The savings of time and effort at all layers of the organization are real, and it will free up teams to deliver new pieces of work they likely weren’t even able to contemplate before (such as more calibration or more insights from the larger pool of data).

3. Communicate

a. Many organizations invest incredible effort, time, and other resources into good work building role selection, performance management, and pay determination processes but then never tell their employees about them. This is an incredible opportunity missed. Perfection is not the requirement for communication. If an organization is doing good work and making progress in the right directions, that organization should be sharing. This means communications at all levels and from all stakeholders. Leaders, HR, recruiting, line managers, and individual contributors all have some role in these processes. They need to understand their role, but also have at least a high-level understanding of both the relevant philosophies and the talent management system.

b. Organizational communication should include both the general approach (which will also often include an explicit summary of an organization’s people and rewards philosophy) and the specific actions taken and planned.

c. While HR (and compensation in particular, if an organization has a discrete compensation function) needs to be involved and drive much of this work, HR should not be the only ones to convey these messages. Managers and leaders of the business are ultimately the most important figures in translating process into knowledge. There are few things more trust-eroding or disengaging to many employees than having an HR professional they may not even know explaining how their pay is determined. We’ve found HR partners supporting and coaching an employee’s boss (or boss’s boss, or executive leader, etc.) to have these actual conversations a far more credible and certainly more scalable way to structure these engagements.

A final note about where to start

There is seldom a single “right” answer in compensation, but there are definitely some wrong ones. Stop almost any manager, HR, or compensation professional on the street and ask them if there’s anything that would look odd at first glance to someone without context on the company’s payrolls, and they’d say “yes.” Someone was overhired or promoted really quickly or made a lateral move to a very different function or is just a poor performer who still enjoys a strong pay position - somewhere, there’s a pay position that may appear too high or too low. A good test is - if we think of someone accidentally leaving a printout of everyone’s salaries on a printer, what’s the one that makes our hearts drop when employees see it? This, by the way, is an extremely common nightmare we think all comp people have, and unfortunately one some of us have experienced in our waking life. 

Now, this is not necessarily a sign of a problem, but it is absolutely a reason for spending time to ensure the system is working properly. We can pay people differently for defensible reasons related to their work. Whole dissertations and legal treatises have been written about what defines “defensible,” but in general, if we feel we could explain the pay differences to a room of people with no favorable inclination towards us and we’d expect them to find it reasonable, we would consider it defensible. When in doubt, as with all of these judgement calls, the services of an experienced employment attorney are invaluable.

And if we find we don’t have a good reason we’d be comfortable documenting, that may mean we need to make an adjustment. We may not be willing to cut someone’s pay (even if it’s legal in the particular jurisdiction, it’s still a pretty extreme act). But we can and should document a “red circle” (someone who is at the top or beyond the appropriate position for their pay and should not receive future increases). We may also see instances where someone came in at a low pay position, has received healthy increases, but still lags where they “should” be based on the company’s internal evaluation and process. These are folks where simply giving a healthier annual increase likely will never get them to the “right” place (or not in a reasonable time frame). Different companies have different philosophies here, and managers often need to balance creating a meaningful compensation experience across the years of employment with getting someone positioned “correctly” (after getting a 50% pay bump one year, a 2% increase is going to feel pretty unexciting, and perhaps even alienating). That said, nothing hurts a company in the long term quite like underpaying a strong performer (as folks who fall behind the range for their roles often are) and practically requiring them to leave to get paid at market rates. And of course from a pay equity perspective, saying “we have a 5% non-promotion increase limit” is little solace to either affected employees or the company’s own management and HR teams.

Before a company starts down the road of pay transparency, address glaring issues. Don’t wait for a massive new process, framework, and change management. Fix the obvious stuff first, even if it means paying people more. Especially if it means paying people more. 

In conclusion

Thanks for reading, and we hope folks have found this useful. While we’re compensation professionals by trade, one of the exciting parts of the field is that there’s seldom one right answer, and things are always evolving. We’re looking forward to continuing the discussion with you all!