Should Your Startup Embrace Salary Transparency?

Did you know that in Norway, it’s possible to see everyone’s salary and tax information online, and that Germany has introduced its own Wage Transparency Act in order to promote gender equality in pay? While it may take some time for other countries, including the US, to follow suit on a national level, there are companies that have already adopted salary transparency policies.

Whole Foods has been following an open salary policy since 1986. And social media scheduling company Buffer, which is known for its transparent pay policy, makes salary data available not only to its employees but to the general public. This shows that these policies can work for big and small organizations alike.

A salary transparency policy is exactly what it sounds like — salaries of all employees are available for all to see. These policies can be implemented in various ways, with varying levels of transparency, from publishing pay ranges for each job or role internally to making every employee's salary public information. But how do you know if this is the right strategy for your company? Let’s look at the benefits and downsides of implementing transparent compensation practices at your startup.

First, the Benefits

1. Encourages Equal Pay. Yes, the wage gap still exists for many women and minorities. One of the main benefits of pay transparency is that it encourages equal pay among all employees. Transparent salary information can help put an end to such issues as pay disparity, and your staff members could understand more clearly how you value their contributions to the business. This, in turn, minimizes the risk of disparate treatment claims from disgruntled employees.

2. Increases Employee Motivation. Researchers from Tel Aviv University studied 280 Israeli undergrads and found that keeping salaries secret was closely linked to decreased employee performance. When your employees understand what they need to do to earn more money — and why — they are likely to work harder for it, the study surmised. Pay transparency encourages them be more engaged, work harder, be more productive and increase collaboration. 

3. Improves Productivity. In 2011, research was done to study the effect of giving feedback to workers on their performance in terms of pay and productivity. The researchers found that switching from pay secrecy to open feedback and compensation led to “a large and long-lasting increase in productivity that is costless to the firm.”

Transparency can give your employees a sense of fairness. Knowing that their salary is in alignment with similar roles can influence overall job satisfaction and productivity if they perceive the company as a fair workplace.

4. Decreases Turnover. PayScale surveyed more than 71,000 employees to study the relationship between salary and employee engagement. An organization’s ability to clearly and transparently communicate about pay was found to be more relevant in lowering the attrition rate and influencing employee engagement, overriding employer appreciation, career advancement opportunities and future enthusiasm for the company.

5. Attracts Talent. When you disclose salary information up-front, you are more likely to attract applicants who have aligned expectations in terms of how much they will be paid. This saves your time and theirs, especially when the prospective employees require a higher salary than you are willing to pay.

Pay transparency can also help attract better talent and reduce the risk of being accused of discrimination, because prospective employees know that their gender or race isn't impacting their earnings.

Now, the Downsides

1. Could Cause Dissatisfaction Among Employees. Despite you taking a rational and transparent approach to defining pay, some employees might perceive it as unfair even when provided with logic and reason. This might affect their performance, or cause them to consider leaving your company.

2.  Might Lead to Lack of Privacy. Some of your employees may feel uncomfortable having their salary information available to their colleagues, or to the world if you make this information publicly available, like Buffer did.

Also, your competitors could use your pay data to try to lure talent away. And if you don’t handle resignation(s) well, you could be opening yourself up to criticism.

3. Could Encourage Dishonesty. A study published in the Organizational Behavior and Human Decision Processes journal found that lower-paid employees were more likely to cheat on tasks if they were able to compare their earnings to higher-paid staff members. However, this happens only if those on the lower end of the pay scale believe they have no other alternative and that the pay disparity is unfair. Hence, transparency about why salary differences exist is crucial in reducing unethical behavior.

Weigh the Pros, Cons at Your Business

Being open about compensation can help you gain the trust of your employees because sharing the logic behind their pay can help them understand and acknowledge their paychecks. However, before sharing any salary information, ensure that the salary levels are fair and consistent. Otherwise, you will be opening the door to disappointments over inequalities in pay scale.

If revealing the salaries of your employees is not feasible for your company’s culture, especially if you’ve been following the traditional model of keeping salaries secret, any steps taken toward pay transparency are likely to improve feelings of engagement and perceptions of fairness — and in the long run, increase performance.  

These decisions should never be made on the fly — any determinations about salary transparency should be made following careful thought among your staff members. Take into account the opinions of your board, your executives and your staff as a whole to determine if salary transparency is right for your organization.