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Making Pay Public
Vol. 59   No. 9
As companies move toward more-open management policies, some employers would like to make one thing clear: employees’ salaries.

By Tamara Lytle   
 

 


When Scott Rick worked in the private sector, he got information on others’ salaries the old-fashioned way: by gossiping with his co-workers.

Now he is an assistant professor of marketing at the University of Michigan, and he can look up his colleagues’ pay anytime he wants.

But he doesn’t.

The public school is one of a growing number of workplaces where pay is transparent. “It’s easy to get really distracted by it,” he says. “It’s like chocolate cake. It’s so tempting, but you have to go for the fruit salad once in a while. I don’t look anymore.”

More and more employers are giving people that cake—to have and eat too, if they want. Whole Foods has long made employee pay levels available companywide. And tech startup Buffer is taking the concept of pay transparency even further—by posting all salaries, and its formula for pay, online for all the world to see.

The transparency movement has been driven by the explosion of information available on the Internet, including third-party websites such as Glassdoor.comPayScale.com and Salary.com that release salary information. The Millennial generation, which is accustomed to sharing personal information through social networks, is also shaping the trend.

Pay fairness is on people’s minds as well. Tight budgets are leaving frustrated workers wondering why they aren’t getting paid more. And former New York Times executive editor Jill Abramson made news herself when she reportedly lost her job after asking why she was being compensated less than her male predecessors (although other factors were purportedly involved in her termination).

“Employers are talking about pay more than in the past,” says economist Linda Barrington, executive director of the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations. “You’re getting more employees coming in saying, ‘This is the going salary. How come I’m not being paid that?’ ”

The Case for Transparency

At SumAll, a New York City-based company that provides analytics to businesses, employees have access to pay information along with other company documents and partnership agreements—pretty much “everything except health data,” according to SumAll’s CEO Dane Atkinson.

“People tend to have a higher degree of trust in an organization that is transparent,” says Atkinson, a serial entrepreneur who started SumAll in 2011.

On an internal file-sharing system, employees can look up the pay of everyone who works there. Like Rick, many of SumAll’s 50 employees know it’s there but don’t look.

With transparency, “it becomes very clear what the company values and how to model your own career,” Atkinson says. “You’re getting everyone on the same page with what is happening.”

Transparency also helps Atkinson in recruiting. The process is shorter because salary isn’t a mystery. Potential employees learn the range for their job as well as the specific salaries of everyone who interviews them. Many tech workers, especially engineers, find salary negotiations stressful. For that reason, they like SumAll’s open system, which Atkinson compared to shopping for a Saturn, a discontinued GM car brand known for its “no-hassle” pricing policy.

Atkinson found that going outside the usual salary range to hire someone provokes a backlash now that pay is public, so he doesn’t do it. In past startups, he had sometimes been desperate to get an app finished and paid way too much to get workers on board quickly. He then had to keep paying them at that high rate, creating inequity with others doing the same job.

No one has left SumAll as a result of learning others’ pay levels, though the system did prompt Atkinson to raise the pay of one worker who was earning less than someone he was interviewing would have been paid. The churn rate for SumAll’s employees is less than 10 percent a year.

Atkinson also finds that, with all the cards on the table, differences in pay between men and women dissipate. “Salary transparency is the single best protection against gender bias, racial bias or orientation bias,” he says.

That’s why some states now require that government contractors report gender gaps in how they pay their employees. Similarly, President Barack Obama in April 2014 signed an executive order that will require federal contractors to provide summary data on how much they pay people by gender and race.

When transparency works, it makes people feel they are being paid fairly, which, in turn, drives employee engagement.

“You want individuals to feel confident they are being treated fairly,” Barrington says. “It will head off water cooler conversations and Internet searching [for comparative salaries].”

Carol Boyer, SPHR, assistant vice president, compensation, at North Shore-LIJ Health System in Manhasset, N.Y., believes that engagement stems more from informing workers how their pay is derived than showing them what the person in the next cubicle is earning.

“If I trust there’s a process and the process is fair, that drives engagement more than ‘show me the salary,’ ” she says.

Organizations with higher engagement, in turn, have better bottom-line results, says Mark A. Szypko, compensation evangelist at IBM Smarter Workforce Solutions in Littleton, Mass. “Transparency builds fairness, fairness drives engagement, engagement drives business success,” he explains.

Types of Transparency

There are two general approaches to pay transparency; a third approach blends the two.

Process transparency. With this approach, people know how salaries are derived, what the ranges are for each position and what it takes to earn more.

Szypko says releasing ranges for an employee’s own job is the bare minimum that a company can do if it wants to show an inclination toward transparency. But he recommends showing ranges for every level within a job type so that people can see their career earning potential.

Full-salary transparency. This approach involves letting employees—and in some cases the public at large—know exactly how much everyone at the company earns. It is the approach followed by Whole Foods, SumAll and Buffer. Although many governments make workers’ salary information available, fully transparent private-sector companies still are rare enough to garner headlines.

Barrington and Boyer believe that process transparency is more valuable than full-salary transparency. “The important question is why people get paid what they get paid,” Barrington says. “Even if you release every salary, you may not have answered that.”

Szypko adds that “Employees can come up with far more devious intent around compensation than we could ever dream of implementing, so why not share [the information]?”

Mix and match. At North Shore-LIJ Health System, several versions of transparency are used at once. Forty-two percent of workers are in unions, so their salaries are transparent under collective bargaining, Boyer says. The top 25 or so senior managers’ pay, bonuses and some other types of compensation are public as part of the IRS 990 form required for nonprofits.

Nearly 15 percent of the nonunion workers are in step plans where their pay goes up with seniority. “There’s really nothing to talk about. Everyone knows what the ranges are,” Boyer says. “We don’t publish it, but we don’t put a black cloud over it either.”

Radical Transparency: Buffer’s Pay Formula

Buffer, a tech startup that facilitates social media sharing, has taken a sweeping approach to salary transparency, publishing all of its employees’ salaries along with the precise method it uses to determine them. Buffer co-founder and CEO Joel Gascoigne shared the formula on the company’s blog:

Salary = job type × seniority × experience + location (+$10K if salary choice)

Job type = base
Happiness hero = $45,000
Content crafter = $50,000
Engineer = $60,000
Designer = $60,000
Operations officer base = $70,000
Executive officer base = $75,000

Seniority = base multiplier
Senior: +5% base and $3K/$1 million
revenue
Lead: +7% base and $4K/$1 million revenue
VP: +10% base and $6K/$1 million revenue
C-level: +20% base and $8K/$1 million
revenue
COO: +20% base and $10K/$1 million
revenue
CEO: +20% base and $12K/$1 million
revenue

Experience = multiplier
Junior: 1x
Intermediate: 1.1x
Advanced: 1.2x
Master: 1.3x

Location = additional
A: +$22K (e.g., San Francisco, Hong Kong, Sydney, London, Paris, New York City)
B: +$12K (e.g., Nashville, Birmingham, Vienna, Austin, Las Vegas, Tel Aviv)
C: +$6K (e.g., Tallinn, Warsaw, Bucharest, Santiago)
D: +$0K (e.g., Manila, Delhi, Hanoi)

Equity vs. salary choice
Employees have a choice of more equity or more salary; those who choose salary receive an additional $10,000.

 

The Downside to Opening Up

A big challenge of implementing pay transparency is having to explain differences among salaries to head off perceptions of unfairness. As much as every company might want to be a model of consistency and equality, the reality is that people’s salaries can vary widely, and for reasons that may be difficult to explain.

For example, from an HR perspective, it may seem perfectly reasonable to offer a higher salary to an external candidate with a wealth of experience from diverse employers—and a steep baseline pay requirement. But that can be difficult to stomach for an employee who has been loyal to a company for years but lacks the know-how that might come from having hopped around more.

Rick notes that someone on his school’s faculty might be paid more not only for having more experience but also because the finance department earns more than marketing, or because the university is worried about a person who is well-known in his or her field getting lured away by the competition.

“People can get bent out of shape over very small differences,” like $300 a year in annual pay, he says.

In addition, pay transparency doesn’t always give the whole story. Interestingly, when total compensation is considered, the salary gap between genders is smaller than when just salary is counted, according to Barrington. She offers an example of nonsalary compensation: When she took a job with Cornell at a New York City campus, a big factor in the decision was discounted college tuition for her daughter.

Benefits can get lost in the equation when transparency focuses just on pay. Some companies’ pullback from offering more-generous benefits may be driven by the focus on salary on sites like Glassdoor.com. Companies are realizing that they may get more credit with potential hires for salary than for benefits, the value of which is harder to demonstrate.

Possible Consequences Of Knowing

Boyer, whose health system has 16 hospitals and 400 ambulatory sites in the New York City area, says companies with complex staffing structures run a high risk of employee confusion and dismay. It’s just too easy for people to misinterpret transparent salaries by comparing jobs that are different, she says. “We have a lot of jobs. It’s overwhelming information. If people don’t know how to interpret it, it could lead to incorrect conclusions.”

Rick lays out what happens when people don’t understand pay differences. In his paper “Cheating More for Less: Upward Social Comparisons Motivate the Poorly Compensated to Cheat,” which was published in the journal Organizational Behavior and Human Decision Processes, he and his co-authors gauged the effect of compensation awareness on cheating. He asked subjects to answer trivia questions and grade their own answers, with a nominal financial reward for each correct one.

When the lower-paid participants were made aware of what they were earning relative to the others in a different room, they were more likely to cheat. And those who were told they were making less than others in the same room cheated more than any other group.

“For people on the low end of a pay discrepancy, if there’s no other recourse, our study suggests that they may very well turn to cheating to even the score,” Rick says.

For companies with transparent pay, that could mean disgruntled employees who spend their workday job hunting, doing low-quality work, lying about productivity or stealing supplies.

In other research, Rick found that when people were given a task counting dots, they were sloppier and got more wrong answers when they knew they were being paid less than others.

Perhaps Rick’s results give credence to the deep-seated societal belief that talking about pay is taboo. For both workers and companies, there is a squirm factor.

Although the National Labor Relations Board has ruled that companies can’t bar workers from discussing their pay, Barrington’s research shows that many employees still feel like they can’t talk about compensation. According to the results of the IWPR/Rockefeller Survey of Economic Security in 2010, about 23 percent of private-sector workers surveyed that year said pay discussions were banned; another 38 percent said such talks were discouraged.

How to Handle Transparency

Whether pay disparities (or perceived ones) come to light through company policies or surfing the Internet, HR professionals should seize the opportunity to be open about how pay is determined.

Szypko, who worked as an HR practitioner before turning to research, says a woman once marched into his office with a magazine survey that she claimed showed she should be paid twice as much. He walked her through the pay data the company used to price the job, including factors such as geography and company type, the market pricing strategy, and the compensation philosophy. While the woman left no richer, she felt validated by having been heard.

When someone turns up in HR demanding to know why they are paid less than someone else, “the HR person should smile,” Atkinson says. They’ve just been handed an opportunity to talk about how pay is determined and its relationship to performance. Without transparency, people just feel disgruntled without a way to open that conversation.

Here’s how HR can best manage pay transparency issues:

Communicate and train. HR has the opportunity to show managers and supervisors how to explain the way the company’s business strategy is translated into compensation. “You have to emphasize very strong communication about the way performance turns into money and how that performance system drives company strategy,” Barrington says.

Stay up-to-date on competitive salaries. At North Shore-LIJ and many other companies, corporate HR sets pay ranges that are competitive in the local market and fair across the entire system, and local HR and managers set salaries within those ranges.

Streamline differences as much as possible. Minimize the number of pay grades to keep things simple. “Manage microdifferences,” Rick advises. “Try to have as few buckets as possible and still be fair.”

Provide context. Workers need to be able to make sense of what the numbers mean. That means organizations must provide more explanation about how pay is determined. At the University of Michigan, faculty now see how they scored on ratings like teaching, research, service and practice, as well as what the averages are for their level.

“Think very carefully before revealing this stuff,” Rick says. “It’s so personal; people see it as their worth.”

Tamara Lytle is a freelance writer based in the Washington, D.C., area.

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