With pay secrecy clauses now abolished in Australia, HR leaders need to consider what salary transparency means to their organisation – and how they can ensure that disclosing wages won’t lead to employees heading for the exit.

When Melbourne IT consulting firm Cogent was founded in 2007, it did things differently from day one. “It was a fully transparent organisation with 200 employees where everyone knew each other’s pay – including the CEO’s,” says Peter Bamberger, Head of the Organisational Behaviour Department at Coller School of Management at Tel Aviv University. “It became part of Cogent’s workplace culture – and it ended up being a very successful firm.” 

This remained the case until Cogent was acquired in April 2022. Its pay transparency model was arguably a decade-and-a-half ahead of the curve. 

Following Australia’s ban on pay secrecy clauses in December 2022, many businesses aren’t just dealing with legislative changes and the review of employment contracts. Some are also weighing up whether to publish salaries in full. In the firing line is Australia’s 22.8 per cent gender pay gap. 

Women, on average, earn $26,596 less than men each year. By following in the footsteps of many US states, the UK and the European Union, the hope is that by removing barriers to discussing salaries among colleagues, employees will be better placed to negotiate raises with their bosses, gradually closing the discrepancy between how much male and female workers are paid. 

Some corporations, notably major banks, scrapped pay secrecy clauses ahead of the Albanese government’s reform. Other big financial institutions have gone a step further, publishing firm-wide pay bands to enhance transparency. And there are calls for companies to go even further, and at least internally disclose employee wages in the interests of fairness and equity. And, as of 2024, as part of the new Closing the Gender Pay Gap Bill, employers will be required to publicly disclose their company’s gender pay gap to the Workplace Gender Equality Agency. 

At the centre of the pay transparency issue sit HR leaders. Not only is it on them to ensure that organisations are fully compliant with the law change, but it also falls on them to fine-tune existing pay performance models so these systems can withstand scrutiny. And if a company is willing to fully embrace salary transparency, it falls upon HR teams to overhaul current models and create a new, objective way of ensuring an employee’s pay accurately reflects their contribution. 

However, adopting pay transparency can come with challenges. Without ensuring the correct foundations are in place, the risk is that openly declaring employees’ salaries places the spotlight on existing problems. 

What can organisations gain from pay transparency?

Research has shown that open knowledge of pay bands and colleagues’ wages has helped narrow the gender pay gap. 

“When we’ve seen other countries opt for pay transparency, a persuasive body of evidence shows that it makes a difference in reducing the gap between the salaries of men and women,” says Michelle Brown, Professor in HR Management at the University of Melbourne. “So it becomes one of a suite of measures to close the gender pay gap.” 

However, pay transparency goes further than merely retrofitting female employees’ salaries so they’re in line with male colleagues. It also helps to unlock clearer career paths for women. 

“When the gender pay gap is reduced, it helps women in reaching more senior positions at an organisation,” says Brown. “It creates implications around promotion and career structures. [It’s about] more than just ensuring men and women are paid the same for the same job.” 

“In this competitive job market, we know transparency is key to attracting top talent and improving trust, morale and engagement.” – Catherine Walsh, Head of People and Culture at PwC Australia

Transparency also promotes accountability. Brown cites Molly Moon’s Homemade Ice Cream in Seattle, Washington, as a company that successfully transitioned to full pay transparency in 2019. 

“It was a long-established chain with a female CEO who decided to get rid of pay secrecy,” she says. “It took them one year to go through the company’s existing salary structure and identify any anomalies. But that transparency made sure their pay performance management systems were reviewed and up-to-date. It meant that if they were challenged, they could explain why one colleague was earning more than another via rational, logical decision-making.” 

A thorough audit of an organisation’s salary structure is a mammoth undertaking for HR leaders, especially among decades-old corporations, but it can pay dividends.

“Many organisations will have legacy issues – a common example is the personal assistant of the general manager may be paid more than [what’s fair for] the job,” says Brown. 

“You can’t take pay away from people, but a well-designed pay performance system means you can more accurately evaluate an employee against targets. Then, by publishing salary bands, you’re effectively motivating people to stay: an individual will know that if they stay for a certain number of years, or if they attain a certain qualification, they’ll receive a raise.” 

A way to attract and retain star players

There’s a clear case that pay transparency can boost a firm’s retention policy. And it can strengthen its recruitment, too.

“Publicly available information offers employees greater access to more information so they can make better decisions,” says Brown. 

“People are less likely to apply for vacancies if no pay bands are advertised – they won’t know if the role will pay more than their current job. And you’re enabling them to plan their career trajectory earlier on in terms of the qualifications and training they need to make the best moves.” 

For the likes of PwC, which made its salary ranges publicly available in April 2022, pay transparency has become enshrined in the firm’s workplace culture. 

“We’re proud to be leading the market on this,” says Catherine Walsh, Head of People and Culture at PwC Australia. 

“It aligns with our strong commitment around diversity and inclusion, and is another element that makes our people feel they belong and are treated fairly.” 

Pay transparency has not only been implemented with the gender pay gap in mind, adds Walsh, but also acts as a powerful recruitment tool. 

“In this competitive job market, we know transparency is key to attracting top talent and improving trust, morale and engagement.” 

Could pay transparency harm employee engagement?

An argument against salary transparency is that it makes pay the be-all and end-all for employees – that it becomes more important than their everyday work. 

However, Bamberger says there’s no real evidence that a stronger emphasis on wages extinguishes an employee’s intrinsic motivation, such as a sense of purpose or belonging. 

“In fact, there’s stronger evidence that well-designed pay systems actually boost intrinsic motivation. They can give the individual a greater sense of self-determination, progress and control in that they have a better understanding of their future income.” 

Likewise, the long-standing case for pay secrecy has been that it reduces resentment among colleagues – that an otherwise motivated worker will suddenly down tools upon discovering their workmate is paid more than them. 

Brown says this is a misconception. 

“The thinking goes that employees fundamentally don’t understand how complex pay is – that conflict would arise and take up managers’ time. It’s an easy argument for management to make, and it’s patronising: ‘We know best, just trust us that we’re paying you fairly.’ People deal with financially complex situations all the time, so they have the capacity to understand how pay is determined,” she says. 

And even if pay transparency stokes the flames of envy in some circles, Brown says there’s no evidence to show productivity is impacted. 

“People are often accepting of different pay so long as there are legitimate reasons, such as greater experience or more varied skillsets. You can have differences within pay bands without sparking antagonism so long as they’re justified – which is something that pay transparency can offer.” 

Avoiding pay discrepancies

Despite this, disclosing company salaries may lead to a short-term spike in employee turnover, particularly among workers who consider themselves underpaid. Bamberger’s research has shown that lower-performing employees, typically on lower wages, typically seek out workplaces that offer better pay. 

While this implies that pay-transparent organisations don’t have to immediately worry about their best performers leaving, a rise in employees quitting is still something HR leaders will want to avoid. 

Longer term, however, companies may risk losing their top talent due to a phenomenon known as pay compression. 

“The risk is that, through pay transparency, the best employees lack incentive to perform better because the reward is the same as the poorer performers,” says Bamberger, who has researched the topic. 

“Secondly, the organisation may unintentionally motivate employees to look elsewhere, to companies that better value their performance with better pay.” 

“By publishing salary bands, you’re effectively motivating people to stay: an individual will know that if they stay for a certain number of years, or if they attain a certain qualification, they’ll receive a raise.” – Michelle Brown, Professor in HR Management at the University of Melbourne

Bamberger says it’s unclear why salary transparency can lead to pay compression, but it may have to do with the new-found pressures placed on managers. 

“Pay transparency means all eyes are on the manager – they now have to be more accountable for salary discrepancies. They can no longer simply give a big pay rise to the best-performing employees to keep them happy.” 

An unintended consequence of pay transparency is that stretched managers opt for workarounds to reward perceived higher performers, such as bonuses, which can further entrench the gender pay gap.

“Managers can differentially reward employees’ output with other benefits,” says Bamberger. 

“Perks like more time to work at home, improved training access and financial rewards could be awarded. But studies have shown that there’s a gender inequity in the allocation of benefits. Men tend to get better packages than women because you often get what you ask for – and men tend to ask for more in negotiations.” 

Making transparency work for your business

Sixteen years on from Cogent launching as a pay-transparent business, companies up and down the country are now figuring out what transparency means to them. 

Pay transparency can only flourish with the correct structures in place. This means HR has to take control in implementing performance management systems that provide organisations with rational explanations for why one employee is paid more than another. 

But with fewer tangible outputs in knowledge work, devising an objective model that accurately accounts for employee performance is difficult. “We’ve looked at inadequacies in performance management systems for 50 years,” says Bamberger. “We’ve still not come up with the perfect model.” 

Transparency shines a light on where problems lie: sharing pay information risks employee dissatisfaction and higher quit rates. 

Therefore, the onus is on businesses and HR leaders to design better pay performance systems that, ultimately, not only help close the gender pay gap, but benefit the organisation and employees too. 

“The hope is that much more information becomes available,” says Brown. “Which helps employees and organisations make better decisions over time.”

This article is from the March 2023 edition of HRM Magazine.

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