Being open about employee salaries can be a remedy for inequality, or a prescription for disaster.

Pay transparency. Two words that evoke very different responses. For some organisations it’s key to their diversity strategy and employer brand. But for many companies, pay transparency is a nightmare policy with the potential to alienate staff.

Yet it’s often forgotten that pay transparency is something of a fact of life in the public sector. So why do so many private sector businesses insist on keeping salaries confidential?

Although many companies claim they are concerned about putting employees off side, Dr John Molineux, a senior lecturer at Deakin Business School, believes the rationale is more about keeping a lid on salaries than sparing the feelings of employees.

“With pay transparency, people can compare themselves to the market. If they receive a better offer, they can come to the organisation and ask what it will do about it,” he says.

Regardless of motivations, many Australian companies may soon lose at least some of their pay secrecy. Under the Labor Party’s new pay transparency plan (which is aimed at reducing Australia’s stubborn 15 per cent gender pay gap), companies with more than 1000 employees will be forced to disclose their gender pay gap.

Prime minister Scott Morrison is not ruling out the idea. In September last year, he told a press conference that he was “open-minded” about pay transparency.

Different approaches

It’s not just Australia; the push for transparency is global. Norway publicly discloses total income and tax paid for every taxpayer, though most countries don’t go that far. The UK, for example, only requires companies with at least 250 employees to publish gender pay gap data.

Gender equity is driving much of the push. Research by INSEAD and US and Danish universities examined 2006 legislation that required companies in Denmark to report on gender pay gaps. It found that transparency reduced the pay gap by seven per cent.

“Given the fact that only a limited number of firms in Denmark are governed by this legislation, the effect is significant,” says professor of economics Morten Bennedsen, from INSEAD. “We can even prove the effect among firms that were not required to provide gender-segregated pay statistics.”

The Danish law shows how pay transparency can mean different things. Sometimes it refers to complete transparency, where everyone knows what their colleagues earn. In other cases it refers to an audit system where individual salaries are kept confidential, but organisational pay equity is evaluated.

The audit approach has proved controversial, and its ability to close the gender pay gap has been questioned. For example, some US firms in the financial sector have been accused of playing fast and loose with data by not listing their pay gap (the difference of pay between genders), and instead listing an adjusted pay gap (which looks at gender pay equity between similar roles).

Public differences

Compared to an audit and tidy data comparison, many businesses find the idea of full pay transparency a lot scarier, although it’s the norm in Australia’s public service.

“In the public sector, everyone is on a pay scale and you receive annual increments until you get to the top of that band. Pay is often not mentioned at all in the public service, as everyone knows everyone else’s banding,” says Molineux, who spent over a decade as HR director with the ATO’s Compliance Division.

Which isn’t to say it can’t be everyday life for private sector businesses. Digital consultancy Cogent has a completely open salary model coupled with full financial transparency. Cogent sees the approach as a reflection of its core values of transparency, creativity, learning, personal wellbeing, diversity and usefulness.

Over its 11-year history, Cogent has always had pay transparency, with the system slowly being refined as its workforce grew to the current 60 people.

“In the early days, the company was a community of people working together who were friends and peers. From that it was a natural flow-on to pay transparency,” says James Ferne, the ‘People Guy’ at Cogent.

Matt Connell, AHRI Victorian state councillor and executive workplace consultant at Workplace Conflict Resolution, has seen both sides of the pay transparency fence and argues that an open model makes it easier to talk to staff about their pay.

“This means you can explain it to people and easily justify where they sit within their band. It leads to less difficult conversations,” he says. “When it’s not transparent, you leave open to debate whether you are doing it fairly.”

Transparency can also help in the battle to attract and retain talent. Cogent promotes pay transparency in its recruiting and believes it gives the organisation an advantage over employers with more opaque systems.

“People self-select. Those who are not interested in our values, or who value money above all else and tend to jump from job to job, don’t tend to apply,” says Ferne. “Pay transparency attracts and retains people. Being a values-driven business and hiring based on value alignment means people tend to stay around longer.”

Connell believes organisations with opaque pay models are making life difficult for themselves.

“When you define a pay structure, it takes the mystery out of it. We find in workplace conflict situations, if there is not a structure, it’s hard to justify pay to employees.”

Peer pressure

Broadcasting pay levels can be a double-edged sword, according to critics. They argue that most people have an exaggerated view of their own performance and hence believe their current pay is well below what they deserve. “Everyone’s general impression is always that other people are doing better than them when it comes to pay,” says Connell.

Staff who discover they are ‘underpaid’ in a transparent system can become dissatisfied and more likely to leave. McKinsey recently reported on a Canadian engineering firm that introduced a transparent annual bonus system, only to find employees’ perceptions of the fairness of the reward relative to their on-the-job effort was significantly worse (-8 per cent), while trust in their employer declined (-7 per cent) compared with a previously arbitrary approach to bonuses.

Staff interviews found transparency made people critically evaluate what had previously been seen as an unexpected gift. It also highlighted those who received larger bonuses, inviting envy by those with lower bonuses.

The natural human tendency towards social comparison often compels staff in a transparent system to ponder questions of fairness.

“Pay is often not mentioned at all in the public service, as everyone knows everyone else’s banding.”

Molineux has seen this occur in the public sector when everyone is paid the same, but some are working harder than others. “This can lead to a perception of inequity. Then the question for those people is what they do about it. Do they continue working at the same high level?”

When employees find out about their peers’ higher pay, dissatisfaction can lead to demands for change, which can be tough to handle. “With transparency, you see a lot of discussions around equity start, which can be uncomfortable or destructive,” says Molineux.

David Bates, executive counsel at Harmers Workplace Lawyers, believes an opaque system helps avoid this problem. “Where a number of people are at the equivalent level, the employer may not want to pay them all the same amount. Confidentiality avoids the unpleasantness of staff knowing not everyone is on the same rate.”

Privacy can also be a problem with open systems. A US survey by Bankrate found only 24 per cent of employees had shared their salary information with a co-worker. Millennials were more likely (33 per cent) to do so, compared with only 18 per cent of baby boomers.

Molineux is unsurprised by this finding. “There will always be some people who just don’t want others to know their salary.”

Transparency is definitely not for everyone, Connell admits. “When it’s introduced, it can be quite confronting.”

“The natural human tendency towards social comparison often compels staff in a transparent system to ponder questions of fairness.”

Pay transparency can also be a recipe for losing top staff, says Bates. Opaque pay models allow employers to keep control. “It prevents sending signals to the market, which may avoid poaching of key employees.”

Connell agrees this can be a problem. “When you have pay transparency, it can be quite rigid, so you can’t reward your high performers – especially if you want the system to be consistent.”

To avoid this, even supposedly transparent public sector schemes are sometimes boosted. During his stint at the ATO, Molineux helped introduce a bonus scheme for senior staff. “Within the ATO the bonus system was secret and no-one knew who got what. In terms of general salary, everyone knew what people earned, except for people who got the bonus.”

Although pay transparency sounds easy, it can also be a very exacting process.

“As the business grew, we brought in a ‘salary table’ of competences. It’s similar to salary banding, but we cover the skills, responsibilities and business impact for each particular discipline within the organisation,” says Ferne.

With 30 levels, Cogent’s salary table is updated annually in a rigorous, but time-consuming process, says Ferne. “It takes a lot of work, especially as it is a collaborative process, not a closed door management process. Naturally everyone is quite invested in it and they closely monitor it.”

Transparent hypocrisy

Although sticking with an opaque pay model may avoid difficult discussions with employees, increasingly it is opening up organisations to questions about their values. Molineux says pay transparency creates trust in management.

“If you are honest in this area, you are more likely to be honest in others. If you want to build a culture of honesty in an organisation, secrecy is the worst thing you can do.”

Supporters of pay transparency also believe an opaque system can’t be squared with public commitments to gender equity and diversity.

“Pay transparency makes you front up to those values. If you don’t have transparent salaries, then you need to ask if equality is just something written up on the wall. Can you really hold yourself with integrity?” says Ferne. “We believe open salaries is the way of the future, and the push for equity and information accessibility is helping drive that.”

Connell agrees that organisations risk looking hypocritical if they don’t have transparent pay systems. “Talking about pay levels is a big taboo in the private sector. And yet 90 per cent of organisations have values of collaboration, communication and trust, but not in this area.

We talk about accountability, but if the organisation is not telling you why you are getting paid what you’re being paid, then how can it claim to be accountable?”

This is an edited version of an article that appeared in the February 2019 edition of HRM magazine.