CIPD Voice: Issue 21
A current HR hot topic is the issue of pay transparency, with this subject being discussed through various events, blogs and articles, but what is driving this interest and how should people professionals respond?
Logic suggests that if you are going to offer a reward, it will have a greater impact if you let people know that it exists and what they need to do to earn it. Also, by being transparent, employers should be able to demonstrate to employees and other stakeholders how their pay approach supports other people and organisational issues, such as a firm’s mission, vision and business strategy; its alignment to its total reward approach, its employee value proposition and workplace financial well-being; or the link to the employer’s reward principles, philosophy and strategy. In addition, by being open about how it manages reward, employees are more likely to trust salary or bonus decisions. So, for these internal reasons, we would assume that employers would seek the advantages of pay transparency.
However, there are also some external factors pushing employers to be more open, most notably the requirements for large organisations to publish their gender and CEO pay ratios, and a government consultation on ethnicity pay reporting. In addition, there’s press interest in pay stories, such as why CEO’s earn so much, would the level of reward transparency already shown by such firms as Buffer or Verve work more widely, or if countries such as Norway can be so open about employee remuneration, why can’t the UK?
In the realm of social media, employees, especially millennials, seem to be more willing to share their terms and conditions through such sites as Glassdoor, Pay Scales and Indeed, as well as talking about their pay experiences and opinions on such sites as Twitter and Facebook. If workers are already talking about pay openly, ought people professionals be asking whether their organisations should be prepared to follow suit?
In addition, investors are now more interested in how the firms in which they invest treat their ‘most important asset’ in terms of management, development and reward, and are looking for further disclosure so they can make appropriate investment decisions. Politicians and the Government are also concerned about how rewards are distributed within organisations, and looking at the issue of pay transparency.
There is also various research evidence indicating that pay disclosure can make a difference. For instance, Striving for status: a field experiment on relative earnings and labor supply, Emiliano Huet-Vaughn (2013) finds workers are more productive when salary is transparent, while Signaling in secret: pay for performance and the incentive and sorting effects of pay secrecy, Bamberger et al, Academy of Management Journal (2014), finds that keeping salaries secret is associated with decreased employee performance.
However, before people professionals start preparing to introduce pay transparency, they should first ask themselves several questions. For instance, how should their organisation define pay, and should it include pension contributions and benefits in kind? Another question is what do others mean by pay? For example, employees might have one definition, while the Equalities and Human Rights Commission and the Financial Reporting Council will define it differently for both gender and CEO pay ratio reporting purposes.
As well as pay outcomes (in terms of salary rises or wage levels) , will the employer also be transparent about the pay processes that led to those outcomes, such as how jobs are valued, or who within the firm makes bonus decisions? And will contextual information also be provided, such as how an employee’s pay compares with comparable jobs within the organisation?
Similarly, with whom should the organisation be transparent? If an employer is multi-national should it share pay data with all employees or restrict it by geographical location? Should it disclose information to its customers and investors? What needs to be disclosed to the regulators or the media? What needs to be given to the remuneration committee and the board?
People professionals also need to think about the level of transparency they want. Should their organisation be fully transparent so that all employees can see all pay data, or should it share this data at an aggregate level, such as through medians or pay quartiles, and by reference groups, such as by jobs or ethnicity?
There are also several practical concerns that need to be overcome before transparency can be introduced, including: getting senior management buy-in; dealing with data protection concerns; and whether the performance measures used to inform pay decisions are ‘market sensitive’, etc.
People professionals need to define what in their context is meant by ‘pay’ and ‘transparency’ as well as who tells what to whom, why and how. For instance, if line managers are going to be expected to communicate about the pay processes and outcomes to their staff, what support does HR need to provide to them? If the firm is going to use technology to aid transparency, who is expected to use it, how accessible will it be and what training will be required?
Reward professionals also have an important part in creating crafting a pay narrative about what the employer wants to reward, why and how and to this share with employees as part of the transparency process. As well as assessing how this narrative compares to the reality and evaluating what polices and practices need to change and by when.
Because pay transparency is becoming more of an issue, doing nothing can’t be an option for most organisations. So, people professionals need to help their employers become proactive, by starting early they will be better placed to overcome the many challenges and take advantage of the opportunities.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.