Why Pay Transparency Regulations Are a Strategic Management Opportunity
Research finds that it’s a win-win for employers and employees when workers understand both their performance relative to peers’ and how pay decisions are made.
Annalisa Grassano
Touted as one remedy to the gender wage gap, pay transparency laws are increasingly being rolled out across the United States at the state and local levels. Nine states — including New York, as of September — are currently regulating some aspect of pay disclosure. The National Women’s Law Center reports that altogether, more than one-quarter of U.S. employees live in a location where pay information is regulated.
By and large, pay transparency regulations have emphasized disclosing a salary range for advertised positions and internal opportunities for advancement. These laws are designed to ensure equal pay for equal work and effectively close the gender wage gap. The logic is simple: If underpaid employees, including women and minorities, aren’t aware of what their coworkers are paid, they are at a significant disadvantage in leveling the playing field through litigation and negotiation. How can inequities be addressed when they remain in the dark? Without pay transparency, enforcement of existing laws, such as the Equal Pay Act of 1963, becomes difficult. Based on recent cases and notable discrepancies that have been exposed (some spanning years of underpayment), it seems that greater transparency has an important role to play.
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Organizational Responses to the Changing Regulatory Landscape
Despite the increasingly widespread adoption of pay transparency regulations, many organizations have responded with pushback, resistance, and minimal compliance. After Colorado became the first state to require organizations to disclose pay ranges in advertised positions in 2021, organizations soliciting applicants from across the country began explicitly excluding Colorado residents from consideration to skirt the new laws, prompting the state’s department of labor to issue warnings and fines. Another organizational tactic is to comply with pay information requirements with pay ranges that are so wide that applicants cannot meaningfully predict what salary they might be offered. In one notable example, Netflix posted a job with a salary range that spanned $90,000 to $900,000.
While approaches to compliance with transparency laws at the organizational level have taken many forms, leaders have expressed several common concerns regarding the potential negative consequences of pay transparency to their business operations and culture:
- Will everyone just ask for more money? More pay information might prompt more conversations about pay (and why someone is receiving what they are).
References
1. T.A. Montag‐Smit and B.W. Smit, “What Are You Hiding? Employee Attributions for Pay Secrecy Policies,” Human Resource Management Journal 31, no. 3 (July 2021): 704-728; and B.W. Smit and T. Montag‐Smit, “The Role of Pay Secrecy Policies and Employee Secrecy Preferences in Shaping Job Attitudes,” Human Resource Management Journal 28, no. 2 (April 2018): 304-324.
2. T. Obloj and T. Zenger, “The Influence of Pay Transparency on (Gender) Inequity, Inequality and the Performance Basis of Pay,” Nature Human Behaviour 6, no. 5 (May 2022): 646-655.
3. L. Kray, J. Kennedy, and M. Lee, “Now, Women Do Ask: A Call to Update Beliefs About the Gender Pay Gap,” Academy of Management, In Press, published online Aug. 15, 2023.
4. J. Greenberg and R. Folger, “Procedural Justice, Participation, and the Fair Process Effect in Groups and Organizations,” in “Basic Group Processes,” ed. P.B. Paulus (New York: Springer, 1983), 235-256; and K. van den Bos, E.A. Lind, R. Vermunt, et al., “How Do I Judge My Outcome When I Do Not Know the Outcome of Others? The Psychology of the Fair Process Effect,” Journal of Personality and Social Psychology 72, no. 5 (May 1997): 1034-1046.
5. M. Recalde and L. Vesterlund, “Gender Differences in Negotiation and Policy for Improvement,” working paper 28183, National Bureau of Economic Research, Cambridge, Massachusetts, December 2020.