Transparency around what people are paid can encourage better performance or create jealousies around the water cooler.
In days past, there was often a veil of secrecy around people’s salaries, religion and politics.
But times change, and some critics believe there’s a case to be made for extending the transparent approach to employee salaries seen in the public service to a broader range of industries.
US chain Whole Foods Market has been open about wages for three decades. Staff can look up anyone’s salary or bonus, from the latest hire all the way up to the boss.
The company’s view is that such openness encourages conversations about salary among staff and motivates them to work harder and reach the top.
So should other businesses share salary details with their workers? We put the question to three remuneration experts.
There are complex pros and cons around salary transparency, according to Chris Mead, who works for recruiting firm Hays.
At its best, the practice can encourage employees to work hard and keep them motivated.
“The disadvantages are that it may create tension in the workplace, and may even impede a company from attracting top talent,” Mead says.
Policies will vary from business to business and country to country, and Singapore-based Mead says there has not been a significant trend towards greater salary transparency in South-East Asia’s city-state.
While proponents believe openness around wages can help break down gender pay inequality in companies and ensure executives are paid the same amount for the same roles, Mead does not believe such an approach should be adopted in isolation.
Other key strategies to encourage diversity include fostering board-ready women through workplace flexibility, clear career paths and development opportunities.
But he sees some merit in having an open policy on wages so staff can look up information about fellow workers’ salaries or bonuses.
“Having salary transparency in a company puts employees in a stronger negotiating position,” he says. “It can also encourage employees to strive for greater excellence, creating a very competitive and healthy marketplace for existing employees and future team members.”
However, the strategy should be part of a wider corporate blueprint.
“For salary transparency to succeed it should be part of an overall company culture of transparency and openness. That culture would need to be carefully established and embedded into all of the company’s policies and operating style – for example, there would be no point in having transparency around salaries but not around performance benchmarks and targets.
“This would also need to be incorporated into recruitment practices. We often see issues with employee value propositions that don’t actually match reality, making it difficult to attract and retain the right talent.”
There are also clear privacy issues to address. Many employees may consider their personal financial information to be sacrosanct, while there is also a risk that making salaries public knowledge could adversely affect the morale of lower-earning employees.
“[So] before putting any transparency-improving plan into place it’s probably best for companies to ask how staff feel about it,” he says.
Pay transparency is likely to be more difficult to implement in large, multi-tiered organisations compared with smaller start-ups, he suggests.
Ultimately, a decision to embrace salary transparency will depend on the kind of culture an organisation wants to create.
“There is no one-size-fits-all solution. This needs to be part of the overall structure of a company’s HR and operating policies,” Mead concludes.
Chris Mead is regional director Singapore and Malaysia at Hays. He has two decades’ experience in executive recruitment in Singapore, Malaysia, Hong Kong, Australia and New Zealand.
Corporate Governance Policy Expert
Pru Bennett believes salary disclosure can lead to a range of unforeseen – and negative – results for businesses.
She cites the example of the Corporations Act for listed companies in Australia, where critics argue that rules around the disclosure of executive pay have led to a “ratcheting up” of salary packages for senior executives.
“Various executives can go to the CEO and say, ‘I’ve just looked at our competitor and I can see that their pay rate is 10 per cent higher – you need to match that’,” Bennett says. “So there can be unintended consequences from disclosure of pay.”
Indeed, she claims there is already too much focus on executive pay, a scenario that can disrupt the priorities of company boards and chief executives.
As part of her role at BlackRock, an international investment management corporation, Bennett engages with boards on issues relating to corporate governance, such as composition of the board and executive remuneration structures.
She says at many engagement meetings most of the discussion centres on executive pay levels rather than issues such as the independence, composition and skill sets of the board and the strategic direction of the company.
“I’m concerned that boards are spending too much time on remuneration and not enough time on strategic issues which can be of greater value to shareholders.”
Privacy fears and inter-office jealousies are other possible repercussions of salary disclosure, particularly if employees have only a partial understanding of the salary structures and policies of their organisation, Bennett says.
“They see someone else earning more than them and they really don’t understand their role, and they think they should be earning the same amount. It is fraught with danger.”
While acknowledging that some American companies have successfully embraced salary disclosure, Bennett does not believe it would translate well to all nations.
BlackRock has been a strong advocate of gender pay equity and higher female representation on boards.
But Bennett is not convinced that salary transparency will help the cause, maintaining that pay fairness is a board responsibility and not an issue that should be debated around the water cooler.
As an investor, BlackRock wants assurance that a company’s board and management understand that gender pay equality can be an issue and that they are doing something about it.
Bennett believes diversity and fairness must be achieved through appropriate channels. “For diversity to be effective, the message needs to come from the top – that’s the CEO with sponsorship from the board. That’s where this issue should be tackled,” she says.
“If there is a gender pay equality issue at a company, if I were a director at the company I would want to know the extent of the problem and understand what management is doing about it. You are likely to lose good talent otherwise, and losing good talent is not in the interests of shareholders in the long term.”
Pru Bennett is a director of the Asia-Pacific Corporate Governance and Responsible Investment Team at BlackRock, the world’s largest fund manager. She is a member of the International Corporate Governance Network.
Senior Policy Officer
Trades Union Congress
For Janet Williamson, the case for pay transparency is a no-brainer. “Employers have nothing to fear and much to gain from pay transparency, so long as they pay fairly,” she says.
The Trades Union Congress (TUC), which represents 53 unions comprising just under 6 million workers in the UK, believes employers should always state the salary range when advertising jobs.
“Pay transparency aligned to fair levels of pay contributes to a culture of openness and trust,” says Williamson.
“Research shows that jobs that are advertised with clear salary information get more applicants than those that are coy about what someone will earn. This holds true even when the salary advertised is quite low.”
The TUC argues that company remuneration reports should disclose information about pay levels and wage rises in the company and explain how these factors have been taken into account when making decisions on executive pay.
“This would also enable workers, unions and others interested in tackling pay inequality to assess how companies are performing,” Williamson explains.
“If pay rates were published, managers would have to think much more carefully before paying a man more than a woman for doing similar work,” she points out.
As well, the TUC advocates regular equal-pay audits. This entails checking cases where men and women are doing equal work, comparing their pay and, if any gaps are found that cannot be justified, taking steps to close them.
“Companies that don’t audit can’t say with any confidence that their pay systems and practices comply with equality legislation,” says Williamson.
Companies should also take action to identify if there is a wide gender pay gap because there are more men in senior management.
Williamson believes pay scales should be tied to what’s a fair rate for each job, rather than performance-related pay.
“Individual performance-related pay can easily reward the wrong kind of behaviour, encouraging competition rather than co-operation between staff in a world where teamwork is essential,” she observes.
Does TUC practise what it preaches? “At the TUC the same job-evaluation principles have been applied to everybody from the cleaners to the general secretary,” she says.
“The TUC’s salary scales are freely available to all employees on our intranet. It is good for morale if pay differentials are felt to be fair.”
Janet Williamson is a senior policy officer at the UK’s Trades Union Congress, focusing on corporate governance, executive pay and corporate social responsibility.
If adopted, salary transparency should be part of a broad approach to organisational culture that encourages fairness and diversity.
- Transparency around wages can create tension and jealousy issues.
- Salary disclosure has been linked to the ratcheting up of executive pay.
- Pay audits can help ensure organisations are behaving in a lawful way.
This article is from the November 2014 issue of INTHEBLACK.