Pay Transparency

Should you know what your boss earns?

A shift is currently underway as we move into the “Post-Boomer era” in the workspace. Millennials are taking over more senior positions and, from what we’ve observed, there’s been and will continue to be a shift in attitude and norms.

We are already experiencing these changes, as we see a shift towards greater openness with people who are more willing to share their lives over social media. With the age of shared intellect and open access to information, we see that even conventional wisdom is brought into question.

“One courts misfortune by flaunting wealth”

- Chinese Proverb

How much do you earn?

Links Payroll salary snapshot

Perhaps you just thought of the ballpark figure of how much you earn in a month, or maybe a year. But what if your friend were to ask you in person? Would you be as comfortable announcing your salary or pay grade? And what if this person was a colleague, how comfortable would you be in telling them how much you make?

Chances are, you’re thinking it’s really none of their business.

The traditional attitude towards wealth and earning is that it’s a private matter and therefore, in general, talk of salary is a taboo topic. Not only is this true in eastern cultures, where people are generally more conservative, but also in the West.

This is why we still have articles teaching people the “right way” to ask for a pay rise. In reality, people are more comfortable talking about their bedroom habits than they are about disclosing how much they earn.

In recent years, however, there’s been more talk questioning this mode of thinking, with companies adopting a more salary transparent approach. Let’s break down this theory and weigh out why salary transparency may or may not be a good idea.

Conventional Wisdom

Norm: Pay Secrecy

The conventional stance towards salary is that it is something that people should keep private.

For companies and employers, the reasons are obvious. By keeping pay secrecy, they gain more bargain power. At the end of the day, why spend more when you can get the same thing for less?

We see this same mentality amongst employees, who see pay as a matter of negotiation. If you negotiate better, you are more likely to get a higher salary than the person next to you. By keeping pay secret, employers could benefit from information asymmetry, a phenomenon whereby one party of an economic transaction had greater access to information, allowing them to take advantage and gain a better deal over the other.

Hidden Cost of Pay Secrecy

Though it may seem like a good deal for employers to bargain their way into cheaper labour (which has been the case for many years), there’s actually a cost to this approach, a cost that is greater now than ever, due to the shift towards open sharing of information.

Let’s be honest, while we may not feel comfortable asking others or divulging our own salaries, we are curious to know. Not only does the lack of knowledge make us want to know more, but it makes us theorise.

In a study by Harvard Business Review, they found that an overwhelming number of people thought that they were being underpaid, and this was even when they were in fact paid at or above the market value.

Links Payroll salary snapshot

This meant that, regardless of how well or how fairly companies treated their employees, because of the information asymmetry on salary discussions, staff would not realise that they were being paid at a fair rate, undermining efforts to engage them.

Since pay secrecy is not a foolproof system, when people do find out about the differences in pay for the same work, there is usually little to no recourse for employees,which results in a frustrated workforce.

On the contrary, in a study conducted through Amazon’s Mechanical Turk platform, where they asked participants to complete two rounds of data entry, it was found that people who were informed of others people’s performance “worked harder and significantly increased their performance”.

In light of these studies, information asymmetry may be doing more harm than good to the longevity of your company.

Barriers to Entry

Barriers to Breaking Conventional Wisdom

If pay secrecy is bad and information asymmetry is preventing employees from negotiating properly for themselves, then why have people gone along with this scheme for so long?

The reality is, we, as employees, know there are salary discrepancies. And in such an environment, it actually serves us better not to disclose what we earn. In a case where one person is earning more than the other, though their roles and abilities are fundamentally the same, there would be a negative backlash on both people if each person’s salary is revealed.

When a worker feels underpaid in an environment of pay secrecy, there is little that they can do, as that is what they had agreed on in the beginning. Feeling wronged, the only person they can turn their frustration towards is their colleague whom they now know is making more. For this reason, people generally do not disclose how much they earn.

However, the problem with this mode of thinking is that it’s flawed on the company’s part and stunts company and talent growth by basing one’s pay on the past. Because pay secrecy bases one’s salary on the initial negotiation, it is indirectly encouraging high performing employees to job hop when they feel undervalued.

Links Payroll salary snapshot

Opening up the field to build stronger foundations

It is actually more constructive for discussion about pay to be in the open. According to Burkus from Buffer, “When it's out in the open, people might still disagree with certain parts of the payscale, but they have recourse."

When a company makes their payroll transparent to their employees, what they’re communicating is that they are willing to handcuff themselves from playing unfair. As a result, employees trust their employers for having their best interest in mind, instead of looking at them as the opposition in a transaction.

Arguments for Transparency

Arguments for Transparency

The truth is that, regardless of how companies decide to conduct their payroll, people are already moving towards greater transparency by way of information sharing.

For example, at Links we have our Asia Salary Snapshot, which is a study of people's salaries in Asia, and also other tools like the Links Career Tree, which allows people to have a better idea of where they should be, the current market price, and how they may progress in their careers.

Dane Atkinson, the owner of SumAll, is an early adopter of salary transparency, implementing it in his current company. He found that pay transparency allowed him to open the conversation on performance and was overall a better way of treating the people who worked for him.

By doing so and by pioneering this movement, companies are communicating value for the employees, value beyond high pay and benefit packages.

In order for salary transparency to work, there need to be two fundamental things:
1.) The Clean Up
2.) The Talk

The Clean Up

Salary transparency can come in many different forms and levels. Depending on what the company is trying to achieve, it may decide the specific approach to the transparency, whether this is departmental, company wide, or entirely public.

Regardless of the level of transparency a company decides to settle on, the one thing that needs to take place before going transparent is what I call “The Clean Up”.

In order to adopt the pay transparency model, you will need to have a solid foundation on which to build your salary model. This, essentially, is a formula in which to generate the foundations of what each person’s salary should be and the carrying out of this adjustment in the workplace.

Whereas the old pay system was one that constantly looked at the past, this new approach calls for a more concrete and strategic foundation that requires planning.

For roles, such as sales, where performance is more tangible or apparent, it may be easier to define a pay scale, but not all roles are directly income-generating and it is not as easy to define a formula for every role.

Without the clean up process, problems like the ones mentioned earlier regarding pay frustration may arise. People trust a pay transparent organisation because a company can’t just say that they are committed to fairness, they actually have to do the nitty gritty to get there.

Check out Buffer’s Transparent Salary Calculator to see how they do it! Links Payroll salary snapshot

The Talk

Words alone can feel uncomfortable, especially in this day where people are more used to concealing their identities, voicing radical opinions under the safety of internet anonymity.

“The Talk” refers to a mindset that is open to discussion. This is important in the context of salary transparency, as difficult conversations about pay will arise as a result and you will need to be ready to show the evidence, or to make adjustments when necessary.

An observation the PayScale study found was that, “It’s more effective for employers to compensate employees at market value, and to be transparent about how pay was determined, than to overpay them and not discuss it.”

The talk acts in conjunction with the pay formula to help companies better manage their talent. By having the formula, employees have a better understanding of where they are and areas that they may improve on in order to progress their career.

Discussion about pay acts as the supplementing step that keeps the foundation in check, as it is an informal review that allows employees to evaluate themselves and get feedback on how they are actually performing in comparison to how they think they are doing, using this as an opportunity to guide their performance. When done well, it allows employers and employees to keep each other accountable and progress.

Conclusion

At this stage, the verdict is still out on whether salary transparency is a better approach over pay secrecy. Although we are seeing more and more tech companies and startups swaying towards this model, the majority of companies still prefer to keep a wrap on pay, as many still see it as highly personal and are not yet comfortable to hop on board this train.

Whether you’re a believer of this model or a sceptic of the whole notion, what we do know is that public in general is gradually changing its ways in pursuit of a more open and transparent society. While companies like Buffer and SumAll have already claimed the spot of being the first mover in this motion, it is only a matter of time before we see other companies joining the ranks.

Are you prepared for this new approach?

Links Payroll salary snapshot

Additional resources on pay transparency:




Download the full Links Ebook on pay transparency here!