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Full Disclosure
Pay transparency -- opening the books on corporate-wide salary approaches, processes and, in some cases, figures -- is making increasing sense to payroll experts and is starting to catch on among employers, too.
Imagine disclosing your earnings for all the world to see. In the United States, some would rather reveal their figurative and literal dirty laundry. But the declared earnings of Italian citizens were revealed two years ago and what followed was fairly predictable: Outrage. Masses of Italians criticized the action by the country's finance ministry as an extreme violation of privacy. And, while that action hasn't been repeated in Italy, the issue of income disclosure continues to reverberate. In fact, it has emerged as a topic of considerable interest for many U.S. human resource professionals. But it's not just the idea of revealing employee salaries that has captured their attentions. Much of their interest revolves around the question of just how transparent they should be about all compensation issues with their rank-and-file. Pay-transparency backers say a basketful of benefits can be derived from being more translucent with employees about everything from an organization's compensation philosophy to what they can do to improve their pay. Proponents of pay transparency -- what some describe as proactively and openly communicating about compensation issues with employees -- suggest the practice will improve employee trust, engagement, morale and productivity. Moreover, a 2008 report and analysis by the Arlington, Va.-based Corporate Executive Board entitled Transparency in Pay Communication Survey says more effective pay-transparent organizations will experience significant boosts in employee retention and effort. Pay transparency advocates, such as Ania Krasniewska Shahidi, product manager for the Compensation Roundtable, a CEB program, are quick to say they aren't in favor of posting employees' salaries inside or outside the company. Rather, Shahidi and an apparent growing number of HR professionals prefer plying employees with information on such matters as compensation philosophy, structure, systems, policies, pay ranges, how pay decisions are made and how they can improve their wages. "For employees, it's not always a question of getting more money," says Shahidi. "It's [about] having a better understanding of how and why you're paid and what, if anything, you can do to change that." Discussions about pay can be a dicey proposition. For many employees, pay is an intimate subject tied to their self-worth. Perhaps it's not surprising, then, that only one-quarter of employees feel comfortable discussing compensation specifics with their managers and even fewer -- 18 percent -- are willing to share details with HR representatives, according to a 2008 survey by Harris Interactive for Glassdoor.com, a career and workplace Web site. But that doesn't mean employees don't like to talk about income. At a number of Web sites, including Glassdoor.com and Salary.com, salary information for many professions is posted anonymously by current or former employees. That data may not always be accurate, but the Web sites offer a sampling of the explosion of information many employees can access these days. "Employees have access to data that they've never had before," says Chris Kelley, founder and CEO of KnowledgePay, a Sycamore, Ill.-based compensation consultant and software provider. "Compared to 20 years ago, people are much more willing to talk about pay." For HR and compensation professionals -- whose traditional roles include designing, developing, communicating and implementing compensation policies, processes and programs -- their pay-transparency duties may vary with each organization. Whatever their role, says Kelley, all should champion the issue in their organizations. "At this time, I don't think enough HR leaders and compensation professionals are pushing transparency," says Kelley. "I do believe there is a lot more that can and should be done."
Higher Expectations At the same time more information is becoming available to them, many employees' expectations about compensation details appear to be rising. A 2009 survey by Harris Interactive for Glassdoor.com reported seven in 10 employees say it would be helpful for employers to provide more in-depth information about current salaries. Rusty Rueff, career and workplace expert for Glassdoor.com, says part of this need may stem from uneasiness related to the Great Recession, in which many employees were laid off or forced to accept pay cuts or freezes. That makes discussions about pay even more critical today, he says. "Growth is a beautiful thing, but it masks a lot of problems companies have," says Rueff, who considers himself a pay-transparency "evangelist." "The [depressed] economy has forced companies to communicate more about why they're doing what they're doing around pay." Employees' preferences for additional information about pay may be connected to a society that is generally more willing to share other intimate details about their lives, says Rueff. Think about Facebook, text-messaging and Twitter. Younger people seem especially willing to communicate. A February Glassdoor.com survey of people ages 18 to 34 found they are more comfortable than those 55 and older in sharing compensation information inside and outside work. "There is absolutely a higher level of interest [in compensation details] among our employees," says Lisa Chekimoglou, senior vice president of global compensation and benefits at CA Technologies (formerly Computer Associates and CA Inc.), an Islandia, N.Y.-based computer-software company with 13,000 workers. "Employees really want to understand how compensation decisions are made -- and rightfully so." It's not just employees who have an interest in discussing pay issues; apparently, HR professionals do, too. Since June 2009, Kelley has managed a LinkedIn group on pay transparency that has grown to more than 150 participants, most of them HR professionals. Meanwhile, a pay transparency Webinar Kelley presented last year -- his first -- received more than 1,000 registered downloads. Moreover, a KnowledgePay 2009 survey of 273 professionals, almost all of whom are from HR, showed three-fourths preferring more transparency about pay. "HR people are absolutely more interested in [it] these days," says Kelley.
Varied Company Response Springfield ReManufacturing Corp., a 1,200-plus-employee holding entity for 26 companies, is an open-book management organization, meaning its financial data -- but not salaries -- are available for all workers to examine. Jack Stack, the Springfield, Mo.-based firm's CEO, who has written two books about open-book management, says pay transparency is a hot topic in speeches he delivers nationally. As far as John Matthews of Costco Wholesale Corp. is concerned, openness on compensation issues is but one element of many in which companies should be transparent to employees. "We want to be transparent in all things we do," says Matthews, senior vice president of human resources and risk management for the Issaquah, Wash.-based wholesale-foods company. "That could involve ethics or financial reporting, decision-making or pay, or other issues. We want [employees] to feel they're part of the organization and that relationship won't work if you're withholding information." Very few large companies disclose all their employees' wages, says Kelley. That contrasts with government entities, such as the state of Minnesota, where employee pay ranges are publicly posted and individuals' salaries are made available upon request by the media or researchers. Among larger, well-known private enterprises, Austin, Texas-based Whole Foods has been cited in numerous press reports as revealing actual salaries to other workers, though the company declined to comment for this story. Costco doesn't reveal its employees' salaries. However, about 90 percent of the company's 145,000 employees are hourly and pay scales for those workers are published in an "employee agreement" -- different from a collective-bargaining agreement -- stating that Costco will take care of its employees, says Matthews. So, based on their hours worked, the hourly employees can fairly well surmise co-workers' wages and their own pay potential, he says. Financial-reporting rules for publicly traded firms such as Costco require pay disclosures of several senior executives. But while the company doesn't reveal the salaries of managers, most fall into a pay range enabling their fellow managers to figure out their wages, says Matthews. Why not reveal Costco managers' salaries? "As long as we're being as fair as possible and we're a step ahead of the competition [with managers' salaries], there is no need for further disclosure," says Matthews. There doesn't appear to be a consensus among HR professionals about whether revealing all employees' salaries -- what some refer to as complete pay transparency -- is advisable. In a 2009 survey of 609 mostly HR professionals, 46 percent said they'd have "some concerns" about how complete pay transparency would work at their company, according to a poll by Philadelphia-based KnowHR, a self-described "plain-speaking" blog about HR issues. Meanwhile, the KnowHR survey showed 18 percent said they were "surprised" complete pay transparency wasn't already occurring at their firm, while 36 percent said it would "never work" at their company.
Employee Perceptions In fact, Kelley says, disclosing the pay of all employees could prove damaging. "Providing data on what all employees make without providing context and education may make them resentful," says Kelley. "They may say, 'Well, I'm worth more than Susie down the hall and yet she's making more than me, so I'm getting screwed.' So if the management team doesn't do its part in explaining and educating how pay is determined, how jobs are evaluated and how employees can control their own destiny, that can be real disruptive to the organization." Even if organizations don't disclose wages, it should be understood that many employees will seek pay information, mostly about salaries, from other sources, says Shahidi. The 2008 CEB survey of 10,000 employees (mentioned above) reports more than 80 percent of employees received compensation information in the past year from informal sources, including co-workers, family members, friends, recruiters and salary benchmarking Web sites. "Our employees are definitely looking at these external Web sites. Without a doubt," says CA's Chekimoglou, whose company doesn't reveal employee salaries. The CEB survey/analysis noted almost all informal sources negatively affect how employees perceive their pay. Shahidi suggests companies turn that possible challenge into an opportunity by providing employees with contextual information on compensation. That's exactly what's happening at CA. "These external Web sites have underlined the importance of educating our employees on what is credible market data and where it comes from. A lot of market data is subject to interpretation," says Chekimoglou. "Market data is great to have, but it is only one factor in helping determine what an appropriate level of compensation for employees is." Adds Shahidi, "The [informal sources] aren't the authoritative sources on pay. So organizations should have a straightforward discussion with employees on pay so they can see where they are at and what they can do to improve themselves." Absent of such compensation information offered in context, many employees draw their own, often misguided, conclusions: "They may think the worst about their salaries," she says. In fact, proactively providing a context for pay may produce a bundle of benefits for organizations, says Kelley. This may mean educating employees about compensation philosophy; structure; systems; processes; policies; total-compensation packages; pay ranges; how economic, market and other factors affect pay decisions; and how workers might leverage their performance, skills and other factors to increase their wages over time, he says. Though not disclosing everyone's salary, Springfield ReManufacturing spells out the company's total-compensation package to employees and provides them market-determined pay ranges. In twice-yearly planning sessions, employees are presented with a detailed overview of economic conditions, Springfield's competitive status and how they can increase their pay in a variable compensation program, says CEO Stack. "Our associates, including mechanics, machinists and assemblers, have a pretty sophisticated understanding of the company's finances and how their pay is determined as a result of open-book management," says Stack. At Dell, the Austin, Texas-based technology-solutions company, managers tell employees their compensation is influenced by market data and how their performance compares with peers. Because performance is the dominant factor affecting salaries, managers spend considerable time explaining the 96,000-employee firm's pay-for-performance system, says Jolene Skinner, a Dell senior consultant in global talent management. Skinner says Dell's human resource department recently created tools that enable managers to frame more fair, honest and consistent communication about pay. The tools also help more tightly align Dell's "meritocracy" philosophy with actual pay practices, she says. While Dell is committed to additional pay transparency, the company must also be attuned to employees' tolerance for change and ensure that the information isn't too complex or overwhelming, says Skinner. It's also important for the company's compensation information to align with other communication. "We have to be consistent in our communication around other HR practices," says Skinner. "Team members need to understand the reason for our communication, what it's tied to, and that's not a one-off thing." Increasing meaningful compensation information to employees can have a major impact on employee retention and effort, according to the CEB survey. In fact, through more effective pay-transparency communication, as measured by a proprietary instrument called the "pay perceptions index," the CEB calculates the average organization can increase employee "intent to stay" by 34 percent. Moreover, enhanced pay transparency also improves worker effort at the average organization by 15 percent, according to the CEB report. In part, that's determined by employees willing to help colleagues with heavy workloads and volunteering for additional duties, says Shahidi. "For the company, it's a bottom-line thing," says Shahidi. "The more transparent you are about pay, that translates directly into a beneficial effect in effort and retention. We want people to work harder and stay longer." Shahidi says the CEB study shows most organizations don't discuss the two highest-impact topics that can affect employee engagement and their perceptions of pay: How total pay can grow over time, and the value of an individual's compensation package. Costco's Matthews underscores the latter point. "I think one of the difficulties in discussing pay is that it's generally too narrow," says Matthews. "If you asked me about pay, then I'd ask you about benefits. When you lump it all together under compensation, you get a much different picture."
Door Has Been Opened Kelley and others predict pay transparency will likely remain a hot topic in HR circles in the near future and perhaps beyond. Additionally, younger workers appear more comfortable discussing pay. And it's likely their expectations for compensation details will continue, says Shahidi. Another reason for anticipating more pay transparency going forward: the momentum for pay-for-performance systems in many companies. For employees to fully embrace that concept, they will seek more information on how compensation is determined, among other things, says Shahidi. "With more and more companies establishing a clearer link between pay and performance," she says, "they will be in a position where they have to explain how that link works." While there is no guarantee the profile of pay transparency will rise, Shahidi says, organizations that shroud compensation issues do so at their own peril. During the current depressed economy, many employees laid low about their salary expectations, she says. "But with an improved economic climate in the next few years, employees will have more options, so pay transparency will become more important," she says. "If a company isn't transparent and, in effect, tells employees to take it or leave it, a lot of employees will start thinking about leaving." Adds Kelley of KnowledgePay: "Pay transparency won't be mandated in the future. But I believe it will be important in order to be considered an employer of choice. There will be a higher degree of competitiveness for future talent who will be asking: Where do I want to work? Will it be for a place that doesn't tell me anything? Or will it be for a place where I feel trusted and treated as an adult?"
June 16, 2010 Copyright 2010© LRP Publications |
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