America's Pay Transparency Revolution
America's Pay Transparency Revolution
Pay transparency was once a taboo subject. Now, shifting cultural norms and a spate of new legislation are changing how Americans think about compensation.
Pay transparency is the practice of disclosing salaries, both internally and externally, with the goal of reducing pay gaps between different employee demographics and providing job applicants with critical information about open positions. Proponents of pay transparency also believe that it can build trust, engagement, and productivity within organizations that practice it.
Historically, pay transparency has only been mandatory for government workers and executive-level employees at publicly-traded companies. While no federal mandate for pay transparency exists today, a critical mass of state and local laws is rapidly pushing America towards de facto national pay transparency.
On January 1st, 2023, pay transparency legislation went into effect in California, Rhode Island, and Washington state, encompassing tens of millions of employees. This follows in the footsteps of places like Connecticut and New York City, which enacted pay transparency in 2022, and Maryland and Colorado, which enacted it in 2020 and 2021. All signs point to this trend continuing. Any multistate employer that hasn’t already been affected by pay transparency legislation is likely to encounter it in the near future.
Here, we present an FAQ roundup that covers everything you need to know about the biggest rock in the world of compensation and why it is now being overturned:
What exactly is pay transparency?
Pay transparency legislation aims to give jobseekers greater insight into the salary of positions that they are interested in applying for. They may also be formulated to allow current employees to inquire about the salary of a role that they wish to be promoted into.
Different policies aim to accomplish this in different ways, but almost all pay transparency laws require employers to either include salary ranges in job postings or to provide salary ranges upon the request of an applicant. Some laws also require the following:
- Providing a comprehensive description of all compensation and benefits offerings to job applicants
- Reporting salary information to state governments
- Providing a prospective salary range to employees that are seeking an internal promotion
- Preventing employers from retaliating against employees who choose to discuss pay with their colleagues or other parties
Why do proponents of pay transparency advocate for these laws?
Proponents of pay transparency argue that it helps to reduce pay discrepancies based on gender and race, saves applicants and employers time and energy during the hiring process by enabling applicants to filter out positions that are not within their desired pay range, and provides valuable context on compensation norms within different professions and industries.
Who is currently affected by pay transparency legislation?
The table below provides an overview of pay transparency laws as of January 1, 2023:*Employers must include a description of all benefits and other compensation including, but not limited to, commissions, bonuses, healthcare, retirement benefits, and paid time off.
Is it possible to avoid pay transparency laws by not hiring employees from these jurisdictions?
Smaller employers based in states without pay transparency laws may not feel the effects of this legislation for a while. However, larger employers with personnel in multiple states are finding them difficult to sidestep. This is partially due to the fact that many pay transparency laws are designed to have as large an effect as possible: Colorado’s law, for example, applies to all remote job openings as long as an employer has at least one employee living in the state.
America’s ongoing labor shortage, the normalization of remote work, and the speed at which new pay transparency laws are being passed will make compliance increasingly impossible to avoid.
What happens if an employer isn’t compliant with these laws?
Almost all pay transparency laws stipulate consequences for noncompliance. Many include a right of action for employees and jobseekers whose rights have been violated under the law. In addition to this, there can be civil penalties of up to $10,000 per violation.
Although there are some lingering questions around enforcement and the practicality of monitoring many thousands of job postings for compliance, it is never a smart strategy for employers to deliberately defy labor regulations. Beyond legal consequences, it should also be noted that employers who are suspected of noncompliance or of deliberately hiding pay discrepancies may face public relations issues or employee relations issues.
What do employers need to do to comply?
Requirements vary according to the specific provisions of a given pay transparency law, but generalizations can be made. In most cases, employers need to formulate a good-faith pay range for every open position and include said ranges in job postings. While promulgations surrounding pay ranges are irregular and little-tested, it is safe to say that the writers of these laws intended for pay ranges to be narrow enough that they are actually useful to applicants.
While listing a salary of $20,000-$200,000 may technically comply with some pay transparency legislation, it is much less defensible than an $80,000-$90,000 range that is based on benchmarking data or a relevant internal peer range.
Is a federal pay transparency law imminent?
A federal pay transparency mandate does not look likely in the immediate future. That being said, considerable momentum has been generated by laws passed at the state and local level, and pay transparency is clearly garnering significant interest as a point of public policy discussion.
According to a 2022 survey by job website Monster, 98% of job seekers support pay transparency in job postings and 53% refuse to apply for jobs without salary ranges. In a Willis Towers Watson poll from the same year that surveyed U.S. employers, 17% reported that they already disclose pay ranges, 62% were considering doing so in the future, and 31% said that they were not ready to do so. It is possible that this policy issue will percolate up to Congress at some point, but the timeline of legislative action and likelihood of passage is highly uncertain.
If a federal law isn’t imminent and I don’t operate in a place with pay transparency laws, why should I care about this?
It is always prudent to monitor new compliance developments and plan for possible changes. With pay transparency legislation rapidly expanding into new states and municipalities, employers who are unaffected today should not bank on that being the case tomorrow. The increasingly common practice of remote work and the fact that many pay transparency laws apply to companies with just one employee residing in a particular jurisdiction means that it is easy for employers who primarily operate in an unregulated location to become affected by this type of legislation. It is also difficult to segregate internal procedures based on whether or not employees happen to live in a pay transparency jurisdiction, and an employer with a mixed workforce may find it less cumbersome to adopt pay transparency for their entire company.
How will pay transparency affect my workforce?
The short answer is that the jury is still out.
The longer answer is that studies on the effects of pay transparency legislation have been few and far between, and have often produced inconclusive or contradictory findings. Many such studies have been conducted in foreign countries with very different economic, political, and cultural contexts than those experienced by workers in the United States, potentially limiting their usefulness to American employers.
That being said, there is a decent body of evidence suggesting that pay transparency policies are effective at reducing gender pay gaps, although data regarding racial discrepancies is less clear. Many pay transparency advocates contend that these policies also build organizational trust and boost engagement, although more studies need to be done before this can be stated categorically.
In addition to this, some researchers have asserted that increased pay transparency can actually be detrimental to worker earnings, with stipulated pay ranges undermining the negotiating power of employees and job seekers. Multiple studies have also found that gains in pay equity tend to come from reducing raises at the higher end of the pay scale rather than from increasing the pay of low earners, which may suggest an unintentional “race to the bottom” effect.
There are also concerns about pay transparency from a morale and productivity perspective, with employees who were previously satisfied with their positions potentially finding that they are compensated less than many of their peers or those with similar positions at other companies.
While millions of government workers are used to operating in a totally transparent pay environment, the fundamental differences between public and private sector employment reduce the applicability of insights from this population. As more jurisdictions adopt pay transparency legislation, there will be new opportunities to generate data and gain a clearer idea of how this type of labor regulation impacts both businesses and employees.
For a more complete rundown of the arguments on both sides of the pay transparency debate, check out our podcast on this topic: OneDigital Debates – Do Pay Transparency Policies Work?