Why Pay Transparency Regulations Are a Strategic Management Opportunity

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.

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). Managers worry that they’ll be caught in the middle trying to juggle competing goals around budgeting and employee satisfaction.
• What happens if some employees find out that they’re paid less than others? Explaining to long-standing employees why they are paid the same as a new hire is likely to be uncomfortable and prompt substantial criticism of the employer.
• Will pay transparency affect our ability to work together? Pay transparency can elicit jealousy and counterproductive competition when individuals perceive themselves as inequitably rewarded. Managers worry that employees might fight and undermine one another when discrepancies are exposed.

New Insights Into Managing Pay Transparency

Our work provides new insights into addressing some of the main questions organizations have about transparency. Most new laws focus exclusively on creating pay transparency by requiring organizations to disclose pay ranges for open positions. In academic research, this form of transparency is referred to as distributive transparency, because it reveals information only regarding the amount of money employees are paid.

In our research, however, we have delineated several ways in which pay information can be transparent.1 With procedural transparency, the emphasis is on sharing information about how pay decisions are made; at the most transparent level, this would include a formula for calculating compensation (such as base pay or a merit-based raise).

Distinguishing between distributive versus procedural transparency is crucial because, as our research shows, procedural transparency can mitigate many of the risks and drawbacks associated with distributive transparency.

Implicit in pay transparency regulations is the idea that underpaid employees will take it upon themselves to negotiate for a fairer wage. In fact, a large-scale study of over 100,000 academics over the past two decades found that changes in pay transparency were related to significantly more wage parity between men and women.2 However, the research also showed that transparency doesn’t equate to everyone asking for more.

To explore this further, we conducted a series of four experiments to better understand how and when pay transparency can encourage employees (especially women) to more effectively negotiate for fair wages. In our first study, lab participants were paid for their performance after four rounds of a popular word search game and were given the opportunity to negotiate for better compensation. In studies 2, 3, and 4, online participants prepared themselves to go into a performance review, armed with varying degrees of information regarding performance and pay, to possibly negotiate for a better annual raise. They were told that they were slated for a 3% raise but that raises could range from 3% to 10%. Across these studies, we varied the amount of information participants could access regarding both the amount other people were paid and participants’ performance relative to their peers’.

These studies yielded four important findings regarding distributive and procedural pay transparency:

1. People made clearer comparisons. We found that the best predictor of whether someone tried to negotiate for higher pay was their performance relative to that of peers. Compared with average performers, high performers were approximately 50% more likely to request higher pay when they knew their ranking relative to others. It’s important to note that in our study, participants saw the previous year’s performance and pay data for their team members, and it was clear that increased performance was directly related to increased pay. Although not an explicit formula indicating performance-based pay, this information provided a clear signal to participants that pay raises were largely determined by performance.

2. People negotiated fairly. Average performers were more likely to accept the minimum raise offered to them, often citing the raise as fair based on their performance. As one person stated, “Considering I only met expectations throughout the year rather than exceeded them, asking for a higher raise seems fruitless and unearned.” Generally, average performers rarely asked for the maximum raise, in part because they considered the fact that they were performing at a lower level than some peers. This was true, though, only when they had all of the information. When they were told nothing about their performance, 85% of people requested the maximum pay amount. Lacking performance information, average performers asked for the highest raises available within the pay range.

3. Women do ask for higher pay. Counter to a pervasive assumption, women didn’t seem to need much encouragement to negotiate. In fact, when the percentage of participants who negotiated is considered, women were often more likely than men to negotiate (though this was not a statistically significant difference). These findings cast some doubt on the idea that one reason for the gender wage gap is that women negotiate less often than their male counterparts. Recent research combining information from dozens of negotiation studies has come to the same conclusion: Many of the negotiation gaps between men and women have largely disappeared in recent years.3 Although this is good news, it does little to close the gender pay gap as it currently stands.

4. People were motivated to perform better. Average performers expressed motivation to work harder and perform better to earn a higher raise during the next review cycle. When asked why they did not negotiate for more money, one participant stated, “My numbers did not show that I deserved a higher raise. With better numbers the following year, a case would be made for a higher raise.” Another stated, “I knew I’d done an average job, so I hope to do better in the future and hope to get a better raise next year.”

Our findings replicate and extend an old but powerful notion in management research: the fair process effect.4 Employees will accept unfavorable outcomes if they believe those outcomes were produced by a fair system. Put differently, if people know why they are being paid less (in other words, there is procedural transparency), they will not respond negatively and might even work harder.

Make Pay Transparency a Win-Win for Your Organization

Pay transparency can be a win-win opportunity rather than a compliance hurdle. But simply listing pay data in job postings without any context in response to regulations might be a big mistake. These practices not only disregard the spirit of the laws but also come at a heavy price and forfeit significant opportunities. Leaders should think beyond compliance and consider ways to strategically leverage pay transparency for their organization to improve applicant attraction and employee retention. Our research offers some insights into how this can be done.

Make pay only part of the transparency equation. Counter to some pervasive fears that transparency will increase labor costs, cause jealousy, and create conflict, the reality is that secrecy around pay creates problems of its own. As researchers at Payscale found, most employees are unsure whether they are paid fairly, with many believing they are underpaid when they are not, which leads to greater turnover and dissatisfaction. Our research suggests that without a reference point for performance, employees have little to no basis for judging what compensation would be fair and are therefore more likely to make unreasonable requests. Transparency in both performance and pay can enable employees to better assess the fairness of their pay and make more reasonable requests.

Focus on the pay decision-making process. Procedural transparency helps managers more clearly communicate with employees about pay because salaries/bonuses are based on performance rather than on seemingly intangible or, worse yet, bias-laden factors. Providing information on how pay is determined helps incumbent employees understand why their pay is higher or lower than their peers’ and, more importantly, how to move up. Managers can’t be accused of favoritism and bias when pay is directly determined by performance, which puts them in a collaborative role during pay conversations. With a focus on performance, these conversations can focus on development and examine how employees can perform better and earn higher raises.

Recognize that (distributive) pay transparency will not fix inequity on its own. There’s an assumption that distributive pay transparency will close pay gaps; however, evidence suggests that this alone is not enough to create an equitable workplace. Research has shown that women and men are asking for salary increases in relatively equal proportions, but women are still less successful at getting what they ask for. Distributive pay transparency can help reduce some ambiguity, but both performance and pay transparency (procedural transparency) together equip employees with the tools they need to ask for what they deserve. When people know what to expect from negotiations (that is, what the bargaining zone is and what’s reasonable to ask for), gender differences are minimized.5 For example, women of color don’t often take advantage of opportunities to negotiate roles, responsibilities, or flexible work arrangements, creating long-term inequities that explain pay gaps beyond starting salary. Broader transparency helps reduce the ambiguity that often leaves women and members of other minority populations hesitant to negotiate, even when they know they could.

Consider the benefits for current employees and applicants. Simply posting pay ranges is only one piece of the puzzle. Applicants have negative reactions to excessively wide pay ranges because they don’t offer useful information. In this case, pay is still essentially secret. As we found in our study, without meaningful information, individuals are inclined to ask for the maximum amount to see what is possible. This creates yet another headache for hiring managers. A better approach would be to leverage procedural transparency to clearly outline the factors used when determining a salary offer, and perhaps even how heavily those factors are weighted. For example, Buffer, a marketing company, has done a great job of creating a pay system that balances simplicity (for better understanding) and complexity (for capturing nuance) by using a standard formula for making pay decisions: salary = job type x seniority x experience + location + $10,000 or equity.

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Despite organizational concerns and hesitancy to implement government regulations around pay transparency, such policies continue to gain traction and are just one force behind growing expectations around salary disclosures. In a 2022 report from HR technology firm Visier, 79% of surveyed employees said they want pay transparency; Gen Z employees were the strongest proponents of it.

Our research highlights the potential for procedural transparency to strategically mitigate the perceived organizational risks while also meeting legal requirements and social expectations. While changes are clearly happening, we hope business leaders think more deeply and creatively about how to make pay transparent in ways that both support organizational goals and meet employee needs.