The Hidden Downsides To Salary Transparency

More information isn't always better, at least when it comes to revealing employee salaries.

Knowing how much your colleagues make is one of the most radical forms of transparency a company can adopt, and while it has its proponents, it also has its downsides.

A recent story on NPR’s business blog and podcast Planet Money explored what happens when employees know how much their colleagues are making. The results were mixed. While some candidates complained that they weren’t able to negotiate their own salaries, one business owner noted that making salaries public prevented companies from discriminating against certain employees.

We spoke with Tim Low, vice president of PayScale, a Seattle-based company that provides compensation data to more than 2,500 companies, to learn some of the pitfalls associated with salary transparency. Here’s what he said:

1. Steer clear if it doesn’t fit with your company culture.

A company’s choice about salary transparency should mirror its culture. Once you’ve established a compensation philosophy, Low advises taking a look at how you communicate that message with your employees. Do they view compensation as being about whether the company’s taking care of them, or do they see it as an indicator that they’re not being valued?

The size of the company may also be a factor, Low notes. You can do things when you’re 35 people that don’t make sense for an organization with 3,500 people, he says.

2. There’s no off switch.

“Transparency is not an on/off thing, [but] it doesn’t have to be all or nothing,” Low says. What’s important is for executive management to be transparent about the methodology and technology used to arrive at compensation decisions, he says. This can be accomplished without giving out everyone’s numbers.

Low says the emerging trend of radical transparency brings with it a huge amount of chaos. “[It’s the] human factor times 100,” he says. That’s because pay is an emotional topic for most people. It can be viewed as how the company values (or doesn’t value) an employee, Low notes.

3. It may lead to some difficult conversations.

If you run a company with 250 sales representatives with the same job description and incentive plans, it’s much less risky to be completely transparent when it comes to salary, Low says. In fact, such information may be encouraging or provide a roadmap to employees for how to be more successful within the company. The difficulty comes, however, when there are different job families within a company, Low notes.

What happens when you have a “purple squirrel": someone with highly specialized skills that are hard to find, necessitating less-obvious factors that go into their compensation calculation? It starts to expose differences in pay that are hard to explain, he says. For example, an administrative assistant who’s spent 40 years with a company is making more than the market rate for assistants, and may be making more than employees with multiple degrees.

If companies decide to be totally transparent, Low suggests they come prepared for tough conversations. Companies need to arm themselves with fresh, credible data, and share how they make decisions on all jobs, Low says.

Hat tip: NPR’s Planet Money

[Image: Shutterstock]

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2 Comments

  • These are some interesting points, but I think I can see how these downsides can be turned into upsides if implemented correctly. I completely agree that salary transparency won't work for everyone, but I think that opening the doors to those tough questions and considering the system is important. I've written a blog post that discusses different pros and cons of salary transparency that you can read here: http://www.gosalaryboost.com/blog/2014/7/22/pros-and-cons-of-salary-transparency

  • Michael Ciampa

    I honestly don't see a possible downside, it automatically lets you know if you're at a company that you want to be at; which in turn best serves the company and the individual. It reveals the culture completely, money talks.