When Berlin-based education startup CareerFoundry flattened its hierarchy last year, all the company’s managers lost their titles. At that point, cofounders Raffaela Rein and Martin Ramsin thought it only fair to create a peer-based performance review and promotion structure. But that required salary transparency.
“If the team had to decide on promotions, transparency for salaries was sort of a necessity,” Rein says. She was nervous about the change, though, and rightly so: Once salaries went public, a few employees came forward to ask for raises, telling the cofounders they’d leave otherwise. Rein ultimately obliged, considering that the employees “had a point.” If she hadn’t thought they were valuable enough to pay more, she’d probably have let them go elsewhere.
CareerFoundry’s experience points up that embracing pay transparency is never just a matter of opening the books. It means reckoning with unequal pay and fielding complaints from employees who believe they’re underpaid, which might explain why only a handful of companies have taken the leap. We asked a few that have already weighed the pros and cons of transparent pay policies what there may be to gain—and lose—from implementing one.
Upsides For Women And Minorities, But At A Price
By now, the pitfalls that women and minorities disproportionately face when it comes to compensation are well documented. In fact, they were the main impetus for the equity crowdfunding platform Crowdfunder to introduce salary transparency. As long as that information stays under wraps, company president Steven McClurg says, “it’s very difficult to equal the playing field on pay.”
Still, not all employees responded favorably when Crowdfunder started publicizing salaries. Employees who were underpaid received raises and were “instantly gracious,” according to McClurg, but “it was the people that were overpaid that were like, ‘Well, why don’t we get raises too?'” Their argument, he says, was essentially, “We’ve been here just as long as these people have; we perform. Just because we negotiated a higher pay coming in and we constantly negotiate our pay doesn’t mean that we should suffer.”
It may come as little surprise that most of these employees were men, McClurg reports, and that most have since left Crowdfunder. This is a common critique—that salary transparency can lead to a lot of employees “lobbying for change,” including where it isn’t warranted. Employees who think they’re underpaid may feel dissatisfied and leave the company as a result.
Pay transparency doesn’t necessarily impose a ceiling on negotiations, though, since salary calculations take into account things like experience and location. But it’s easy to see how it might put off prospective or existing employees who worry their salaries will be capped. This also might explain why so many tech companies that now embrace transparency elsewhere—say, in regards to diversity—still hesitate to give salary transparency a try.
Attracting A More Diverse, Passionate Workforce
If the cost of offering a fairer shake to women and people of color is employee attrition elsewhere, some employers still see it as a net gain. Social-media management platform Buffer has long been a proponent of “radical transparency” in all aspects of its business, from diversity and revenue data to product roadmaps. (It’s also meant being up front about bad news, like when Buffer was low on cash last year and had to make layoffs.) In keeping with that policy, Buffer opted to publish its compensation formula and employee salaries not only internally but also to the public in late 2013.
It wasn’t an easy decision. Among other things, Buffer worried that the move might open its employees up poaching by competitors. But Buffer PR head Hailley Griffis claims the company actually saw an upswing in applications after making the switch. “When we put all of our salaries online, applications went up by 50% the next month,” she says.
For Buffer, this meant attracting employees who were actually a better fit and flocked to the company because of its values, not despite them. In fact, Buffer recently reviewed its employees’ salaries in order to evaluate its gender wage gap and found something surprising: Men at the company make 2.5% more than women do overall (compared with adjusted U.S. average of 5.4%, according to Glassdoor researchers), which Griffis claims is because Buffer has more men on its engineering team. But when Buffer compared salaries within departments, it found that female employees actually earned more than their male counterparts.
To be fair, most companies probably wouldn’t be comfortable with Buffer’s commitment to being publicly “transparent even when it hurts.” But just advertising the fact that there’s internal pay transparency can have a similar effect, McClurg points out. He credits the company’s embrace of transparent equal pay with creating a demographic ratio other tech companies can only dream of: “We now have more female developers than we have male developers.”
Employees Know Where They Stand
When companies make salaries transparent, they also have to explain how they arrived at them—which can be tricky. Even at CareerFoundry, says Rein, “a flat hierarchy still doesn’t mean everybody’s equal,” which means people will still get paid differently. Buffer determines pay through a combination of factors, including role, experience, location, and cost of living. And even when salaries are set through a public formula, certain criteria—experience, in particular—are still more subjective.
But for the most part, conversations about pay are less uncomfortable when you know exactly how your salary has been awarded and can compare it against what your peers are making. “I’m personally awful at negotiating,” Griffis admits. “If there had been internal transparent salaries at my last company, where I happen to know that I was making less, maybe I would have been more comfortable asking for more.”
When CareerFoundry first posted its salaries internally, Rein says employees “rushed to see what everyone else was earning.” But after addressing those initial complaints from employees who felt they were underpaid, Rein says employees have rarely had grievances since, which she also attributes to the company’s biannual peer-promotion system. As for checking up on their coworkers’ salaries, Rein claims that employees are less inclined to do so now.
Making Fair Pay Possible Without Full Transparency
MarketGoo, a marketing and SEO platform for small businesses, seriously considered salary transparency, but eventually decided against it. MarketGoo is completely transparent internally about its finances, so disclosing salaries seemed like the obvious next step. But when MarketGoo put the question to its 15 full-time employees (“Do you think it’s important to know what your coworkers earn, and for them to know what you earn?”), the majority voted against sharing individual salary information.
“I’m not the owner of the culture,” MarketGoo founder and CEO Wences Garcia says. “It’s the team together that is creating the culture of the company and the values we want to reinforce.” Instead of transparent pay, MarketGoo is devising a formula to make sure salaries are fairly awarded, and Garcia says he’s open to reconsidering salary transparency as the company grows and the culture evolves as a result. Plus, being privy to company finances means employees are more understanding when it comes to compensation.
Of the companies I spoke to, Buffer is the largest, with 75 employees. There’s a likely reason why more sizable companies haven’t tried salary transparency: It’s more difficult to implement if sweeping pay inequity has long been the norm. One notable exception is Whole Foods, which has posted all salaries internally since 1986, barely six years after the company’s inception.
“Sometimes salaries at larger, older companies aren’t equal at all,” Griffis acknowledges. “If it’s the case that men have negotiated for more or are receiving larger bonuses, and women haven’t spoken up, it will not reflect well on them. I know there’s definitely some fear there, but I think putting in place a salary formula would solve a lot of that.” She adds that some larger companies post salary ranges rather than reveal exact salaries, to offer employees a bit more context.
But McClurg doesn’t see why bigger companies can’t adopt salary transparency. His previous employer, whose head count numbered around 2,000, had a standardized vacation policy that varied according to experience and title. “Some people lost, and some people gained, but at the end of the day it was rolled out across the entire organization,” he says. “It takes work, but I think you can get there. If a company did that with 2,000 people across a lot of different businesses, surely they can do the same thing with salary.”