Is it time to be transparent about pay?
In 2019, US Uber drivers went on strike due to Uber not letting them know how much they would be paid per ride as there was no available option to see their distance and mileage-based calculations within the app, including trip-by-trip and total earnings (Siddiqui, 2019). While Uber drivers are considered independent contractors, the general sentiment remains the same among employees. There is an increased need for employers to make pay transparent and let their employees know that their pay is determined with rationale and commensurate with their skills, experience and job scope.
Due to the important role that employee satisfaction plays in an organisation’s success, employers are further motivated to practise pay transparency. The reason for this is that many employers view it as an attempt at achieving pay equity, which refers to equal pay for work of equal or comparable value.
What is pay transparency’s impact on employees?
Similar to the many other trends in the corporate world, pay transparency has its pros and cons.
Firstly, making pay transparent within the organisation would help to improve trust and morale, since knowing that they are fairly compensated would mean that the organisation is looking out for their best interests and their efforts are being recognised.
This brings us to our second benefit, increased employee productivity arising from increased trust and morale. This is logical as employees will be cognisant that their pay is directly related to their performance and hence are more likely to put in extra effort to achieve their goals and meet their targets.
Thirdly, employees who look forward to progressing in their career could also be more motivated by pay transparency, since a better understanding of the different pay grades leads to a better idea of the criteria they need to meet in order to progress to the next level. This can then motivate them to work harder and develop the skills and experience needed to achieve their career goals.
Lastly, pay transparency also tends to give employees greater bargaining power, as they will be able to leverage the information given to them during salary increment negotiations.
However, pay transparency does have its downsides.
The first disadvantage of making details about salary completely transparent would be its ability to lead to tension and resentment amongst employees within an organisation. For instance, one might find it unfair if a colleague who has fewer years of working experience ends up earning more than they are.
Another disadvantage would be a lower retention rate, since employees are 50% more likely to leave their job if they believe they're being paid below what they think they deserve (Payscale, 2021).
Last but not the least, there could be a potential negative impact on employees’ morale due to pay transparency. Despite efforts to rationalise the different salaries, employees tend to have their own opinion on their contribution to the organisation. Due to these varying perspectives, there is a high tendency for them to lose motivation if they were to find out that their counterparts are earning more than them despite having achieved equal or better performance. For instance, there was research done on this subject by a team of scholars from the University of California, where they conducted an experiment where the University's employees' salaries were made public in order to gauge the impact on their satisfaction and morale. The results of the experiment showed that those who learned they were paid less reported lower job satisfaction and a higher likelihood of seeking work elsewhere, and proved that pay transparency encouraged dissatisfaction and a higher turnover rate (Zenger, 2016).
Despite the disadvantages, pay transparency could potentially become mandatory…
Although there is no law prohibiting pay confidentiality, nor mandating pay transparency in Singapore currently, but, starting with financial years ending on or after Dec 31, 2024, all Singapore listed firms will have to declare the exact salaries of their directors and CEOs according to the Singapore Exchange’s new rule (Straits Times, 2023). As for both United States & European Union countries, in 2022 and 2023 respectively, the European Union and several states of the US have introduced legislation mandating employers to disclose salary ranges in job postings (Liu, 2022). The rationale behind disclosing the salary ranges would be to make it easier for the job seekers to assess whether the particular job is suitable for them.
So what can employers do to tackle the disadvantages?
One solution to resolve tension and resentment amongst employees will be companies choosing to make sure that every employee's salary is revealed, so as to ensure fairness. They could also consider conducting reviews that focus on justifying the pay given to the employees, through considering factors such as job scope and quality of performance, which can in turn lead to lesser discontent and increase understanding amongst employees.
Next, employers can tackle the issue of low retention rate by aiming to offer competitive salary packages according to the market rate, or justify the rationale behind the lower compensation packages.
Lastly, in order to manage employees’ dissatisfaction and high turnover rate, companies can make sure that their employees completely understand the duties, responsibilities and successes that determine each pay level. It would also help to encourage their employees to clarify any questions that they might have regarding their pay openly with the management without hesitating.
In conclusion, being transparent about pay is not just about revealing salaries, but it also involves employers openly communicating their pay practices to employees and explaining how their pay is determined. Since there are both downsides and upsides of making pay transparent within the organisation, it is up to the discretion of the management to decide whether it should be implemented in their organisation.
References
https://www.straitstimes.com/business/singapore-ceos-may-get-richer-after-being-forced-to-reveal-pay
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