How pay transparency will impact the future of HR

This article by Boyd Davis, our Global Head of Compensation Planning, first appeared on HR.com on April 23rd, 2022.

Ready or not, pay transparency is an unstoppable trend, and HR organizations are going to have to address it. Legislation that requires pay scale disclosure is in the pipeline or already on the books in multiple jurisdictions, including California, Connecticut, Colorado, Maryland, New York City, and Rhode Island. Proposed EU legislation may go even further in Europe, requiring companies with more than 250 employees to publish gender pay gap information.

The pandemic triggered a cultural reckoning around the employee-employer relationship and created the tightest labor market in generations. Jobseekers have more power now, with both candidates and current employees increasingly expecting more insight into how decisions on salaries, raises, and bonuses are made. Employers who give them the transparency they want can boost engagement and retention while competing more effectively for highly skilled people.  

HR’s reluctance to jump on the pay transparency bandwagon is understandable. People leaders worry that it would lead to publishing employee salaries and unwanted attention on executive compensation. They’re concerned about data being misunderstood or misused, and they know that pay is only one component of the total rewards package. But embracing pay transparency is also an opportunity to ensure that pay decisions align with company needs and values while building employee trust.

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Solve Recruiting and Retention Challenges

The truth is that most employees don’t know if they’re paid fairly or not. A recent Gartner survey indicated 86% of employees feel they are underpaid, while a Salary.com survey indicated 73% of companies feel they pay their employees fairly.

Employee perceptions about how their company handles pay equity issues are critical because they directly affect morale and performance. When employees are confident that they’re being treated fairly, they’re more likely to be committed to the organization and their role in its success. If company leaders believe pay is fair, but employees disagree, that creates a disconnect.

This disconnect damages employee engagement and creates retention issues. It also prevents employers who spend heavily on wages, raises, and bonuses from getting the full return on that investment. Pay transparency can increase confidence on both sides, sending a message to employees that their employer values them while also giving companies another tool to solve recruiting and retention challenges.

Create a Culture of Transparency and Trust

When the processes that determine rewards like pay raises or bonuses are opaque, it can arouse employee suspicion and contribute to a greater focus on the pay decision process — at the expense of employee development. For example, if workers believe pay and advancement opportunities are based on favoritism, they have more incentive to curry favor with the boss than to serve customers. Data-driven rewards evaluate factors like individual, team, and company performance along with job range penetration, markets, employee history, and internal equity. It’s a better approach that can align pay with the business strategy while helping HR root out bias and become a better business partner to the executive team.  

Empowering managers to make data-driven decisions and articulate the compensation strategy to employees is the key to successful pay transparency. HR can support the approach by making compensation part of the manager and employee communication and engagement process. With this model, the company can openly share how salary adjustments are determined, linking pay directly to business results and providing context around the labor market and skill availability.  

The Role of Technology

It’s an information-heavy approach, but HR leaders should avoid getting bogged down in spreadsheets and data wrangling. That would be a waste of time when they could be using their skills to add strategic value to the organization.

To create an effective pay transparency program, HR needs compensation software so they can ensure pay decisions are consistent and free of bias. From there, the data that went into the compensation decision can be shared with employees, increasing overall transparency and giving employees insight into why certain decisions were made. Software can also make pay decisions more personal. If every employee gets the same result from a compensation review, the trust that their individual contributions matter will suffer.

A technology foundation is necessary but by no means sufficient. Organizations also need to ensure they have a clear compensation strategy and data framework. Questions such as where a company strives to position itself relative to the market, how much compensation will be fixed (base pay) vs. variable (bonus), and how to maintain internal equity across different functions (job levels and ranges) should be answered. Keeping market data fresh and relevant is also a key challenge. Finally, leadership in the organization must have the confidence to communicate their rationale, share more data and engage the entire management team in compensation decisions.  

For the foreseeable future, the trend toward greater pay transparency will accelerate, and HR leaders need to get out in front of it now, putting the right processes and tools in place. By making decisions based on data and communicating the factors behind pay decisions clearly, HR can better align pay with business goals, address bias issues, and create a culture of transparency and trust that provides a competitive edge in recruiting and retention.

How can Unit4 help you?

Unit4 creates enterprise software for people-centric organizations. Our HCM solution is designed to help marry operational, project, and people data together to create a seamless experience for all of your employees that boost efficiency, productivity, and satisfaction.

Our Compensation Planning tool solution allows organizations to plan, allocate and communicate compensation decisions in a way that lets you configure multiple compensation plans, set budgets and guidelines, generate real-time analytics, and allocate pay globally.

You can check out the capabilities of HCM here or click here to book a demo to see what HCM can do for your organization.