Pros and cons of pay transparency laws

More and more, states and cities are enacting legislation to provide greater clarity around wages and salaries. Pay transparency laws offer certain advantages, but they also come with potential risks that employers should prepare for.

What are pay transparency laws?

Pay transparency laws require employers to disclose salary information and pay structures to employees and job candidates. These laws aim to promote equality in the workplace by ensuring that all employees are paid fairly for their work.

Pay transparency laws vary by jurisdiction, and not every state has implemented such legislation yet. However, states like California and Washington are leading the way, with other areas of the country expected to follow suit. In 2023, a quarter of US workers will be covered by a state-wide or local pay transparency law, so these changes will affect a wide range of organizations moving forward.

Pros of Pay Transparency

Putting DEI in action

Pay transparency laws are gaining traction as a means of promoting diversity, equity, and inclusion (DEI) and wage parity in the workplace. By mandating the disclosure of salary information, these laws aim to reduce pay disparities based on age, gender, race, and other factors. The median salary for women working full time in 2019 was $10,150 lower than men in the US, and pay transparency is expected to raise women’s wages while lowering how much men are paid.

Growing employee morale

Pay transparency may also make employees feel valued and that they're part of a fairer workplace. When employees know what their colleagues earn, they feel more confident that they are being treated fairly, and trust in their employer increases. When workers feel valued, organizations see increased engagement, productivity, and retention, which has led to nearly $9 million in annual savings in some cases!

Attracting new candidates

Finally, pay transparency can be an excellent talent attraction. By promoting a transparent and fair pay culture, businesses can drastically improve their employer brand and attract top talent. New research on pay transparency reveals that 85% of new graduates are less likely to apply for a job if the salary isn’t disclosed in the vacancy.

Cons of Pay Transparency

Introducing salary compression

Pay transparency laws have some potential drawbacks that employers need to be aware of. SHRM opposes new legislation as it believes pay transparency may lead to salary compression, where the gap between pay for new employees and experienced employees is reduced – because workers are unaware of the context surrounding salary decisions. Job applicants may also overlook other job benefits like insurance, bonuses, and vacation time as they compare opportunities based solely on salary.

Lowballing new hires

There are concerns that pay transparency laws give employers access to past salaries, which may be used to lowball candidates during the hiring process. This could create a self-perpetuating cycle of low pay, particularly for individuals from underrepresented groups who are historically paid less. On average, women in the US earned 83 cents for every dollar earned by men in 2020. If employers base new salary offers on an applicant’s previous salary, then pay gaps are likely to become a much more serious obstacle.

Increasing turnover

Pay transparency could increase turnover. If employees feel that they are being paid less than their peers for similar work, they may become disengaged and seek employment elsewhere. Researchers at Gartner believe that if employers fail to adequately explain the reasoning behind different levels of pay within their organization, a new wave of quitting may impact an already turbulent job market.

How to Tackle Pay Transparency Laws in 2023

As pay transparency laws become the norm, hiring managers will need to effectively promote the benefits, perks, and positive work culture that distinguish their company in the job market. It’s also important to have a clear and objective performance measurement and reward system. By linking performance with rewards through metrics such as OKRs and regular monitoring, current employees can better understand their salary and how they can earn a raise within your company. To make this possible, managers need training to communicate the company's compensation policy and manage employee expectations.

This is where Adecco can help. We have decades of experience in quickly adapting to labor market trends and are experienced in implementing best practices for wage rates.

At Adecco, we have decades of experience helping organizations like yours overcome widespread changes in the job market. When you partner with us, you get access to our team of HR experts, the biggest talent pool in the US, and a full range of workforce services. Contact us today to find out how we can help you handle pay transparency laws.