Three ways to do pay transparency

By Veronica Fridfeldt Hoff

Klar_Reward Agency

Pay transparency can bring great benefits. But only if you have the right approach

The EU’s pay transparency directive will have far-reaching consequences for the relationship between companies and their employees. The directive requires companies to disclose something that was previously considered a closely guarded trade secret: how much they pay their employees. The legislation will impose new reporting requirements and a complex analysis burden on companies. It can go terribly wrong for some and bring significant benefits to others. Much will depend on how companies approach the new reality. Let’s consider the three most common approaches.

The good: Embrace the change.

While the intention of the law is to protect the rights of the employees, there are also considerable benefits for the companies. A competitive pay policy based on fairness is highly beneficial for your business. It increases trust, job satisfaction, and motivation among employees, and strengthens your employer brand. Transparency and fairness are among the most sought-after values among job seekers today, and according to a survey by the English analytics firm Visier, 68% would switch to an employer offering the same pay but greater transparency. Becoming known as an open and fair employer is a significant asset. It will make you one of the companies people aspire to have on their CV. It will enable you to better attract, motivate, and retain the most highly sought employees without increasing your salary budget.

The bad: Looking for a shortcut.

Some companies, even those committed to fairness, may view the new rules as extensive, perhaps even conflicting with their own interests. They will seek ways to obscure the information they wish to keep secret without violating the law. For example, they could publish pay bands so broad that they lose their actual meaning. Similar legislation has already been introduced in the United States, and a recent job ad from Netflix in New York stated a “typical” pay band for a software developer between $90,000 and $900,000.

There is a disadvantage to this approach: It seems like they have something to hide, even when they haven’t. It will reduce trust among the company’s employees, increase challenges to their pay policy, and make it harder to attract new employees. In a survey by Adzuna in the UK, 46% of British job seekers would decline a job interview if the salary level was secret, and 32% would believe that the company had something to hide. Is keeping your salary levels secret really worth all this?

The ugly: The unprepared.

One could be tempted to believe that all this fuss about pay transparency will end up like GDPR:  a thing people cared about when it was implemented that quickly became part of normal business operations. Maybe we should just take it as it comes? This is a false impression. People care more about their pay than they do about their personal information, and injustice can evoke strong emotions. Gender pay gaps are prevalent, they exist even in the most well-managed companies, and they particularly exist in companies that haven’t actively investigated whether they have them.

Becoming known as a company with widespread inequality and, worse yet, becoming known for a lack of willingness to take it seriously will reduce trust among your employees and significantly harm your brand. In addition, there are legal consequences. The specific sanctions for violating the law have not yet been formulated, but according to the EU directive, they must be “effective, proportionate, and dissuasive.” They may include fines, exclusion from public procurement, and, of course, compensation for the discriminated employees retroactively. Can you pass the printer test? Imagine if all your pay slips were accidentally left in the printer. What problems would that cause? It is better to address them before the directive becomes law. It is a tough, lengthy and costly process to restore trust once it has been broken.

First published in Borsen, May 25 2023