This month, California and Washington state passed laws requiring companies to post salary ranges on job openings. Like similar rules in New York City and Colorado, lawmakers passed them on the premise that pay transparency helped narrow wage gaps.
There is little debate among researchers that this is the case. “It’s absolutely 100 percent true in all the studies I’ve seen, with few exceptions,” said Zoe Cullen, an economist at Harvard Business School. Pay transparency laws are “very good” at reducing pay gaps, she added.
But that’s not the end of the story. As companies embrace pay transparency — either because the law compels them to do so or because their employees find it increasingly easy to disclose their paychecks — both employers and employees have noticed ripple effects. It changes the way bosses set salaries. And it has the potential to make the lives of top performers a little less lucrative.
When Ron Harman King, the founder of a small content marketing company in Colorado, started posting salary ranges on job postings to comply with state law, he was surprised. The candidates who responded to his ads seemed to be a better fit than those who previously applied with higher salary expectations. “The interviews have been easier,” he said. “They knew what the position would bring, and they were already interested in applying for that range.”
The way Mr. King set his rates also changed. Instead of looking at nationwide industry data, he could look at what his direct competitors were paying. “Everybody kind of has to, you know, show what they’ve got,” he said. “So I feel like we’re all better informed about what it takes to be truly competitive as an employer.”
Tyler Stodden, a software engineer, said when his employer published salary ranges for each position before the New York City law went into effect, it lent credence to the company’s rule of not negotiating when employees received an offer from a competitor . Now he is confident that he knows – and is told – the upper limits of his salary for his job. “I’m pretty confident that they’re sticking with what they’ve said about them putting out the bands,” he said.
While wage transparency laws and policies generally aim to reduce inequality, a growing body of research has examined some of their indirect effects.
A trade-off is that some forms of pay transparency seem to make pay not only fairer, but also flatter, with a smaller gap between low and high performers.
In a study published in the journal Nature Human Behavior, researchers analyzed the salaries of 100,000 academics over 20 years. As websites made their salaries easily searchable, the gender pay gap improved by nearly 50 percent. But the gap between academics who performed best – based on markers such as publications, awards, grants and patents – and those who performed less well also narrowed.
“What transparency seems to do is dampen performance-based incentives,” said Tomasz Obloj, an associate professor at Indiana University’s Kelley School of Business and a co-author of the paper.
LaKeisha Caton, a partner at the law firm Pryor Cashman who advises companies on labor-related matters, said she discusses the potential of pay transparency to compress wages with clients. “I think that’s just the other side of the deal,” she said, pointing out that without the effect of transparency pushing salaries toward the middle, “women and minorities tend to fare worst in those circumstances.”
With pay transparency, Ms Cullen noted, some differences related to performance can be wiped out, but the same can happen with differences related to discrimination.
One explanation why some forms of pay transparency tend to weaken the link between income and performance is that this disclosure weakens individual bargaining power. If salaries are public, employers can argue that giving one employee a raise would mean giving everyone a raise. Employees may also be less likely to negotiate in the first place if there is a public salary range for a position.
“They see the posted price and think, Hey, I can’t ask for more because of course they’re not going to change their entire website, which is for everyone, on my behalf,” Ms Cullen said. . She co-authored a working paper for the National Bureau of Economic Research that found wages fell an average of 2 percent when wage transparency protection laws were introduced in the United States.
There are other ways employers can benefit from pay transparency. For example, some research suggests that when wages are more transparent, workers tend to work harder.
In an experiment at a major commercial bank in Asia, Ms. Cullen and a co-author found a similar result: Employees tended to underestimate their managers’ salaries. When the bank made the salaries public, they learned that they would earn more than if they moved up the ranks and put in more effort.
Companies that pay fairly can benefit the most from this effect. In an ongoing project, Mr. Obloj and his co-authors on productivity and pay for 20,000 academics. They found that in universities that paid fairly, increased pay transparency resulted in an overall increase in productivity, while in universities where pay transparency revealed unfair wages, productivity fell. Other research has suggested a similar pattern for turnover: when reward systems are perceived as fair, wage transparency is associated with lower turnover. When it is perceived as unfair, the opposite is true.
As salaries become more transparent, some managers may refine the system by compensating employees in ways that are less public, such as bonuses and benefits. And that could undermine the narrowing of the pay gap. “If we shift pay to other forms where there’s less transparency and where we also know there’s gender inequality, we’re not really solving anything with pay transparency,” said Peter Bamberger, a professor at Tel Aviv University. He co-authored a study published in the Academy of Management Journal that found that employers were more likely to request these types of benefits, and managers were more likely to grant these types of benefits when pay was public.
To avoid the pitfall of paying everyone the same regardless of performance or moving to less transparent systems, Mr. Bamberger that companies had to figure out how to assess performance and explain differences in pay. “Those companies have a competitive advantage,” he said.
Ms. Caton said that wage transparency legislation is in practice forcing companies to think more carefully about how their decisions play out.
“I don’t think you can just post the salary and that’s it,” she said. “I think internally it leads to more conversations about: How do we think about compensation?”
