In the fiercely competitive job market today, job seekers look for more than just a paycheck. They crave a sense of purpose, recognition, and the assurance that their employer values their contributions and compensates them fairly. This is where pay transparency comes into play - an idea that has been generating a lot of buzz in recent years. Some believe it can lead to greater trust and fairness in the workplace, while others fear it could cause discord among employees. 

However, with an increasing number of states in the US following New York City's lead and mandating compensation disclosure and growing calls for transparency across multiple industries, it's evident that transparency guidelines will become more common in the future.

In this comprehensive guide from People Matters' Big Questions series, Ruhie Pande, Chief Human Resources Officer at Godrej Capital, Pritish Gandhi, Associate Partner and India Practice Leader, Executive Compensation and Governance, Aon, and Ester Martinez, CEO and Editor-In-Chief, People Matters delve into the nuances of the pay transparency model.

Setting the stage for pay transparency

So, where do organisations begin with pay transparency? HR leader Ruhie suggests that a job evaluation framework can be useful for this purpose, and market experts can provide guidance through the process.

To ensure pay ranges are equitable, it's essential to conduct market benchmarking studies and analyse what competitors are paying for similar roles. The insights can help organisations identify where they may be losing or gaining talent. However, external benchmarking is only one part of the equation, and organisations must establish minimum and maximum pay ranges for each role, taking into account factors such as experience and performance.

It's not just about meeting regulations, either. Pritish, the executive compensation and governance expert, highlights the importance of governance in ensuring transparency, including publishing the gender pay gap and providing explanations for differences from crowdsourcing platforms. Pritish stresses that making compensation benchmarking reports public, where relevant, is an idea whose time has come.

The obstacles on the road to pay equity

Transparency in pay can help create a culture of trust and have a positive impact on productivity and engagement, but it's not all roses. There are a few pitfalls that can make the journey tricky. According to Ruhi, one major challenge for organisations is providing transparency on how they're rectifying past wrongs. Closing the pay gap requires finding budgets to create a seamless movement into a state of transparency, and failure to do so can lead to upset employees who may ultimately quit the company.

“Another issue is that many employees may not understand the underlying criteria that govern remuneration, such as market benchmarking, which can have multiple nuances. Companies often base their pay on subjective determinations, and not clearly communicating the reasons why certain employees are paid more or less can create frustration among the workforce.”

Organisations may be hesitant to make their pay transparent because it can make it more difficult to hire talented employees at lower rates. However, if companies can retain their employees with work-life balance and additional perks, they can hire more stars and pay them less.

Managing budgets, employee morale, ensuring that complex data is easily understandable, and providing HR leaders and supervisors with support during this transition are all necessary for organisations to implement pay transparency successfully, concurs Ruhi and  Pritish.  

Steps to navigate the pay transparency journey

Don't ask about past pay: One of the most straightforward ways to improve pay transparency is by not asking about an applicant's past pay. Pritish pointed out that the last offer an applicant received is not relevant to whether they are a good fit for the role or not. Instead, recruiters should focus on the applicant's skills and experience to determine their value.

Managers are crucial: Managers play a crucial role in pay transparency. They need to be accountable and provide context and explanations to employees about their pay practices. After all, they are the ones who determine how their team members are compensated.

Communicate your compensation strategy: It's essential to have a clear compensation strategy that employees can understand. Are you a merit-based organisation, or do you focus on enabling employees? There is no right or wrong answer, but it's crucial to communicate this strategy to employees, so they know how decisions about their pay are made.

Share aggregate pay statistics: Before moving to individual pay transparency, organisations should consider sharing pay statistics on an aggregate level. For example, if I'm an associate partner and tomorrow I'll be a partner, I think it should be okay for me to understand how partners are paid. I should not need to have a corridor conversation with a partner to understand that.

Go beyond regulation: Many organisations are already going beyond regulations and publishing data on gender pay parity, but Ruhi suggests that they can do even more. For example, organisations can publish data on pay parity for LGBTQI individuals, people with disabilities, and even different castes. They can also publish data on the ratio between top management and entry-level employees to see if there is a disparity within the organisation. For example, “we at Godrej Capital Group," says Ruhi, “conduct a gender pay parity study every year, but we don't publish that. We ensure that at every level, we constantly keep fixing that there is a disparity at some level and correcting later on.”

The payoffs of transparent pay

Studies have shown that when companies publish their salary ranges, it increases the number of qualified applicants who apply for the job. In turn, this attracts more suitable employees to your organisation, says Ruhi. But the benefits of pay transparency don't stop there. By being transparent about salaries, companies show prospective candidates and current employees that they have a culture of transparency. “This adds to the company's authenticity and helps attract better cultural fits. Gen Zs and millennials are proven to be far more open about discussing their own salaries with each other.”

Another important benefit of pay transparency is fairness. By adopting pay transparency, companies set clear guiding rules for themselves and have to live up to higher standards. This not only helps close pay gaps and decrease inequality but also ensures that everyone is being paid what is fair for their job and level of experience.

Pritish believes that pay transparency can also benefit companies operating in new geographies. For example, a large Indian company hiring employees in the US can benefit from transparent pay practices to counter bias and demonstrate that they can pay competitively.

Pritish adds, “for one thing, employees need to be comfortable with having their performance and skills made public. And companies need to be willing to invest in systems and processes that can support transparent pay policies.”

Navigating the complexities

Pritish suggests that pay transparency should be broad and not tied to specific roles or job families. He argues that organisations are becoming more agile, and job families are changing much faster than before. Being too specific may end up tying the organisation into knots.

“Otherwise, it removes the agility which the organisation may want to keep with themselves. And with the world moving at such a fast pace, it also gives the organisation flexibility to allocate resources to the most valuable roles, which is what creates a competitive advantage for the firm," Ruhi chimed in.

But, as Ruhi points out, this creates complexity when publishing pay data. For example, an analytics role may be at a premium, but a person in another function may not be open to seeing that the pay ranges for their function are actually larger. This is because organisations are going all out to attract talent in certain areas, and this demand drives up the pay range. While this may be a reality, it's not always easy to accept for those in other functions.

If you have a bunch of historical data lying around, you need to sift through it and make sure that you're paying people fairly based on their job evaluation. Some roles may be paid more than they should be due to previous negotiations, promotions, or other factors. So, getting your entire compensation data in order is crucial.

To simplify the entire process, you may want to start by announcing your increment ranges as a first step. Then, you can start to identify where you're already compensating at a certain level and band your employees unless they go to the next level. You also need to establish the fact that you're a meritocratic company and determine what kind of differentiation you want to make between your high-potential employees and the rest of your organisation's performance. This will help you determine the kind of percentile wrapping you need to offer high performers to retain them, according to Ruhi.

Sustaining the compensation model

Pay transparency should not be a one-time event, but an ongoing process integrated into the organisation's core principles.

After all, a company's ultimate goal is to make a profit, so it's important to keep employees informed about how their decisions impact the bottom line. But that's not all. Organisations also need to be honest about their affordability paradigm, especially if they're not big MNCs. And they need to understand how the talent model is changing and adjust their pay practices accordingly. Ruhi emphasises the importance of a sustained effort over a long period of time. This means understanding the competition, benchmarking to stay relevant, and continually reassessing the significance of each role to the organisation.

In the end, sustaining pay transparency is all about commitment. It's about staying true to the core principles of affordability, organisational strategy, and role significance year after year. By doing this, companies can create a culture of fairness and transparency that benefits everyone involved.

Getting your house in order and ensuring that your data is accurate and up-to-date is critical, Ruhi reiterates. This means looking at compensation ranges and making sure that pay is fair and equitable across the organisation. Additionally, it's important to empower managers to take an active role in the compensation process, rather than leaving it solely up to HR leaders.

The final critical aspect of remaining competitive is creating a culture where employees feel comfortable discussing their expectations and career goals with their managers. This is particularly important for women in the workplace, who may face unique challenges in terms of career advancement and compensation.