Use pay transparency to better align compensation with goals

Talking about personal compensation at work, with family, or in a social setting had historically been discouraged. Like many traditional management practices, however, organizations are now faced with adopting significant change with respect to compensation communications and the level of information that must be shared with employees. If not prepared or aligned with requirements, the emerging regulatory requirements can create risk or magnify inconsistencies in ill-defined employee compensation programs.

Engaging with state and federal laws

Significant variations in pay transparency regulations exist from state to state, creating a troubling environment for many employers to navigate. In addition, pay transparency was introduced at the federal level in 2023, where H.R. 1599 requests, per the Fair Labor Standards Act, the disclosure of “wage range.” The trend for the different approaches taken by various states is to require a similar level of pay disclosure. At a minimum, employers may be required to supply certain information about their compensation programs upon request. This information may include salary ranges and other forms of compensation for the role, as well as the general benefits that are available.

For example, in August 2023, the Illinois Equal Pay Act was amended to mandate new pay transparency requirements for all public and private employers in Illinois with 15 or more employees to provide pay range and benefits information in all open job postings. In addition to the posting requirements, the amendment defines the type of covered positions, including remote employees, use of third-party job postings, recordkeeping, as well as requirements to announce to current employees all opportunities for promotion within defined periods after the external job posting is made.

Other states have already adopted similar regulations, including prohibiting employers from requesting a salary history from prospective job candidates and prohibiting employers from preventing employees from discussing their own compensation information with other employees. For organizations that have employees across the U.S., this can create significant challenges in administering enterprise-wide compensation programs if a company’s pay transparency tools do not exist or the readiness to share details of employee compensation programs across all labor markets is low. 

Dimensions of pay transparency readiness

A February 2024 survey conducted by Grant Thornton for Chicago SHRM provided insights into the level of readiness that may exist to adopt the changes mandated by such regulatory requirements. The survey outlined eight dimensions that human resources leaders can use to evaluate their current practices against the new pay transparency requirements. The 2024 survey results for these eight dimensions are summarized in the graph below.

The survey participants indicated a low level of readiness with respect to all dimensions, with heightened concern over the competitiveness of the current program, the internal resources needed to manage pay transparency, employee understanding of the current pay program, as well as the lack of a shared understanding of the factors used to differentiate pay.

As employers continue to refine their talent acquisition strategies and differentiate their total rewards practices, the evolving business and regulatory landscape may create barriers if they have not equipped talent specialists with the necessary tools. Additionally, many employers continue to struggle with ensuring pay transparency and countering legacy practices, both of which can lead to pay inequities. These inequities can affect motivation and relationships at work as well as the employer’s brand and reputation.

It’s no surprise that Grant Thornton’s past survey research found a strong correlation between the level of pay transparency and perceptions of pay equity. Our June 2021 By the Numbers pulse data suggests that employees who have experienced a greater level of pay transparency practices are more likely to indicate a belief that no difference in pay exists across genders at their organization. On the other hand, employees who have more limited access to information about pay practices are more likely to report a belief that men are paid more than women at their organizations.

Preparing for pay transparency

Given the need to respond to the emerging pay transparency laws, it is crucial that human resources leaders prepare their organizations for any changes to current practices. Provided below are five plausible actions an employer can take to prepare for increased pay transparency and manage the near-term impacts any change to current practices may have.

1. Creating or refreshing an agreed-upon compensation philosophy.
2. Aligning leadership perspectives on pay transparency and the company’s posture.
3. Evaluating human resources systems, applicant tracking tools, third-party job posting practices for gaps and capabilities to post pay ranges.
4. Adopting formal pay structure with ranges and method to deploy same or similar or different range in job postings.
5. Preparing tools, training and resources for internal human resources, talent acquisition teams and hiring managers

Pay transparency regulations create an opportunity to strengthen the type of information that is available to the current workforce at critical points in the employee experience. At a high level, pay transparency practices help management reinforce the efforts the organization makes to structure meaningful employee experiences and mitigate the risks of legacy business processes that create pay disparities. By taking a proactive response, employers can be more prepared to improve pay transparency practices and potential inequities that are created by legacy practices. Starting with job posting processes and offer letters, to salary increases and promotions and, ultimately, to severance programs, transparency needs to be considered throughout the entire reward life cycle.

Given the intended relationship between increased pay transparency and improved pay equity outcomes, we expect to see some form of a pay-equity ratio measure more routinely reported voluntarily in public company disclosures to meet future SEC requirements, as well as an increased use by nonprofits where public scrutiny is high. By taking a proactive response to develop pay equity metrics, employers can evaluate the impacts that pay transparency may have to reduce potential gender pay gaps.

Many organizations continue to refine their internal communication capabilities to include active listening strategies, or “employee listening.” Pay transparency regulations create another opportunity for employers to gain insights into perceptions of compensation and the level of transparency that can follow by using employee listening tools such as brief pulse surveys, open-door exchanges, and mentorship opportunities to engage senior leaders, top performers and critical workforce segments.