Why radical transparency about salaries can pay off

How much do you make? How much do you think your colleagues make?

Most of us feel uncomfortable discussing our salaries. We are afraid to find out we are underpaid. Or worry that someone might envy that we earn more than they do.

Organizations work very hard to make salaries opaque. Some argue this helps prevent potential infights. Though many think lack of transparency gives companies the upper-hand during salary negotiations.

Secrecy not only puts employees at a huge disadvantage. It also promotes speculation and a lack of trust. When people don’t know how they fare against others , they usually think the worst.

As Morela Hernandez, a researcher at the University of Virginia, said, “By keeping compensation secret, we might obscure structural inequalities and enable inequalities to persist.”

What would happen if we removed that secrecy? Wouldn’t it be better to spend more time working than speculating about what others make?

The Benefits of Salary Transparency

When I encourage my clients to embrace pay transparency, I always get the same reaction. They look at me as if I’ve gone crazy.

Transparency is a sensitive topic. But keeping employees informed always pays off. It has brought public goodwill to Whole Foods, Buffer, and SumAll, among others.

Under Whole Foods’ policy, anyone can look up to anyone’s salary — all the way up to the CEO.

Avoiding the salary conversation creates more public scrutiny. Even Uber and Google could no longer hide their gender pay gap.

Research shows that transparency can help lower the gender gap.

This is huge because women are less likely to get a salary raise even if they ask for it as often as men do. Or that evaluators see black job applicants as pushier even when negotiating the same conditions than whites.

Transparency can protect companies too. It minimizes the risk of disparate treatment claims.

Pay transparency increases employees’ motivation. It helps people work harder, be more productive, and collaborative.

Above all, it eliminates one of the most pervasive reasons why people gossip at work: How much do my colleagues make?

If you don’t know your co-worker’s pay, you assume the worst. As Elena Belogolovsky, an assistant professor of human resources at Cornell, said, “When people don’t know each other’s pay, they assume they are underpaid.”

The Downsides of Salary Transparency

Broadcasting everyone’s salary triggers comparison.

A Harvard Business School study found that learning that your coworkers make more can be demotivating.

When people found out that a colleague in a similar role earned more, they were inclined to start looking for a new job. However, when they were told how much their boss made, they were inclined to work harder — it gave people something to aspire to.

Some companies argue that salary transparency is a fad. They think it is a “Millennial thing” that will soon go away. And fail to realize that transparency matters to most generations, not just Millennials.

We are all used to living in a world driven by easy access to information.

Research by Gartner Group shows that 60% of the organizations had not yet acted on pay transparency, while only 14% had fully realized it.

A report from the Institute for Women’s Policy Research confirms transparency is still in its infant stage. About 17% of private companies practice pay transparency, while 41% discourage, and 25% prohibit discussion of salary information.

Only 37% of companies agree that pay transparency fit into their culture. This seems like a weak excuse. In today’s environment, transparency is not optional. Companies can no longer hide behind obscure policies.

Many detractors think transparency can facilitate competitors to poach our most valued talent.

Buffer has long been a proponent of radical transparency. When the social media software company published its compensation formula, they too worried about losing their best employees.

However, Buffer applications went up by 50% the next month.

Salary transparency is not a perfect approach. But the many benefits offset potential downsides.

How to Practice Pay Transparency

You don’t have to start by disclosing salary information for every employee in the organization. The key is to create a more transparent culture.

Here are different ways to experiment with salary transparency.

1. Share senior executive salaries:

Leaders must embrace vulnerability. Start by disclosing the income of the top executives to promote transparency.

Also, as I mentioned before, people get motivated when they realize their career growth opportunities.

2. Assess your pay gap:

The majority of organizations have suffered from this. Rather than hide it, make the difference public. And, most importantly, what you are doing to bridge it.

Google used the entire raise pool to take care of structural inequalities.

3. Share salary ranges:

Seeing how they fare within the range can help people address their own concerns.

Specify what drives upward mobility so employees can focus on getting better at it. Or to fight back if they think they should be paid closer to the highest end of the spectrum.

4. Make your compensation formula public:

Buffer paved the way for many others to follow suit. The company published its formula for determining salaries on their website.

However, some companies are moving beyond algorithms. As digital design firm Hanno explains in this post, “People don’t just fit neatly into formulae. Our problem was defining a formula and trying to squeeze everyone into it.”

Hanno developed a new system that contemplates what an employee thinks it’s a fair salary, the team thinks it’s fair, and the company can afford it.

5. Share everyone’s salaries:

Verve proved pay transparency naysayers wrong. The U.K.-based tech firm took the plunge by allowing all of their employees access to everyone’s pay.

People can check their peers, managers, and even the CEO’s salaries — nobody is off-limits.

Verve determines salaries based on two objective measures: job scope and market value of the position. Those who perform well are given more responsibility and bigger projects, which result in more pay.

6. Allow employees to set their salary:

Self-setting salaries is becoming a common practice among transparency enthusiasts.

Setting salaries is often an opaque, unfair, and, sometimes, dishonest process. Employees aim for the highest salary assuming managers will give them as little as possible.

Morning Star has been practicing self-set salaries for decades. As explained by Frederic Laloux, the largest tomato processor in the world has a compensation committee that calibrates people’s proposed pay.

The yearly process involves:

– Requesting the salary you think is fair and explaining why

– The compensation committee provide feedback if they believe the proposal is too high or too low

– Considering the feedback, employees adjust their salary level

7. Leverage peers common sense:

Self-selection is not a free-for-all approach — -it encourages people to make better decisions.

When it comes to self-set salaries, set up a transparent process that involves other people’s perspectives.

Hanno has an advice process in which employees seek advice for as many people as they see fit. Smarkets’ employees’ proposal is benchmarked against performance, peer feedback, and market rates. At the London startup, anyone can contest salary raises.

Shifting toward salary transparency is tough, but it pays off. Contrary to popular belief, common sense prevails over individual greed.

Practicing self-set pay doesn’t mean salaries always go up. At GrantTree, two staff members decided to reduce their pay after their responsibilities changed.

A peer-to-peer review system or a compensation committee regulates the overall dynamic. When people are being greedy or not objective, their peers push back.

People make smarter decisions when they have autonomy. Also, having access to financial implications makes them focus on what’s best for the company.

I hope this post inspires you to start your own salary transparency approach.

Want to build a culture of transparency?

Read How to Move from Secrecy to Radical Transparency.