Pay Transparency Can't Be Ignored Any Longer

Author: Emily Scace, XpertHR Legal Editor

December 8, 2022

Since November, a pay transparency law has required New York City employers to include pay ranges in job postings, and beginning in January 2023, similar laws will take effect in California, Washington and elsewhere. A New York state law awaits the signature of Governor Kathy Hochul. What does this rapidly spreading trend mean for employers and the future of pay equity?

Why Pay Transparency?

Disclosure requirements around compensation aim to advance pay equity by giving applicants and employees more informational leverage. The theory is that individuals who have been underpaid in the past - often women and people of color - may accept a lower salary than they otherwise could have commanded if they lack the context about the employer's pay practices to assess the fairness of an offer.

Without transparency, employers have a massive upper hand in this dynamic. Although employees may be able to conduct some research about typical compensation in a particular role, finding accurate data is difficult - a difficulty compounded by the many variables that can influence pay such as location, experience level, and a particular organization's salary structure.

And there is little incentive for an employer not to lowball. After all, a candidate may accept the lower offer. Even if the candidate does negotiate for a higher salary, psychological anchoring effects make it likely that the final negotiated salary will be lower than it would have been with a higher initial offer.

Without transparency, even if a candidate negotiates for a higher salary than an initial offer, psychological anchoring effects make it likely that the final negotiated salary will be lower than it would have been with a higher initial offer.

Of course, this pattern, repeated many times over, is one source of systemic pay disparities, both within individual organizations and in the labor market as a whole.

Transparency laws aim to counteract that trend. In 2021, Colorado became the first state in the nation to require employers to include pay ranges in job postings. Other jurisdictions, including California, Washington and New York City, soon followed suit.

A separate group of locations, including Connecticut, Maryland, Nevada and Rhode Island, has enacted transparency laws that do not require pay scale information in job postings, but instead mandate that employers provide the information to an applicant during the hiring process, typically before making an employment offer to a particular candidate.

Challenges and Concerns

Despite the noble intent of these laws, compliance will not be without challenges. Some employers may fear that having pay information publicly available could mean ceding a competitive advantage, while others may worry that pay disparities could come to light as a result of the required disclosures.

Pay compression is another common concern. In a tight labor market with many more job openings than employees willing to fill them, employers may need to advertise jobs at higher salaries than they have paid in the past, meaning that employees with longer tenure may find themselves making close to the same salary as a new hire. This dynamic can damage employee morale and contribute to increased turnover.

While these are valid concerns, it is important to remember that secrecy around pay does not solve disparities or overcome the challenges of a competitive hiring landscape. If disparities exist along the lines of a protected characteristic such as race, ethnicity, sex, disability or age, it is critical for an employer to identify and correct them promptly in order to mitigate the risk of a pay discrimination lawsuit - not to mention the broader impact on diversity, equity and inclusion goals.

Moreover, from a practical perspective, pay transparency has the potential to make the recruiting and hiring process more efficient for all parties. If a candidate knows the pay range for a position before deciding to apply, employers will begin their hiring process with a more targeted pool of applicants who are willing to work for the offered salary.

While some employers may fear that all candidates will expect the top of a listed range, this can be mitigated by clear job descriptions that clarify what types of credentials and experience are most important for the role and how those factors typically influence starting pay.

Recommended Action Steps

As recent developments suggest, the push for transparency is not going away. Employers, therefore, should take proactive steps to identify and address pay inequity and develop a solid strategy to implement pay transparency - even if not currently required to do so by law. Done well, transparency can even be a selling point that helps an employer's recruiting, retention, reputation and employee morale.

Done well, transparency can be a selling point that helps an employer's recruiting, retention, reputation and employee morale.

Steps to take now include:

  1. Conducting a pay equity audit. A pay equity audit is a systematic way of identifying employees whose compensation falls below the expected level based on factors such as the employee's tenure, job performance, and responsibility level. It is a good idea to involve legal counsel when conducting an audit to evaluate risks and determine whether the audit can be privileged.
  2. Developing a plan to act on inequities. Depending on the scope of the disparities, an employer may choose to adjust the salaries of underpaid employees all at once or more gradually. But either way, it is important not to delay too long: an employer that conducts a pay equity audit and does not take reasonably prompt steps to correct disparities may find itself faced with a pay discrimination lawsuit.
  3. Creating a salary structure for the organization. If an employer has taken a more ad hoc approach to pay structure in the past, it should consider developing a consistent framework for pay that captures the roles in the organization and identifies an appropriate pay range for each.
  4. Preparing to list pay ranges in job postings. Along with a reasonable range, it is a good idea to include context about what factors - such as relevant experience or credentials - will impact where a given candidate falls within the range.
  5. Providing guidance to hiring managers and others making pay decisions. Salary should not be left entirely up to the discretion of the hiring manager but should be justifiable based on objective, nondiscriminatory criteria. Hiring managers must understand the organization's pay equity efforts and their role in carrying them out.