The case for pay transparency was best epitomized by Lilly Ledbetter, namesake for the Lilly Ledbetter Fair Pay Act. She was unaware her male peers were paid more than her until she received an anonymous note telling her she was earning significantly less money than men in the same position. Since the enactment of the Act in 2009, we have seen a regulatory shift toward allowing employees to discuss their pay without fear of reprisal.
Federal contractors are prohibited from restricting an employee’s or applicant’s ability to discuss his or her wages with coworkers under Executive Order 13665, which amended Executive Order 11246. Similarly, some state fair pay laws include pay transparency provisions, such as that of Massachusetts and New York.
Pay transparency provisions are intended to help identify and eliminate pay discrimination. The assumption is that if there are fewer secrets about pay, it will be harder for pay inequities to arise. Proponents of pay transparency tout other benefits, such as increased employee trust and engagement (https://www.localwork.com/tools/pay-transparency) and higher job satisfaction, leading to increased employee retention (http://fortune.com/2015/10/15/pay-transparency/).
However, according an article in the Harvard Business Review, pay transparency may cause as many problems as pay secrecy. The article explores the downside to pay transparency using empirical data and cautions employers to consider the potential fallout. It states:
Far from a panacea, pay transparency is a double-edged sword, capable of doing as much — or more — damage as good. Broadcasting pay is as likely to demoralize as it is to motivate. While pay transparency may accelerate attention being paid to remedying pay discrimination, managers should consider moves toward transparency with their eyes wide open.
The problem is not only the demoralizing effect pay knowledge may have on all but the highest paid, but also the accompanying employer-employee communication issues highlighted by the author: Employers must “link individual performance to rewards but recognize that they must be vigilant in efforts both to measure performance and to convince employees that their necessarily imperfect measures are acceptably fair. The real problem with pay transparency is that it focuses individuals on comparing pay rather than on elevating performance.”
Employers, of course, must comply with applicable federal and state regulations mandating pay transparency. From a legal, talent management, and employee relations perspective, employers are well-served by focusing on effectively supporting and persuasively communicating information about their pay systems, based on performance and other relevant, race- and sex-neutral business factors.