Why there is a dark side to total pay transparency

Open discussions about salary have long been considered a workplace taboo. The last few years, however, have witnessed the concept of pay transparency gain momentum among younger professionals. Today, several companies around the world are embracing pay transparency policies and practices as a means of building a positive work environment, and narrowing the gender pay gap.

According to a 2022 Visier Survey, 79 per cent of employees want some form of pay transparency, while 32 per cent desire total transparency. Pay transparency is widely believed to generate benefits such as helping attract and retain talent, improving job task performance, and even keeping gender and other biases at bay. But is there a dark side to practising total pay transparency? Could it spark any unforeseen consequences?

Disparity creates feelings

Simply speaking, pay transparency refers to a policy wherein an organisation voluntarily gives employees access to pay-related information. Such information may pertain to the actual pay level or range, the process of the pay system, or even the practice of not restricting employees from freely sharing information about their salary.

“Pay transparency can work well in organisations where the pay is standardised across levels – for instance, every employee at the entry level draws the same salary,” says Rajesh Nair, executive president & CHRO, Polycab India.

“At one level, it is reassuring for individuals to know that their co-workers have the same salary as them. However, this can easily transmute into negativity if there is a wide gap — a peer or manager drawing much more — engendering disgruntlement and eventual demotivation,” explains Nair.

“Pay transparency is certainly not a liner or uni-dimensional perspective. It is based on pay practices that are fair and deeply aligned with an employee’s impact at work. These practices should not be generic in any manner”

Rajesh Rai, VP & head HR – GlobalLogic APAC

He notes that salaries are seldom standardised nowadays. “Salaries are increasingly becoming unique,” says Nair, referring to how pay / salary has come to be largely determined by individual skills and experience. “Companies have a fairly wide pay range these days. If there are two marketing managers, one may draw what’s at the minimum level, and the other may get what’s at the maximum end of the spectrum,” elucidates Nair, stating that this may easily lead the manager with the lower salary to wonder why the other person at the same post earns so much more.

Repudiating the idea of complete pay transparency, Nair says that while employees could have a fair idea of the broad pay range, they should not get to know each other’s unique salary. “Human beings, by nature, compare. Disparity generates feelings and subsequently mistrust,” he observes, underlining that there is no clear solution to the problem other than having a very narrow salary band or a highly standardised pay system which, he points out, isn’t practical at all.

Mature organisation

According to Jacob Jacob, group CHRO, Malabar Group, whether or not pay transparency will have positive or negative consequences depends on the depth of maturity of the organisation.   he says, adding that the wage band is usually clearly stated in mature organisations.

“Large MNCs and corporations understand how pay transparency works. However, the policy can easily become a bane in companies that lack a clear philosophy around pay structure,” he opines.

“Basically, the value system around employee compensation should be engrained in a way that the pay structure becomes cogent, articulate, well meaning and standardised. Otherwise, pay transparency would only trigger chaos and problems” he suggests, elaborating on the fallout of pay transparency in the absence of a well-defined and logical pay grade structure.

“Transparency related to specific areas of the salary is welcome”

Dipankar Ghosh, group head – HR, Apollo Tyres

What about salary negotiation?

The argument for standardising pay range levels brings an important subject to mind. If the pay band is standardised, can salary negotiations — a key element of the hiring process — be done away with?

“If there is a standard mean and median salary, and again, a well-articulated pay grade structure, pay transparency can actually simplify the process of salary negotiation for both parties. It could become a win-win situation for both the employee and organisation,” opines Jacob.

Dipankar Ghosh, group head – HR, Apollo Tyres, says that salary negotiations would continue to take place in cases of external hires. “There is no right or wrong here. The negotiation will depend on the degree of criticality of the role,” emphasises Ghosh. “Moreover, there would be natural economic factors at play. If there is a higher supply of candidates, the candidate may have to accept what is being offered. On the other hand, if the demand is higher than the supply, the candidate may always negotiate for a better wage”.

It’s complicated

Rajesh Rai, VP & head HR – GlobalLogic APAC, suggests that pay transparency — while a noble practice — is never simple. “Thef concept of pay is very personal, intricately linked as it is with the skills, experience and strengths an employee brings to the role and organisation”. He further indicates that these elements also outline the impact the individual is able to make on the job. The impact, he adds, is naturally different for every person.

“There should be a well-defined pay grade structure and standardised benefits in order for pay transparency to reap positive results”

Jacob Jacob, CHRO, Malabar Group

“Therefore, pay transparency is certainly not a liner or uni-dimensional perspective. It is based on pay practices that are fair and deeply aligned with an employee’s impact at work. These practices should not be generic in any manner,” Rai informs, alluding to the reasons behind visible pay differentials.

Speaking at length on the complications and challenges of implementing a pay transparency policy, Ghosh enumerates two components in this regard. “One, people usually get a salary that is in accordance with their market value. Two, there is a differing pay range for every role”.

Rather than total pay transparency, Ghosh espouses a measure of transparency regarding the principles of wage management. “Transparency related to specific areas of the salary is welcome,” says Ghosh. “These may include the pay range and annual increment; also the variable amount, and benefit component – such as the house rent allowance (HRA) and medical expenses – of the pay. There can even be transparency regarding the formula used for arriving at the variable amount”. But complete transparency, in Ghosh’s opinion, can easily set off needless water-cooler talk, generating dissatisfaction and dissonance among employees.

“Pay transparency can work well in organisations where the pay is standardised across levels – for instance, every employee at the entry level draws the same salary”

Rajesh Nair, executive president & CHRO, Polycab India

One of the biggest downsides of pay transparency is believed to be the unwelcome prospect of companies ending up overpaying employees, particularly when a perfect candidate — or ‘purple squirrel’ in HR parlance — is found. Organisations are often willing to offer a higher salary to such candidates to secure them, fearing they may go elsewhere.

“In this era of The Great Resignation, organisations have to frequently look for external candidates whom they may end up hiring at a much higher salary. When such an individual joins, it is not practical for the company to raise everyone’s salary just to create parity,” says Ghosh, underlining how salary transparency can become a major disadvantage in such situations.

It seems that in order to make pay transparency a truly positive force, organisations need to move beyond simply giving free access to pay information. Instead, they should adopt a broader, more holistic approach to ensure employees are able to make sense of the logic that lies at the core of pay- and performance-management processes.