«Companies around the world have been increasingly adopting pay transparency policies and practices as a means of narrowing the gender pay gap and fostering an engaged and positive working environment that builds trust. Pay transparency can help companies achieve these goals — but it can also have unintended consequences.
Pay transparency refers to a pay communications policy in which a company voluntarily provides pay-related information to employees — for example, about the process of the pay system (process transparency) and actual pay levels or ranges (outcome transparency), or even an open policy for employees to freely share information about their pay (communications transparency).
Why is pay transparency important? For one thing, it facilitates attracting and retaining talent, as new applicants to the workforce are demanding increased transparency with regard to pay. According to PayScale, if the process is not transparent, employees — particularly younger ones — may be more likely to leave a company within six months. For another, there can be legal implications for companies that fail to meet relevant transparency compliance standards. Moreover, public news of pay inequality at companies with more secretive pay communication practices can seriously damage their reputation, as was the case at BBC and Google. Finally, studies indicate that, at least in the short term, pay transparency may have some important benefits for employees and their employers. For example, pay transparency has positive impacts on employees’ perceptions of trust, fairness, and job satisfaction and has been found to boost individual task performance.
However, there may a dark side to pay transparency as well. Our recent global study of pay transparency involving employees in the U.S. and UK, as well as over 100 Chinese firms, suggests that there are some key caveats to consider. Here are the unintended consequences to be aware of — and how to avoid them.
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