... Every pay system has pockets of unfairness, where managers have made special arrangements to attract or retain talent. Pay transparency exposes these exceptions, so they can be immediately explained or corrected.
But if there are too many such pockets, managers need to brace for a productivity downturn. When pay transparency reveals systematic inequities – for example, disparities based on gender – overall organisational productivity declines.
Over the long run, pay transparency leads to flatter and narrower pay distributions, but distributions can also be too flat and too narrow. Managers making pay decisions are aware that their decisions will be directly scrutinised and may become reluctant to assign high wages even for high performance.
If pay loses its motivating potential, employees can become disheartened, especially star performers.
Proceed with caution
As stakeholders on this issue demand more transparency, employers would be wise to stay ahead of legislative moves.
Independently making the first move is a show of good faith and can unfold in stages. A good first step is to reveal the pay ranges associated with groups of related roles, giving employers time to conduct internal audits, communicate with employees and systematically correct inequities as they surface.
In contrast, having to reveal pay data because of a government mandate can publicly expose patterns of inequity and cause permanent damage to a company’s reputation.