With companies like Buffer and Gravity Payments raising the bar on radical pay transparency and employees expecting more information about pay and pay decisions, more companies are exploring what it means to be transparent about pay. PayScale data suggest that about half of all organizations are aiming for pay transparency in 2017. The question then becomes how do you know if you’re ready to become transparent about pay and/or pay decisions? And if you’re ready, how transparent should you be? What is the right level of transparency for your organization?
Before we get too far, let’s explore what pay transparency is and isn’t. Pay transparency is not an all or nothing decision. Transparency is a spectrum of choices organizations can make about how much information they want to share about their pay practices.
We’ve written before about a few critical questions to consider before venturing down the transparency path. These high-level questions are about culture, workforce and overall readiness. Today we’re going to look at the very practical questions you should ask yourself before you select each level of transparency. Essentially, these are the prerequisites for each step on the transparency spectrum.
Prerequisites for Level 1 Transparency
Level 1 transparency means that employees find out what they get paid on their paycheck. Conversation about pay is very limited if it happens at all. “Go ask HR” is a familiar refrain. PayScale’s Compensation Best Practices Report (CBPR) revealed that 49 percent of organizations were at level 1 transparency in 2016, although only 27 percent are aiming for level 1 transparency in 2017.
At the risk of sounding flip, the prerequisites for level 1 transparency are that you have employees and you provide them with pay either by check or direct deposit. Level 1 is one very extreme end of the spectrum, and is a missed opportunity to talk with people about what’s working, job expectations, development opportunities and more.
Prerequisites for Level 2 Transparency
Level 2 transparency means that organizations get market data or do a limited study on some of their positions. They may share some of their high-level strategy or results with employees, but there is limited sharing about data for their specific job. According to the CBPR, 18 percent of organizations were at level 2 transparency in 2016 and 16 percent are targeting level 2 transparency for 2017.
In order to share information at level 2, the organization needs the following:
- Market data for some or all jobs.
- A basic compensation strategy that, at the very least, helps them select appropriate market data and percentile. For example: we compete with organizations that are about our size, in our geographic area and industry. We’re looking at the 50th percentile of that data.
- A desire to share some information about compensation decisions with employees and managers.
Prerequisites for Level 3 Transparency
Level 3 transparency means that organizations have a compensation plan (philosophy, strategy and ranges). They share at least the employees pay range with them. They may share more than just the pay range, such as the philosophy or strategy. Employees learn where their pay falls relative to the range and also get a sense of movement (in the upwards direction). Seventeen percent of organizations were at level 3 transparency in 2016; 23 percent are targeting level 3 transparency for 2017.
In order to be at level 3 transparency, the organization needs to:
- Have a clear philosophy and strategy for compensation. That covers both the high level intention with regard to compensation as well as a plan to execute against the philosophy.
- Have at least job-based pay ranges, a min-mid-max for each job. They may also have grade-based ranges, where multiple ranges are arranged mathematically and jobs are assigned to grades.
- Have training for managers to help them understand compensation basics as well as how to have effective conversations about pay. While managers may not be the ones sharing compensation information at a level 3 transparency, they will likely have to field questions from employees about pay.
Prerequisites for Level 4 Transparency
Level 4 transparency means that organizations use compensation to reinforce and amplify their culture, aligning their talent strategy to business objectives. The “why” or rationale for pay decisions is discussed more openly at this point. In the CBPR, just 8 percent of organizations were at level 4 transparency in 2016, but 18 percent are targeting level 4 transparency for 2017.
To accomplish level 4 transparency successfully, organizations likely:
- Have a clear compensation plan including philosophy, strategy, ranges, policies and processes in place. The strategy is probably slightly more complex, in that it’s not a one-size-fits-all strategy applied to the whole organization. To succeed in today’s economy, organizations often have to make tough choices about their priorities; the compensation strategy drives those choices.
- Provide more in-depth training for managers to have difficult conversations about pay.
- Have talking points for managers for both key compensation decisions (Why do we use a different market for that function? Why do we target higher for those jobs?) and specific compensation conversations (Why are you freezing my pay? Why aren’t I getting a larger increase? Why won’t you match pay for this report I found online?).
- Are able to connect the dots between cultural values and compensation decisions. They can articulate the connection, and they have consistency between values and choices. For example, if they celebrate that they’re a fast-paced organization, they examine pay frequently. If they have an open-door policy, they are also transparent about pay decisions. If they believe their employees are their most valuable asset, they pay employees fairly.
- Have a commitment from executives and a dedication to transparency of decision-making.
Ultimately, to accomplish level 4 transparency, organizations need to have their ducks in a row. The more transparent they are, the more they need to be able to rely on sound decision-making and consistent choices. One note on consistency: the implication is not that all employees be paid the same, but that all employees have the same rules apply to them.
Prerequisites for Level 5 transparency
Level 5 transparency is the other extreme on the spectrum. At this point, both pay decisions and pay itself are transparent. Some call this radical transparency, while for others, it’s just a natural extension of their organizational culture. Some level 5 organizations publish pay internally, some externally. According to the CBPR, 6 percent of organizations were at a level 5 transparency in 2016 and 8 percent aim to be in 2017. This level also accounts for public jobs where pay is necessarily transparent.
To be at level 5 transparency, organizations would need all of the above plus the desire to have everything visible. Level 5 transparency, when chosen, is a statement. That said, when organizations choose level 5 transparency, they still have watch for the common pay challenges: compression, equity, range outliers. Transparency itself is not a panacea for pay issues.
One last thought on the prerequisites for pay transparency: take them with a grain of salt. There is more than one path to transparency. The main thing I’d hope to convey about higher levels of pay transparency is the need for making clear choices, having strong intentions about pay strategy, being consistent across the organization, and training managers to understand and communicate the rationale for pay and pay decisions.
Tell Us What You Think
Where does your org fall on the pay transparency spectrum — and why? We want to hear from you. Tell us your thoughts in the comments.
Image: Sime Basioli
We are between the how and where thanks to Payscale. Sometimes its the small baby steps that will help propel you into the transparency part.
Most companies I work with are at Level 3. It really depends on the type of organization and the culture.
I would say that we give transparency to each individual in their perspective job, but not necessarily as a whole company. I would like to see the top down embrace transparency thinking toward front line employees to start. I believe that would assist in job expansion, development and succession planning.
We are on Step 2. Pay transparency requires a lot of intentionality on behalf of the company and a high level of maturity on behalf of the team.
I’d say we’re a 3. We look at the market and have formal pay ranges, but don’t do a very good job of communicating they “Why” (level 4) to Managers and employees. Would love to get to 4 though!
I would have to say between a 2 and 3. I believe we have a strategy and philosophy but it’s not documented and shared.
We are currently working on Level 2, coming from a culture (years ago) of “don’t ask, don’t tell” when it came to pay. Our goal is to get up to Level 4 and better explain where the employee is and where we would like them to be. However, it’s a SLOW process to change pay culture. Right now, one of my struggles is having a small number of employees inflate their pay when they discuss it with their coworkers, leading to a PERCEIVED disparity in pay which is almost as bad as an actual disparity. The only way I can… Read more »
I think the key is to take a look at your current culture and go from there.