The Potential Consequences of Pay Transparency Laws

In 2019, when Colorado passed the nation’s first laws requiring that job postings share salary information. The world of work changed forever. 

“Pay transparency laws are changing the information balance, shifting from a spectrum where the employer held all the information to one where the employee has more information, more light,” says Helena Almeida, Vice President, Managing Counsel in the Human Capital Managing Group at ADP (No. 14 on Fair360, formerly DiversityInc’s 2022 Top 50 Companies for Diversity list).

Proponents say that pay transparency laws can close the gender and racial pay gap, attract workers and boost employee engagement and productivity. While there are benefits to pay transparency laws, there are potential consequences companies need to consider.

Legal Challenges 

When Colorado’s law took effect in 2021, some employers tried to evade the law by saying Coloradans need not apply for specific positions. 

“What’s important to know and that wasn’t mentioned enough, is that it was a very small set of employers that were saying that and they were quickly brought into compliance with the law,” says Andrea Johnson, Director of State Policy at the National Women’s Law Center. “We’re in a bit of a culture change around transparency. We’re seeing some knee-jerk reactions from employers who have always felt that it’s to their advantage to be as secretive as possible.”

At the beginning of 2023, new pay transparency laws were enacted in California, Washington and Rhode Island. The laws include bans on employers asking about salary history to mandates that employers provide pay ranges during interviews upon request. 

New York City’s law, which rolled out in 2022, requires employers to list the minimum and maximum salary on all job postings, promotions and transfer opportunities. Workers have the right to sue employers who may face civil penalties of up to $250,000 for violations.

“There are justifiable reasons why pay might be different among employees, experience, performance, education, a seniority system and others,” says Dr. Sean Edmund Rogers, Vice President and Chief Diversity Officer at the University of Rhode Island and member of the PhD Project. “If similar employees are making significantly different salaries, managers will need to be crystal clear about why that’s the case. Or else, they’re opening their firms up to legal challenges.”

In response to the laws, some employers have implemented compensation changes throughout their companies, regardless of location.

“If an employer is based in that jurisdiction, but also other jurisdictions, many will say let’s apply this rule across the board because it’s not a complex regulatory regime,” says Johnson.  “It’s a relatively simple measure with significant gains in attracting talent, avoiding wage gaps and liability.”

Tension in the Workplace

Pay transparency laws allow workers to determine how their pay compares to colleagues in similar roles. This could lead to resentment if some workers are paid more to do the same job, resulting in low employee morale and high turnover rates.

“This is perhaps one of the biggest issues with the pay transparency developments – how leaders and employers manage employee reactions to their own and others’ pay,” says Rogers. “As workers become more aware of what their coworkers make and their employer’s pay practices, they will understandably want to know why they make what they make relative to others, particularly others with the same job title or that perform similar work.”

According to a Gartner study, only 32% of employees believe they are being paid fairly at work. Of the employees that view their pay as unequal, 13% are less likely to be engaged at work. Companies must be prepared to answer complex questions about pay differences or workers may perceive injustice or inequality.

“We are hearing of employers taking the time to look through their payrolls and the ranges they’ve been offering for different positions and ask – are those ranges associated with the position? Or is it associated more with the person who happens to apply? Is that related to race? Is that related to sex?” asks Johnson. “That deep, thoughtful analysis and having conversations with employees about how they set pay and what the justification is – those conversations are important because transparency makes people feel like they’re being paid fairly.”

Women aren’t feeling as valued as men in the workplace and pay inequality is one of the reasons. In 2020, women were paid 83% of what men earned. The gap widens even further for women of color. All companies in the 2022 Fair360, formerly DiversityInc Top 50 Companies for Diversity list and the Fair360, formerly DiversityInc Hall of Fame have systemic efforts to detect and correct pay inequity. Regression analysis controlling for variables like location and experience and engaging external consultants are some tools Top 50 companies use.

“If you’re asking for a 10% to 15% increase over your prior pay – which is common in a job negotiation – a woman’s gonna have to ask for a lot more than her male counterpart,” says Johnson. “That all plays together and makes negotiations rife with bias. What pay transparency does is help to level the negotiating playing field.”

READ: 8 Salary Negotiation Tactics for Black Women 

Compressed Pay 

One of the unintended consequences of pay transparency laws is pay compression. Pay compression occurs when there’s little difference between employee pay regardless of one’s knowledge, skills, experience or abilities. 

“We’re still learning why this might happen, but one potential explanation is that transparency acts as a force that keeps managers in check and keeps them from doling out unjustifiably different salaries for similar jobs or employees,” says Rogers. 

Some research suggests that laws in places like New York City can result in lower wages for some workers. ADP says employers should evaluate their compensation structure and pay ranges for each position and determine the impact of criteria like education, experience and tenure. 

“This isn’t about sticking a number on a posting and calling it a day,” says Almeida. “It’s about using this as an opportunity to look at what you’re paying for a particular role, what the differences are and what the justification is. That allows you to look at your data and your policies and see if there’s anything about the compensation policy that might be impacting pay.”

Benchmarking data based on roles, industries and location can help a company see how its pay stacks up against its peers. 

“If you can see what other people are paying for similar work, you can determine if your salary is competitive,” says Almeida. “My salary isn’t as high as what so and so is posting for this particular position, in this jurisdiction or this market. But how else can I attract talent?”

READ: Pay Transparency Laws are Crucial for Women of Color: Here’s Why

Compensation Conundrum 

Not all employers can pay top salaries when recruiting candidates. Depending on the state or city, forms of compensation like commissions, stock grants or bonuses may not be included in pay transparency laws. 

Some companies are thinking beyond the pay and focusing on benefits and other perks in their job descriptions. Research from the Society of Human Resources Management (SHRM) found the compensation and benefits employees want and what employers think they want are often misaligned. Employees said they are most interested in generous paid time off, flexible and remote working options and paid family leave. However, benefits aren’t as transparent as salaries.

“It’s important for employers to communicate about all the pieces of a compensation package because that helps them tell their full story of what they’re offering and who they are,” says Johnson. “It also helps workers make sure they’re getting fair pay, fair benefits or other compensation. It’s not just with pay that we hear of discrimination and pay gaps. It’s also sometimes in the benefits that are given. A woman might not get as good a compensation package as a man.”

Benefits and perks aside, Johnson says alternative forms of compensation can’t take the place of an employee’s base pay.

“The main source of income for most people is their job,” she says. “That’s what allows them to do all sorts of things – buy a house and pay for groceries. While employers want to provide the whole compensation package and information about that, I don’t think that lets employers off the hook for making sure that their base salary is strong.”