For the culmination of a year-long leadership training course at work, I had to give a presentation in front of some Senior Management types. Everyone was instructed to pitch something in 15 minutes or less that would make the company better/more valuable/etc. I chose Pay Transparency. The presentation went well. And because I hate to simply let the work I put into it curl up and die of neglect in a corner, I’m posting it here, for anyone else to use as a template, or for ideas, or whatever. Parts of it are lifted wholesale from things I read, and everything else is highly borrowed, so please don’t attribute any of this to me, I’ve simply collated and compressed what other people said much better than I could. Claiming any of this as original to me would be plagiarism. :) I’ve removed my company’s name, and some changes were made on the fly as I spoke, but this is basically it. I hope someone finds it useful.
We are [corporation]. And these are our values
They’re good values, they guide us well. By following these values we create a culture of trust and openness, which leads directly to exceptional performance.
But how do we apply this philosophy when it comes to paying our people? Without even thinking about it, we’ve just gone along with the received wisdom that compensation is one of those things that’s best kept secret. And that’s unfortunate, we are ignoring low-hanging fruit, and going against the grain of the values we live by.
In keeping with the spirit of what I’m proposing, I’ll skip the build-up and get straight to the point – Pay Transparency is the future of top-tier companies, and [we] can get the jump on our peers.
The term is fairly self-explanatory, but to dispel any confusion, yes, Pay Transparency is a policy of making everyone’s pay open information to everyone in the company. This has three immediate positive impacts for [us].
- Employee Performance
In 2014 Bamberger of Tel Aviv U and Belagolovsky of Cornel published a study on Pay Secrecy.
It found that secret payrolls weaken employee perception that a performance increase will be accompanied by a pay increase. Study participants unaware of their peers’ earnings tend to underestimate how much successful performers earn, while overestimating how much poor performers earn.
“When the economic gap is imagined to be so minimal between good and bad performers, the employee thinks that working harder just isn’t worth the effort,” – Belogolovsky
Pay secrecy degrades the perceived link between performance and reward.
In a separate 2013 Study Bamberger and Belogolovsky found that the demotivating effect was especially strong among talented workers. High-performing workers are more sensitive than others when they perceive no link between performance and pay. Pay secrecy led to decreased performance and increased turnover. When there is some pay transparency, top workers are the most motivated to achieve.
Of course those who were paid below the median were generally dissatisfied. In theory those who are paid less are poorer performers, and managers want strong performers. Pay transparency helps both parties in this case, as poor performers are encouraged to look for work that better suits their natural talents and abilities and thus brings them better pay, while managers can fill these now-vacant positions with candidates better suited for the job.
Interestingly, in practice Pay Transparency can have positive effects even on poorer performers. Whole Foods has been Pay Transparent since 1986, and CEO John Mackey states “I’m challenged on salaries all the time ‘How come you are paying this regional president this much, and I’m only making this much?’ I have to say, ‘because that person is more valuable. If you accomplish what this person has accomplished, I’ll pay you that, too.’” When employees see what others are making and can see clearly how to get to that position themselves, they are much more motivated to apply themselves.
Understand how to get from Point A in a salary range to Point B is crucial, and this leads me to the second positive impact of implementing Pay Transparency
- Company Structure
It forces good practices in an area that is otherwise often overlooked. Let’s take SumAll as an example, a start-up of about 30 employees that implemented Pay Transparency from Day One. Its leaders consider these to be crucial to their pay system:
- The company’s employees are each assigned to one of nine fixed salaries
- Anyone hired into the company must be comfortable with the system
- Workers who feel they’re unfairly paid can easily bring that up
What can we tell just from looking at this?
- There is a clear, unambiguous pay structure
- Only those who are a good cultural fit will be hired
- Employees have clear, formal channels for raising concerns about pay fairness.
These are all important, but the last point in particular tends to be conspicuously missing from most companies’ playbooks. There are very few formal pay policies, leaving employees who feel they are not being fairly compensated in the dark as to what they can do about it. This results in office gossip or silent brooding, neither of which are beneficial, and neither of which can be directly addressed by a manager. An employee who has a way to address her pay concerns may not get a raise, but she will at least get an honest explanation from a knowledgeable source. SumAll has built a culture and policies that are both transparent and defensible so that management is held to a standard of fairness, employees have information in context, and there is a path for remediation of issues. This is a structural improvement that all companies would benefit to implement regardless of their stance on Pay Transparency, but it is very easy to ignore in cultures of Pay Secrecy.
Pay Transparency forces management to confront such issues in a forthright manner. What matters to employees isn’t that their pay be equal but that the system for awarding it seems fair. As such, it’s important for managers to be transparent about the methodology used to arrive at compensation decisions, and come prepared for tough conversations. They must clearly understand the company’s compensation policy before trying to explain it to employees.
Companies need to arm themselves with fresh, credible data, and share how they make decisions on all jobs.
In addition, such structural changes protect companies from the games that bad bosses can play. Capriciousness and incompetence in pay practices cannot survive openness. Tim Low, VP of PayScale, which provides compensation data to companies, says. “If you are going to be transparent, data is your friend. Employees will feel reassured if they have access to the relevant market information showing how their boss arrived at each salary.” When compensation is open and well supported with credible reasoning it is very difficult for an employee to claim systemic bias against them.
Implementing such changes also allows [us] to harness Market Forces rather than fighting against them.
- Market Forces
Basic econ tells us that if a certain set of skills and experience has a market-based wage (which is assumed to be the case), then any variations on that wage will be slight and shouldn’t provide a large competitive advantage to a company. But this is only the case in efficiently operating markets. As we all know ideal market models assume perfect information, so one of the best ways to gum up markets is to hide information. This is the key insight that drives Pay Secrecy – if an employee is unaware of the true value of their labor then they may offer it at a lower-than-market rate, and the employer can save costs on the difference.
However this puts employers at odds with the market, they will always be fighting against the trend for wages to return to their fair market rate. This struggle is costly in several ways.
On the micro level, it increases turnover rate, especially among the highest-value employees. If that wasn’t bad enough, the poor performers stay, as they are already being paid their fair rate.
It also incentivizes things we don’t actually want. The employees who end up getting paid the most are the ones who have the best salary-negotiation skills. While there are positions where such skills are what we want to pay for, there are many positions where what we want from an employee has nothing to do with the ability to negotiations wages. We want to reward extraordinary talent in skills that pertain to the job. Why then are we paying for talent in a skill that has nothing to do with the job? We are creating perverse incentives.
And on the macro level, we exist in an environment with many competing employers. Even if we are successful at hiring people at below the market rate, and thus getting the most value for our dollar, over time people tend to notice and we develop a reputation for underpaying employees. What was a boon at first becomes a drag on the company as high-talent employees avoid us, not even bothering to apply, due to a bad reputation.
Pay Transparency isn’t an instant fix, but it does bring us into alignment with market forces, rather than fighting against them. We can explain our pay structure to potential employees, show them where and why we differ from local averages, and assure them they will be paid fairly. Where we need top talent, we can attract it.
We also gain a competitive advantage over our peers that don’t practice pay transparency. They are currently over-paying some employees who have strong negotiation skills, but average job-related skills. Likewise, they are underpaying employees who have poor negotiation skills, but strong job-related skills. Employees with strong job-skills but poor negotiation skills will be attracted to our Transparent Pay system, as they will no longer be penalized for their lack of negotiating skill and will be able to take a wage that more accurately reflects the value they provide to their employer. We will slowly gather high-skilled non-negotiators, while leaving our competitors with strong-negotiators that are overpaid for what they can produce.
There are two schools of thought as to how to implement Pay Transparency. The method I prefer is Full Transparency, in which a file is made available to every employee which lists every Employee’s name, title, and their previous year’s salary & bonus. These are grouped by location and department, to allow for most applicable comparisons. I prefer this method because it leaves no room for suspicion or doubt. It is the method used by every company I talk about in this presentation.
However there is a second method which has many of the benefits I’ve covered without quite as radical a cultural shift. I call it Anonymized Transparency due to its central feature of keeping people’s names out of sight. In such a system the salary of every employee in the same position is averaged, and only that number is made publicly available. Using this resource employees can see about how much they would make in other positions, and can compare themselves to the average of their peers.
This does have two downsides. The first is that there is no way for an employee to verify the accuracy of what is reported, they have to trust the numbers as given. The second is that they cannot look as specific peers and see that “Jill works like a madwoman! But she’s getting paid a fair chunk for it… I could get more if I worked like her.”
However both systems remove the information vacuum that exists around pay. They provide a rich source of information to employees which can be used by them in a feedback cycle with their supervisors to refine expectations and career goals. Both have the advantage of making the employees paid more than average feel appreciated, and causing the employees paid below average to question why that is, which allows us to explain how we view compensation, and more importantly, what those workers need to do to earn more
The costs of implementing such a system are difficult to quantify. The mechanics of it are simple and basically cost-less, but just throwing the numbers out there is a terrible way to implement this. Communication is vital. If they can’t get a clear answer as to why they make less than someone else, employees might begin to resent each other and the company. We must take time to really think about how we’re rewarding employees, what we’re rewarding them for, and make sure the pay policies and practices we have in place are supporting our strategy and compensation philosophy. Managers must be prepared with data. Employees feel reassured if they have access to the relevant market information showing how their boss arrived at each salary.
This requires a fair bit of preparation and some training on the management side. Let us assume an average of two (2) full days of labor per manager to develop such preparation, as well as a full-day training session each. Training is aprox $100/person/day, for a direct cost of $AAAAA. The greater cost is the XX man-days of diverted productivity. If we assume that every manager would also have to spend eight hours addressing employee concerns after the roll out, that increases the number to YY man-days of diverted productivity. At [company] we don’t have a standard cost we assume for such things, as they fall within the scope of one’s job as a manager, so I couldn’t put a precise cost value on this. However the additional workload, while not extreme, would not be trivial.
This leads us to the basic question underlying all business:
Is It Worth It?
This depends in part on our business model.
For a work-a-day business just looking to chug along through another quarter, maybe not.
Good-Enough pay policies, resulting in Good-Enough employees and a Good-Enough product can be… Good Enough.
But top tier companies serving top tier customers require top tier employees, and the next-generation policies that attract, motivate, and empower such employees.
Whole Foods is one of the companies that focuses on higher-value products to a more affluent customer base. Their share price has increased 250% over the last 10 years, with over $12.9B in sales in 2013. They’ve have been on Forbes 100 Best Companies to Work For for 17 consecutive years – since the list’s inception. Whole Foods has been Pay Transparent since 1986. They have over 80,000 employees, and in the grocery industry employee turn-over averages 100%. But in 2013 Whole Foods enjoyed their 4th consecutive year with under 15% turnover.
I quoted their CEO Mackey earlier. What does he have to say about the role Pay Transparency plays in their success?
Mackey believes that a culture of shared information helps create a sense of a “shared fate” among employees. “If you’re trying to create a high-trust organization, an organization where people are all-for-one and one-for-all, you can’t have secrets,” he says. Pay Transparency has resulted in a highly motivated workforce with a deep sense of community who value productivity. And that is the greatest strength of Pay Transparency.
Pay Secrecy pits employees against employers where wages are concerned. As much as we’re all on the same team in every other aspect, when it comes down to brass tacks – who gets what money – management and labor are on opposite sides, wrestling for advantage. This undermines all the talk of trust and team-work we focus on at all other times. It’s accepted because it’s the way things have always been, but it is adversarial at its heart.
Pay Transparency reverses this. Management and Labor finally can work together in an open way. When the employee feels like management is an ally that works with them rather than an opposing force, they are freed up to put all of THEIR focus on the customers we serve – our residents. Mutual collaboration and respect leads to employees who view their own future as intertwined with the company’s. They work with their employer with the same dedication they would work for themselves.
In the past perhaps we didn’t need this level of passion from our employees. Maybe back then our business model was served best by sticking with Good Enough. But as we move into the highly competitive and more rewarding top-level markets we face far more demanding customers, and ones with a lot of options before them. If we want to keep the best customers we need the best teams in the market. We won’t get those by living in the past. We have to push forward on the leading edge of business. Pay Transparency is that edge.