A Surprisingly Transparent Way to Save Money
Figuring out how much to pay your employees can be a tough decision, and it’s likely much more local, and more personal for you than it is at larger companies. Everybody, employer and employee alike, needs information to make good financial decisions (and to feel confident they’re making good decisions). Yet our sense that discussing money is vulgar or impolite—particularly how much we make—has turned what could be money-saving conversations, like those around salary transparency, into awkward exchanges, or even confrontations.
While the thought of being more financially transparent with your employees might make you queasy, ensuring everyone has just the right amount of information can actually save you time and money. Salary transparency, a policy by which employees know not only their own compensation but also that of their coworkers and superiors, is an increasingly popular way of providing workers and businesses with more financial information. This kind of transparency may seem counterintuitive, but evidence of its benefits is piling up.
What’s the appeal of salary transparency?
Transparency can have positive benefits as well as eliminate potential existing problems. Perhaps the greatest argument for transparency is that it increases the likelihood of happy and loyal employees. It turns out that transparency can be more important than the actual compensation. PayScale’s 2015 Compensation Best Practices Report found that a “top predictor of employee satisfaction and their intent to leave was a company’s ability to communicate clearly about compensation” (emphasis added). In fact, even when employees received lower-than-industry-standard pay but their employers clearly communicated why, 82 percent of employees were satisfied with their jobs.
Transparency eliminates the possibility of employees overestimating their coworkers’ pay or their own market value. According to a 2006 study done at Yale, we tend to assume that our peers and subordinates are making more than they really are. However you feel about transparency, there’s a good chance that keeping employees in the dark about how you decide to compensate them means, at best, they’re wondering about whether or not their pay is fair in relation to both yours and their co-workers, and, at worst, you’re creating resentment. Workers who are paid at market value but don’t know it are also likelier to be looking for a better deal at another company. PayScale’s report indicated a search for increased pay was the most common reason employees quit in 2014.
A policy of transparency increases your employees’ trust, which can make them more invested in your company. And an employee who is psychologically invested in the business is likelier to stay, “sav[ing] you the costs of high turnover, rehiring, training, and acclimation,” as an NYC boutique baker noted in an American Express OpenForum article. Glassdoor’s April 2015 report on salary transparency, “Is Salary Transparency More Than a Trend?” likewise suggests that companies that have moved to a policy of salary transparency have “experienced large and long-lasting boosts in productivity.”
Even if you’re not sold on transparency, creating a compensation strategy will make determining pay more formulaic and thus faster and simpler. Small businesses “are more likely to use individual salary ranges for each position”—meaning there’s a good chance that the busiest folks are also the ones using the most time-consuming method of determining their employees’ compensation. Pay determined by formula could be a huge plus. And when it comes to those awkward talks with your employees about their pay, a formula will make that easier, too.
Does salary transparency sound like something that might work for you? As a Business Insider article points out, moving to an open compensation policy isn’t necessarily easy, even if it makes good business sense. When salary information becomes public, “there’s going to be a flurry of questions and a lot of necessary explanation.”
Here are the three essential questions to ask yourself first, courtesy of Entrepreneur:
- Does salary transparency fit with the workplace culture?
- What will you need to do to make salaries transparent?
- Are you (and your managers, if you have them) prepared for the hard conversations that may result?
Salary transparency isn’t a one-size-fits-all proposition. Before you start talking about compensation, decide what level of transparency you want and what level of transparency you’re ready for.
There are two basic approaches to transparency, process transparency and full-salary transparency, sometimes also referred to as radical salary transparency. According to an article on the Society for Human Resource Management’s site, process transparency means employees “know how salaries are derived, what the ranges are for each position and what it takes to earn more.” In contrast, full-salary transparency allows employees, and sometimes the public, to know everyone’s exact salaries.
Although process transparency can mean that less information public, it seems to be more effective in creating an atmosphere of trust and productivity for at least two reasons. First, giving employees a range for their position offers workers a sense of their “career earning potential”—in other words, a future with your company. What seems to matter more, though, is that employees understand how their own salaries are calculated. If an employee understands how his or her own salary was determined and believes it to be fair, that employee is less likely to be wondering about their coworkers’ pay, trusting that compensation is determined equitably for everyone.
So, if transparency sounds right for you, how can you implement it, as smoothly as possible, in your business?
Tactics for Transparency
Start by creating a compensation strategy
Almost 20 percent of small businesses have no compensation strategy and it is, needless to say, hard to communicate clearly or otherwise about something that doesn’t exist. So, if you don’t already have a compensation strategy, now might be the time to create one, and consider making transparency part of it.
Determine what your variables are in considering compensation: cost of living; employee demographic; type of work. Part of the strategy should be informing yourself as much as possible about the industry standard for the job, regardless of how much you share with your employees—so do a job search as though you were looking for a job yourself using job boards like AllRetailJobs.com, jobcrank.com, and craigslist, or include “small business” as a keyword in searches on CareerBuilder, Monster, and Indeed. Pay attention to job descriptions, pay range, and types of compensation other than salary. This information will help you determine what your industry market rate or pay range is. Experts recommend creating a job description—this can be especially useful for small businesses, who may have jobs that combine positions and don’t exactly match similar job titles in larger companies. An accurate job description can thus help you decide how to combine positions and adjust the salary accordingly.
Know where your employees are coming from
You won’t accrue many benefits from salary transparency if you’re not providing the information your employees want, information that will help them make their own good financial decisions. The quickest way to know the answer to that question is, of course, to ask your employees. In terms of pay, the first concern is certainty: everyone wants to feel financially stable, and not worry that an unexpected medical bill or car repair will mean they can’t make rent.
Remember there are other kinds of compensation that matter to prospective employees. Many workers are willing to take a job that pays less if it’s more emotionally or psychologically satisfying. This is where talking with your employees can really pay off; it may be that, while you can’t offer more pay, you can offer them something else—team incentives, flexibility, or learning and development opportunities—that will matter just as much, or more.
Communicate with your employees about their compensation
Once you know what to communicate to your employees, decide how you’ll communicate it. A total compensation statement will lay out all the parts of the package for your employees, including aspects they may not always be taking into account, like healthcare or other benefits besides the net pay. An HR portal designed for small businesses, like ZenPayroll, Namely, or BambooHR, can help make benefits costs more transparent and give employees 24/7 access to their records, taking some of the burden of transparency off of you. Depending on the product, payroll software can track hours, build schedules, optimize shifts, calculate and file payroll taxes, create reports or provide analytics, manage employee benefits, and even help with recruitment!
Whichever path you choose, if you’re changing the level of salary transparency, you’ll need to have some face-to-face conversations about how pay is determined. Keep in mind what information your employees want: they want to know that pay isn’t arbitrary, that’s its equitably determined, and that there’s the possibility for growth. Having a carefully considered response to those concerns will make most hard conversations about money a lot easier.
A Peek into the Future
Given all of the above, it’s probably good news that transparent salary policies look like the future of compensation. Glassdoor’s report quotes one academic who argued in 2014 that “pay confidentiality will be impossible to maintain.” Already, 38 percent of employers in PayScale’s survey “reported offering Total Compensation Statements [that include benefits] to their employees,” and while larger companies are leading the way, 34 percent of those offering such statements are small businesses. Meanwhile, thirty-five percent of small companies surveyed are working on a transparent policy.
And while the Securities and Exchange Commission’s new rule requiring some companies to disclose the ratio of CEO compensation to the median employee compensation won’t go into effect until 2017, and won’t apply to small business owners, it will change the conversation, including what prospective employees are likely to expect.
Be sure to check out the highlights of PayScale’s Compensation Best Practices report – they’re fascinating and very user-friendly, broken down by industry, geographical region and more. They also have a short video on “The Great Salary Transparency Debate.”