Traditionally, companies have been very secretive and closed about what they pay their employees. In fact, many companies have specifically told their employees not to share how much they earn with their coworkers, although this practice is now illegal due to the National Labor Relations Act (NLRA). However, studies now show that there is a better way, for both employees and employers: pay transparency.

The purpose of pay transparency

The primary purpose of pay transparency is to communicate enough to get everyone on the same page as far as pay and pay philosophy. It’s not just a matter of knowing what everyone makes; it also involves being open about underlying formulas and philosophies of how compensation is determined, and what a company believes as far as what should be recognized and rewarded. When employers are open and truthful about how pay is calculated and what the company values and rewards, it requires them to consistently hold to what they say.  They are held accountable to the system, and therefore can not make emotionally-based or circumstantial decisions. Their actions must be defensible in order to gain and maintain employee trust.

The benefits

Of course, not everyone is pro-transparency; company culture, region, and especially employee demographics play a big part in differences of opinion. Baby boomers tend to be much more private and against pay transparency, Gen. X falls somewhere in the middle, and Gen. Y and Millennials tend to be much more public and pro-transparency. Millennials are used to having all information easily and quickly accessible because of the internet and advances in technology, and this largely contributes to their desire for a more open system. While there are a range of opinions, Millennials now make up the greatest part of our workforce, meaning changes in the workplace tend to cater to them.

Many organizations are becoming more transparent because of the resulting benefits to both employers and employees. Here are some of the positive results companies see when they create an open environment:

• Increased trust between the organization/leadership and employees.
• Increased employee engagement; when employees feel there are no secrets at work, they’re better able to focus on productivity, leading to greater performance and better business outcomes. When pay is a secret, employees often overestimate what their coworkers are making, often leading to decreased job satisfaction.
• Higher job satisfaction and less intent to leave the company.
• Increased employee empowerment due to open communication about their     performance in relation to their pay range (they understand the importance of maintaining high performance and how they need to improve). In a survey of over 70,000 U.S. employees, PayScale found that how people perceive their pay matters more than what they’re actually paid.
• Improved job matching and shorter periods of unemployment. Increased access to information helps people find suitable jobs more quickly.

When a company is really non-transparent, it can give the impression that there is something to hide (even if there isn’t). Communicating more openly with employees and helping them understand why the organization does what it does helps them form a stronger relationship of understanding and trust. For these reasons, transparency is growing in popularity.

Thousands of employees anonymously share their salary data on Glassdoor and similar services. Buffer has the formula they use to calculate employee salaries open to the public on their website. At PayScale, employees “don’t know each other’s specific pay, but we do disclose the median salary for each type of job. So employees can see whether they’re above or below it and have a reasonable discussion about it with their managers,” said Dave Smith, chief product officer. SumAll and Whole Foods have also embraced complete transparency. There are a variety of ways companies become more transparent, and there is not one right way for everyone.

Spectrum of transparency

Not every company should post their salary formula on their website like Buffer; transparency is a spectrum and there are multiple levels companies can choose to be at. BambooHR‘s spectrum (below) describes levels of transparency from 1 (no transparency) to 7 (complete transparency).

Usually, somewhere in the middle works best, but each organization needs to evaluate and determine what would work best for them and their employees.

A surging tide

Your company’s level of transparency is a meaningful part of its culture and employer brand. Therefore, you need to understand exactly what your pay philosophy is and determine how transparent you want to be in your organization.

Glassdoor spokesman Scott Dobroski says there’s a “surging tide calling for employers to come clean on who’s making what.” He predicted, “Employers who embrace salary transparency will have the recruiting edge. This is a wake up call for employers to be buttoned up, reevaluate their pay practices, and understand that they should be practicing equal pay for equal work.”

In the end, it’s all about determining what will work best for your company. Take into account your employee demographic, culture, and leadership, and figure out what degree of transparency will work best for you.