The Implications of Wage Transparency

With Connecticut and Rhode Island joining the fray as of summer 2021, 7 states in the US now require...

With Connecticut and Rhode Island joining the fray as of summer 2021, 7 states in the US now require wage range disclosures. These disclosure laws require employers to inform applicants on the wage range prior to or at the time of making a compensation offer and are part of the effort towards improving pay transparency and pay equity. The reasoning behind these laws is that minorities and women are disadvantaged by a lack of transparency in the pay arena due to the fact that their history of being underpaid results in lower pay expectations. By requiring that employers disclose the pay range for the position before making an offer, these states are increasing the level of information that applicants have and decreasing the opportunity for employers to get away with “low-balling” qualified applicants. Posting salary ranges and increasing wage transparency at your organization will decrease the inequity that often exists in starting salary offers and increase employee trust in DE&I initiatives. While some employers that have been embracing transparency for years will be relatively unaffected by these new laws, for many organizations they bring new considerations and consequences.

Remote Work & Increased Recruiting Footprint

               One aspect that brings an added layer of difficulty to these rules is the increasing presence of remote work. If your company is based in a state like Ohio that does not require wage range disclosure but are making an offer to an employee who will work remotely out of California where disclosure is required, then technically you must disclose the wage range to this applicant. One response to this issue that is especially viable for larger employers with a presence in many states is to implement wage range disclosure as an organization-wide practice. However, other organizations have looked for ways to work around these requirements, such as excluding residents from states that require range disclosures from applying. Others have posted excessively wide ranges that provide little information regarding what an employee might actually expect to be paid. While these practices may be technically legal at this time, employers should consider the message this sends to applicants and current employees at their organization. The push for pay equity in the US is stronger than ever, employees have more power and information at their disposal, and employees are leaving their current organizations in droves for better opportunities. Moving towards best practices in compensation, which includes greater pay transparency, is a way for organizations to signal to current and potential employees that they value their people.

Wage Compression

               Dealing with wage compression is another complicating factor for employers when disclosing wages. Wage compression is when newly hired employees earn close to what current employees make. In posting for many lower paying roles, the competitiveness or the labor market requires that new employees be brought in at a rate near or above what current employees are being paid. This brings an obvious concern when hoping to retain current employees while hiring. Best practices would dictate that employers in these situations examine bumping the salary of current employees to reflect how the market has changed the value of these roles. However, it’s important to ensure that a structured method is employed to implement these pay bumps, as across the board changes without regard to the relevant job-related variables can open up pay equity concerns. While employers may cite budget concerns in hesitating to increase pay for both current and new employees at the same time, it’s important to consider the implications of bringing in new employees at the rate that current employees are being paid. Employee turnover is the one of the most significant expenses that organizations face, and if employees see that they will be valued more as a new hire than as an experienced worker, they are unlikely to hesitate when opportunities arise.

Location-Based Differences

               A third situation organizations must navigate when posting and/or disclosing wages is that these ranges frequently depend upon the cost of living and/or cost of labor of the location the employee will be working in. Geographic differences in compensation are generally considered legally defensible so long as they are applied consistently. But what should an organization post as the range for a role that could be remote or based out of multiple different locations? Generally speaking, an organization can make clear in the posting that the wage ranges differ based upon the location in which the employee will be working. Or, especially in the cases of fully remote roles, employers can opt for a simpler approach: Universalizing the compensation regardless of the location of the specific employee that earns an offer, by using either the United States average or the home office as the geographical basis. If an organization isn’t requiring that employees live in specific areas, then it is 100% defensible to pay each employee on the same geographical basis regardless of where they choose to live.

Benefits for Organizations

               While there are certainly additional considerations for employers navigating the new wage disclosure laws, there are also many potential benefits for organizations who move towards pay transparency. For employers with strong compensation philosophies and a culture of transparency, adapting to these changes will be easier. However, as of 2021 only 12% of organizations were in the habit of disclosing wage ranges prior to making an offer. While the remaining 88% of companies may be hesitant to adopt such a transparent policy, it is important to consider the current employment climate. Employees who switched jobs in 2021 earned nearly double the pay bump that incumbents received, and approximately 2/3 of employees were considering leaving their job last year. In addition, pay transparency helps the right people apply. Sometimes there is a mismatch in expectations when an applicant doesn’t know what sort of pay to expect, so they end up backing out late in the process. Pay transparency helps save time for both employers and applicants. Additionally, compensation is the most important part of a job ad according to SHRM, and listing benefits and perks directly leads to more applications. In short, providing more information about the compensation for a role from the get-go will tend to result in a larger pool of candidates who will be interested in accepting if and when an offer arrives. Increasing pay transparency is certainly a pro-employee policy, but it may be pro-employer in the long run as well.

Nick Setser, HR Consultant – Compensation Services
Nick Setser, HR Consultant – Compensation Services
Nick Setser, M.A., Industrial & Organizational Psychology, is a Compensation Services Consultant at Berkshire Associates Inc. Nick regularly advises clients on compensation best practices, offering practical guidance on how to navigate OFCCP risk, market analysis, and pay equity.

Contact Us

Get in Touch With a Berkshire Expert