The Pay Transparency Conundrum: Does bridging the pay disparity imply lower wages for all?

“Equity is something that happens when everything is laid bare.”

A company is more equitable, yet the total wage bill is lower. Salary discrepancies between employees and their supervisors account for the great bulk of pay disparity inside businesses. The media, lawmakers, and policymakers frequently discuss salary discrepancies. However, it’s unclear if employees are aware of wage disparities inside their very own organizations.

The public debate around pay transparency is centred on the direct effect of how workers seek to resolve newly disclosed wage inequalities through renegotiations. However, less attention has been paid to the topic of how the firm’s wage-setting and recruiting procedures respond in equilibrium.

The majority of pay transparency efforts are based on the premise that openness increases workers’ negotiating power. Compensation transparency laws aim to enhance workers’ awareness of their peers’ pay in order to guarantee that “victims of pay discrimination can effectively challenge uneven pay.” However, using salary disclosure to correct uneven compensation for equal labour is just one side of the coin. When both the company and the employees expect compensation transparency, the best wage-setting, negotiation, and recruiting procedures to adjust accordingly.

Then what could be the reason behind the legislation pushing salaries down? Managers who publish wages can honestly tell staff requesting raises, “If I give you a higher pay, I would have to offer everyone else a raise, and I really can’t afford that.” This allows businesses to establish lower total pay and stand fast on first offers when employees are hired, giving companies an advantage in salary negotiations.

Though pay transparency has been in the political and public spotlight due to its claimed advantages to employees, its impact on salaries and hiring is unclear. Pay transparency decreases employees’ negotiating power in situations when workers have some individual bargaining power. The rationale behind this conclusion is that the firms refuse to pay high wages to employees with strong options in order to avoid costly renegotiations with others. When workers bargain collectively, individual decisions play a lesser role in wage negotiations, which in turn reduces the impact of transparency.

If this was not convincing enough, here are some facts

• Companies such as Whole Foods, Starbucks, and the social networking tool Buffer have touted their pay transparency policy as a way to ensure fairness. However, pay transparency does not always result in higher compensation. This notion is also reiterated in Harvard Business School professor Zoe Cullen’s recent working paper titled, Equilibrium Effects of Pay Transparency.
• More than 20 states in the United States have approved laws requiring companies to publicise employee pay in order to give workers more bargaining power. However, making the information public has resulted in 2 to 3 per cent less money in workers’ pockets, at least in the private sector in the United States. These policies, rather than empowering workers, encourage businesses to set lower pay, stick to original offers, and avoid costly renegotiations.
• Since 2004, laws and regulations that safeguard workers’ freedom to discuss their pay with coworkers without fear of consequences have grown in favour. The United States enacted two congressional measures in 2016, bringing the country online with several European countries that guarantee similar rights.
• Between 2010 and 2017, the number of firms with wage non-disclosure practises decreased by nearly half in states that implemented such rules. Anecdotally, employees began exchanging wages using Google spreadsheets.
• Wages fell by 2.2 per cent a year after these rules were implemented, and they fell by 2.6 per cent three years later.

How do unions come into play?

“If all else is equal, you are better off finding out as much information as possible and asking for a raise.”

Workers’ negotiating power is non-existent when wages are posted or established by a union. In a unionized labour market, transparency has no impact on the equilibrium outcome. Unions postpone making contract proposals to employers as long as possible so that they might benefit from the knowledge gained from other unions’ discussions (supply effect).

Thus, it has been noticed that union employees’ earnings have stayed higher. Firms whose employees aren’t typically union members saw a 3.2 per cent drop in wages three years after the transparency laws went into effect, while companies with more union workers saw a 1.5 per cent drop in wages over the same period — despite the fact that employment numbers remained unchanged in both cases. When a corporation has a union, it first negotiates with union officials to develop a set salary scale, which gives workers less individual negotiating leverage.

Employees should keep in mind that payments are not handled the same way in every company or for every worker. For example, the principles of openness do not always apply to big superstar businesses ready to pay greater compensation than anybody else. They also do not apply to employees who have outstanding skills. The superstar worker will not have their negotiating power diminished if there is no equal or comparator group.

Worse still, what about the initial objective of pay transparency and making firms more equal, as well as providing employees greater bargaining leverage. Transparency delivers pay equity at the price of certain individuals’ high incomes — but that sacrifice may be worthwhile.

By Amruta Das

Edited by Rishabh Falor

References:

https://www.hbs.edu/ris/Publication%20Files/w28903_3cf6cf0c-f05e-4665-a638-61986faa4c50.pdf

https://hbswk.hbs.edu/item/what-if-closing-the-wage-gap-means-everyone-earns-less