By Maggie Mancini
One in three Americans now live in a state that requires companies to post pay ranges on job listings. The general idea behind this growing wave of pay transparency is that making pay expectations clear at the start helps combat misperceptions around employee compensation and subsequently boosts retention, as employees are more likely to seek employment elsewhere if they feel they aren’t being paid fairly. But amid this rise in pay transparency legislation across the country, recent research suggests that organizations can do more internally to communicate their compensation strategy.
New data from Payscale finds 68% of employees believe they are underpaid, even when their compensation is at or around market rates. Even with more organizations adopting transparent pay practices, there are plenty of different elements that influence whether employees perceive their pay as fair or not, says Ruth Thomas, chief compensation strategist at Payscale.
“Employee expectations about pay remain elevated, fueled by expectations of pay fairness, anxiety about inflation, and concerns about the cost of living,” Thomas explains. “Even though the report shows that cumulative wage growth has outpaced inflation since 2019, workers don’t necessarily perceive that progress, which is concerning. As a result, you get this perception gap appearing, which suggests there’s something missing that organizations are not quite getting right.”
There are two key things HR leaders need to do to help employees understand their organization’s compensation strategy, Thomas says.
Make sure there are equitable compensation structures in place that are market-aligned and competitive.
Communicate those compensation structures effectively to employees.
“What I’ve observed from interacting with Payscale customers is that they are spending a lot of time on that first part, working on their compensation structures to make sure they’re in the position to comply with pay transparency legislation in the United States,” she says. “But maybe what they’re not spending much time on is the communication side, and that’s concerning because it’s really an own goal.”
If HR leaders are doing all the hard work to build compensation structures, benchmark and price jobs according to market data, but they’re not communicating it, they’re not going to feel the value from it, she says. This is where that perception gap comes from, even when employees are paid at or above market rates.
Employees are more likely to leave their jobs if they believe they aren’t being paid fairly, according to the report. The perception of pay—rather than the pay itself—is the reason employees seek opportunities elsewhere. Employees who work for organizations with high levels of pay transparency, however, are 59% less likely to leave their jobs.
“Regulations move quickly, but sometimes the perception takes time to catch up. We know employers are doing work around being able to create fair and competitive pay ranges, but there’s a gap between them doing that work and then employees seeing pay ranges posted on job advertisements and questioning why they don’t fit into that.”
While more organizations are sharing pay ranges with employees and candidates—often in accordance with the law—they're often not sharing how they got that number. At the same time, there’s been a larger cultural shift in the workplace where employees don’t just want numbers. They really want context, Thomas explains. They want to understand.
There are three things that employees want to know at work, including:
how their pay was determined;
how they compare to their peers; and
how they can progress their pay.
“As employers formulate a compensation communication strategy, it’s really important to think about those three elements,” Thomas says. “At the moment, most people are discussing the pay ranges rather than the whole story.”
Pay transparency drives fair pay and allows employees to understand where those pay ranges are coming from. It can help reduce retention and increase trust in pay practices, which extends to trust in leadership and trust in the whole organization. And when employees feel trust, they’re more likely to be engaged in the work that they do, which drives accountability and outcomes within the organization.
“I always think of it like a trust equation,” Thomas says. “If your employees trust you, then they’re engaged, and then they deliver output. We’re also seeing some very tactical benefits. There is research to show that if you are being transparent about pay and you’re putting those pay ranges on job postings, you get more qualified applicants applying. The hiring process speeds up, and then you also see that some prospective candidates won’t even apply to organizations that don’t include pay ranges in their job postings. This means that companies might be leaving out a portion of their potential workforce by not providing pay ranges upfront.”
For HR leaders looking to improve their compensation communication practices and enhance pay transparency, Thomas suggests the following.
Develop a compensation philosophy. “It’s important to do it in an authentic way,” Thomas says. “You really need to start at the top by developing a clear compensation philosophy and understanding what it is in your organization that you’re paying for and how you differentiate pay.”
Test the strategy prior to implementation. “So many people have an off the shelf total rewards strategy where they pay to recruit, retain, and motivate, but they don’t really know what that means,” she says. If the organization says they pay for performance, it's important to look at the numbers within the company to see if the top performers are being paid demonstrably more than medium performers and if the most experienced employees are sitting at the top of those pay ranges.
Train managers to communicate the compensation strategy to employees. Once HR has a base understanding of how it wants to drive differentiation in the organization, it’s important to train managers to be able to communicate that, and then cascade that communication down to employees, ensuring every leader understands the story and can articulate it.
Keep it consistent. “By this point, it’s down to very tactical things like compensation guides, FAQs, and manager training, so that you continually think about keeping communication consistent across the organization,” Thomas says.