Why pay transparency is good for your employees and your business

The Trump administration announced this past week that it is halting the implementation of an Obama-era rule that would have required U.S. employers with 100 or more employees to report salary and hours worked according to race, ethnicity, and gender across several job categories. The rule, slated to take effect in March 2018, would have improved the Equal Employment Opportunity Commission’s ability to investigate and address pay discrimination. This reversal serves as a substantial setback to efforts to address gender- and race-based pay gaps, and happens despite growing evidence showing that pay transparency not only reduces harmful pay disparities but also improves employee satisfaction and productivity.

Women and people of color continue to earn less than white men. While factors such as hours worked, occupation, and union status explain some of the pay gap, research shows that discrimination continues to play an important role. Work by Cornell University’s Francine Blau and Lawrence Kahn, for example, finds that 38 percent of the gender wage gap remains unexplained, which the authors suggest is due to discrimination.

If you are being discriminated against in terms of pay, how do you know? The problem is that a lot of times you don’t. Pay secrecy is common in the United States, and about half of all workers—and 60 percent of private-sector workers—report that they are banned, either informally or formally, from discussing pay with their colleagues. Prohibiting your employees from discussing pay is technically illegal under the National Labor Relations Act, with some states being even more explicit in protecting the rights of workers to discuss their pay, but it is rarely enforced.

These laws also exclude supervisors and managers. So, if Lilly Ledbetter—a manager at Goodyear Tire and Rubber Company, who found out that she was being underpaid through an anonymous note—had instead obtained this information through discussions with her colleagues, she could have been legally fired.

Even if bans on pay secrecy were better enforced, it doesn’t change the still fairly common taboo about discussing pay with your colleagues. One report found that an overwhelming number of workers aren’t comfortable disclosing what they earn to their colleagues, even in the absence of a policy deterring them from doing so. That’s why pay transparency is so important—it enhances worker bargaining power without requiring that they personally solicit salary information from their colleagues. Research by University of Washington’s Jake Rosenfeld and Patrick Denice shows that workers who have access to organizational financial information earn more than those who do not. Other work by Princeton economist Alexandre Mas finds that the pay of California public employees was compressed by 8 percent following the publication of pay data online, which may be due in part to the elimination of pay differences that were hard to rationalize.

Pay transparency benefits employers as well. For one, it can reduce worker distrust and boost productivity. Research shows that knowing your colleagues’ salaries can help employees collaborate more productively and also work harder overall. Pay secrecy, in contrast, leads to more disengagement and decreased performance and may “ultimately do more harm to individual task performance […] than good,” according to Elena Gitter (neé Belogolovsky) of Cornell and Peter Bamberger of Tel Aviv University.

The updated EE0-1 reporting requirements that were scuttled this past week by the Trump administration would not have required full transparency. And the data that would have been collected would not have been made available to employees. The aim was to help the EEOC target individual employers and industries or regions with sizeable pay disparities. The rule, however, would have been an important first step in a long effort to compel companies to keep track of this kind of information and, ideally, to make it available to their workers. Because, as the evidence shows, shining a light on pay disparities not only can help eliminate them, but can also be a boon for company productivity.