States Pass Pay Transparency Laws—Will Productivity Diminish?

Joe Raedle/Getty Images

Washington and California passed laws requiring companies to post salary ranges on job listings. New York passed a similar last year. The goal is to help reduce wage gaps and make a more level playing field for employees.

And with pay transparency laws becoming a hot topic in business, questions by both employers and employees keep coming up. What is pay transparency, how does it work, and what are the results?

Pay Transparency Strategy

Pay transparency is a strategy to highlight and discuss salaries within a company. It can be a conversation between managers and employees. Pay transparency can be measured on a spectrum.

For example, transparency includes sharing pay ranges for each employee’s role and sharing information on how salaries are calculated.

The ultimate goal is to allow an understanding by employees as to how they’re paid and what they need to do to move up the ladder.

But it goes beyond just having a discussion with employees. Pay transparency must be practiced outside the company as well.

Salary ranges and descriptions of benefits must be part of all job listings in certain states.

Pay Transparency Laws

Pay transparency laws require all posted jobs to list compensation. Colorado has had a pay transparency law since 2021 as part of their Equal Pay for Equal Work Act.

Washington enacted a similar law in 2022 that took place in January 2023. And other states that are or will be passing similar laws are California, Connecticut, Maryland, Nevada, and Rhode Island.

In November 2022, New York City initiated a pay transparency law. They required employers to include a “good faith salary range” in job advertisements. This applies to both hourly and salary.

Most states exclude employers who have few employees. But that number varies from five to 15 depending on the state.

Most states have fines for non-compliance with the law. For example, New York City will levy possible fines and require payment of monetary damages, if any, to adversely affected people.

Gender Relating to Pay Transparency

One stated goal of pay transparency is eliminating underpayment based on gender. The openness of the salaries will let a woman know if she is paid less than men on her level.

The goal is to make any discrimination come to light and lead to equal pay.

Results of Wage Transparency

A trade-off in pay transparency is that salaries advertised are flat, and there’s a smaller pay gap between low and high performers. As a result, the superstars of the office aren’t rewarded as much.

A study was published in the journal Nature Human Behavior that addressed this. It was a 20-year study based on 100,000 academics. Public salaries improved the gender gap but not productivity. The gap shrank between well-performing academics and those who performed less well.

The difference related to discrimination may be wiped away, but with it goes the differences related to performance.

The link between performance and income weakens bargaining power when job searching. But some employers like this. When a salary is posted, it signals to all applicants that they can’t ask for more.

It also signals to employees how much their managers are earning. In some cases, it motivates workers to apply for management positions.

Companies must avoid paying mediocre and unproductive employees the same, or shift back to less transparent systems. Or, as some employers are doing, go around the transparency wage mandates by offering other incentives, like bonuses.

Pros of Pay Transparency

One perceived advantage of pay transparency is increased production. Research from Tel Aviv University showed employees performed better when salaries weren’t kept secret.

Lack of pay transparency might be harmful to employee morale. For example, two employees who have the same credentials may make different salaries because one was a stronger negotiator.

Pay transparency guards against gender or racial bias.

Cons of Pay Transparency

Pay transparency laws are confusing to those companies who are hiring out-of-state remote workers. There’s no clarification as to what these businesses are supposed to advertise. It may be up to each company to decide if they want to voluntarily advertise wages.

Suddenly revealing salaries in an established company could cause distress among employees. This is especially true if there are different pay levels, regardless of the reason.

Some employees may not understanding the nuances of individual’s roles or groups. As a result, they may respond negatively if they find employees of other groups are paid more.

And, finally, it’s not a solution to any wage disparity. It won’t discourage bias or rewarding those for additional work. Once more, pay is on a spectrum, so an employee may be on the high or low end of the scale.

Could Pay Transparency Cause Unrest

States are beginning to pass pay transparency laws. These dictate to businesses how they can advertise for new employees. And although on the surface transparency in the workplace looks good, time will tell if this causes unrest when salaries are revealed.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.