Can pay transparency close the pay gap?

5 Minutes Read

The upsides and downsides of sharing your salary

Talking about the amount of money you make is generally a taboo subject. However, in this post-pandemic world, all sorts of taboos are being thrown out, and the call for more transparency in pay has been growing.

Consider how much of a struggle job searching can be. Finding a job that meets all your wants and needs can be a struggle — and employers make it harder than it needs to be. If all job postings had information about pay, everyone’s time would be saved. You wouldn’t have to type up resumes and cover letters for jobs that don’t pay what you’re worth, and employers could spend less time recruiting and negotiating salaries.

Even further, being transparent about pay can combat pay inequality in the workplace — but it’s not a cure-all. Unfortunately, it’s not as straightforward as it might seem, partly because there just isn’t enough research on the subject yet.

While growing evidence suggests that pay transparency does help fight pay inequality, there are some unintended negative consequences that should be considered as well. In this blog we’ll discuss both the upsides and the downsides of pay transparency to give you the big picture of this complex issue.

What exactly is pay transparency?

Pay transparency is exactly what it sounds like: it’s about people being open about how much money they make for the work they do. It also means being open about benefits and other forms of compensation such as parental leave, vacation days, and paid sick days.

Pay transparency is even written into some legislation, where employers are required to disclose the wage structures in their workplaces. The intention behind this is to help enforce human rights laws and promote gender equality. Canada has federal pay transparency legislation for federally regulated workplaces (which covers only about 6% of the workforce), and some provinces have their own legislation.

Employee pay is usually one of the largest expenses for a company — which makes sense. Pay drives the financial performance of the company, efficiency, productivity, and helps attract and retain talented employees. Yet many organizations don’t pay their employees equally; and in 2022, the “pay gap” still exists.

The pay gap

In general, the pay gap is the difference in average earnings of people based on factors like gender, race, and disability. For example, as of 2021, the gender pay gap for full- and part-time Canadian employees was 0.89 — that means women made 89 cents for every dollar that men made. Unfortunately, the pay gap also has disproportionate effects on women of color, Indigenous women, low-income women, and women with disabilities.

Despite many people still believing the gender pay gap is a myth, it has been confirmed through extensive research and documentation – it affects people across industries and professional levels in pretty much every part of the world.

Acknowledging and reducing the pay gap is important because the impacts are felt at all life stages. For example, young girls experience summer job pay gaps and women with university degrees often face greater challenges in paying back student loans. This means some women are being left behind before they even have a chance to start.

If you want to learn more about the gender pay gap, check out the Canadian Women’s Foundation.

Can pay transparency help? 

We can’t definitively link pay transparency to pay equality quite yet because there hasn’t been enough research on the subject. Most companies in the private sector aren’t exactly lining up to make these changes on their own and legislation hasn’t caught up. Because of this, the effects of pay transparency on pay gaps aren’t completely understood yet.

The research we do have does point towards pay transparency being a useful tool in closing the gender pay gap. Part of the reason why the gender pay gap exists is because it’s hidden; and transparency laws transparency laws are being considered to change that.

A 2019 Statistics Canada study looked at faculty salaries at Canadian universities and found that pay transparency laws actually did reduce the gap between men and women’s earnings. In departments where salaries were disclosed, there was a 30% reduction in the gender pay gap compared to departments where no salaries were disclosed. 

This is also not just a gender issue. Pay transparency can help all new hires, regardless of gender, get paid fairly.

When employers are open about pay, employees can make better decisions about whether they are being paid fairly and when it’s appropriate to negotiate for a higher salary. Employers who promote pay secrecy perpetuate pay gaps and the taboo around pay transparency benefits the system, not the workers.

Other benefits of pay transparency

Employees can be happier and more productive

When people don’t know each other’s pay, they often assume they are being underpaid. But if employees can compare their pay, they might realize they’re actually being paid fairly and spend less time being unhappy about their compensation.

When employees are treated equally, trust is improved. And when trust is improved, workers can be happier, loyal, and more productive.

It saves everybody’s time

If salaries are shared in the hiring process, job seekers spend less time applying for jobs that don’t match their salary preferences and employers save time in recruitment and salary negotiations. When both parties are on the same page from the start, conversations about pay can be less stressful. 

While pay transparency has been proven to close pay gaps, it’s not a cure-all. Unfortunately, it can also introduce other issues to the workplace.

Downsides of pay transparency

Can lead to less pay for everyone

Pay transparency doesn’t always mean a pay increase. In that 2019 Stats Canada study we mentioned earlier, the researchers found that even though the pay gap was narrowed, overall faculty salaries went down.

It can be psychologically draining for a manager to address complaints and salary adjustments after a pay transparency law comes into effect — especially if they were resistant to adopting transparent practices in the first place.

Research has found that because of this, transparency can sometimes drive managers to make employee compensation more similar to each other. By doing this, the average pay for everyone drops. Employers may also avoid paying their top performers more to avoid everyone else demanding more, which leads to everyone being paid less.

Companies may hire or keep fewer employees

Many companies are reluctant to make their pay transparent because it can make it more difficult to hire talented employees at lower rates. This means companies on tight budgets have to hire fewer people.

We can’t help but compare ourselves to others

Some argue that pay transparency makes employees feel they are being paid fairly, and thus can increase employee performance. But pay transparency can also cause some tension in environments where performance is difficult to measure and not seen by everyone.

By broadcasting everyone’s individual pay, people will often start comparing themselves to others, and envy and jealousy take their toll on the company’s culture. Also, not everyone is in favor of pay transparency, and the taboo nature of the topic can lead to even more tension in the workplace.

Without clear communication, pay differences can be taken out of context

In some organizations, pay can be subjective. If the reasons why certain employees are being paid more or less are not communicated clearly, it can breed frustration within the company.

Going beyond simply publishing salary amounts could be beneficial here. It might be helpful for companies to explain how pay is determined, too. For example, as a student in university you don’t get to see your classmates' exam grades – all you know is how your performance is measured.

The main takeaway is that it’s not enough to have pay transparency alone, how it’s communicated to employees also plays a big role in its effectiveness.

Because every organization is different, pay transparency in the workplace can take many forms, even something as simple as fostering more open communication about pay within a company. There is no one-size-fits-all solution.

Many companies don’t currently participate in pay transparency and aren’t planning on starting anytime soon out of fear it’ll upset their employees. But as they say, you have to crack a few eggs to make an omelette. Maybe a little bit of frustration is a necessary cost to achieve fairness for everyone moving forward.

It’s worth noting that people do want more pay transparency. 73% of Canadians surveyed in a 2018 Maclean’s survey said they would share their salary publicly in order to reveal inequality between men and women. A 2022 Viser study revealed the same insights — 79% of employees surveyed want some form of pay transparency, and 68% said they’d switch to a more transparent employer, even for the same pay.

The bottom line

Talking transparently about pay can be uncomfortable, but it can also be incredibly helpful in ensuring fairness and building trust — after all, knowledge is power. However, because we don’t understand the full effects of pay transparency yet, we can’t accept it as the only solution to closing the pay gap.

Melissa Atefi