Dollar Scholar Asks: Why Does Pay Transparency Matter, Anyway?
This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
When I was in journalism school, I had to take a course called Fact Finding. I began the semester thinking I wouldn’t learn anything — ”how hard can it be to find facts,” I scoffed — but soon got proven wrong. I emerged a highly trained data collector, armed with a deep knowledge of public records laws, court documents and the internet.
You think your voter registration, home address and phone number are secret? Think again. Not only can I access those, but I can also pull marriage licenses, police reports, bankruptcy filings, property deeds and more. I love research so much that sometimes I do it for fun.
That’s why I got excited when I heard about New York City’s salary transparency rule, which took effect in November. Any company with at least four employees hiring in NYC now has to include pay ranges in every job posting. My nosiness aside, this seems like a big deal.
Why are salary transparency laws important?
Let’s start with the big picture. In the past, info about employees’ pay was essentially “kept in a closed drawer in someone's office,” says David Turetsky, vice president of consulting at Salary.com. But ever since the advent of the internet, we’ve seen what he calls “the democratization of data.” Slowly but surely, sharing information about wages has become more common as people have gotten more connected. (The Real Media Salaries spreadsheet comes to mind for me.)
“The world of human resources is transitioning to transparency,” Turetsky adds.
This will, in time, shine a spotlight on the many pay gaps between various demographic groups in the United States. I could list stats all day, but here are a few: Women earn 82.3% of what men do. Black women earn 58 cents for every $1 a white, non-Hispanic man does. People with disabilities earn 87 cents for every $1 earned by those without.
These differences compound. If I’m underpaid for my first job, then my benchmark could be off for the rest of my career, says Sid Upadhyay, co-founder and CEO at online recruiting service WizeHire. Cue the domino effect.
He says pay transparency laws aim to drive deeper discussions about compensation disparities — and, ultimately, reduce them — by giving folks all the information they need on Day One. The idea is that if I know what salary the company is expecting to pay the person it eventually hires, that can help me negotiate… or at least appropriately weigh my options.
It also helps both parties not waste time, says M. Diane Burton, the director of the Institute for Compensation Studies at Cornell University. Companies usually have a budget in mind when they post open roles, but that's traditionally been kept secret from applicants. Publicly listing pay data will make for “more efficient matches,” she says, by decreasing the number of people who will apply for jobs they wouldn’t take.
For employers, more informed candidates = fewer resources spent on recruiting non-starters. For job seekers, it means consistency in the hiring process. Companies now have to back up why certain roles earn more than others. And the answer can’t be discrimination. (Because that is illegal.)
“When companies are forced to disclose pay ranges, it forces them to clean up their act,” Burton says.
It works, too, at least according to international studies. In Canada, salary transparency laws for university faculty reduced the gap between men and women by up to 40%. In Iceland, an equal pay law narrowed the gender pay discrepancy from 15% to 12.6% in three years.
In the U.S., this isn’t just a movement happening in New York. Upadhyay points out that Colorado, Connecticut and other places have similar requirements. And he expects there’ll be spillover to states without pay transparency laws soon.
Because New York City is such a common location for big firms to have offices, there are a bunch of well-known corporations being forced to post ranges. Some, like Google and American Express are now sharing compensation for gigs in all states. It just “makes sense to treat all their employees the same way,” says Esta Bigler, the director of the labor and employment law program at Cornell’s School of Industrial and Labor Relations.
There are some downsides, Bigler adds, especially for small employers that don’t have full-blown HR departments devoted to compliance. But in general, it’s a “step forward,” she says.
The icing on the cake: If I’m an employer and all my competitors are posting compensation data but I’m not, people are going to take notice — and probably apply for jobs where they know they’re getting paid fairly. So eventually, listing pay ranges in job ads (in New York or otherwise) could simply become a corporate best practice.
“If you don’t list compensation, you are missing out on great talent,” Upadhyay says.
The bottom line
Pay transparency laws like the one just enacted in New York City matter because they make for better matches between applicants and potential employers, help candidates negotiate and close gaps between different groups of people.
More from Money:
How High Can High-Yield Savings Rates Go?