How to build a pay transparency foundation and integrate it into your culture.
By Brenan German, Founder and President of Bright Talent
with Michael Kestenbaum, Managing Director with Gallagher’s Executive Compensation practice.
While we’d be excused for thinking terms like “gender-wage gap”, “pay gap”, “equal pay” and “glass ceiling” are modern concepts – focused on the disparate treatment women and historically under-represented groups experience in the workplace – political activism focused on addressing these inequities date back to at least the 1860’s.
Despite being a political issue for over 100 years, governmental intervention and social change were slow moving. The first meaningful piece of legislation, the Equal Pay Act, wasn’t passed until 1963. Though well intentioned, the Act, which prohibited employers from paying male and female workers different wages for performing similar jobs requiring similar skills, notably left exceptions based on seniority or “merit,” which allowed employers to circumvent the spirit of the act.
Fast forward to the 2020s and companies have made significant strides in leveling the playing field. Yet, the essence of inequitable pay remains persistent. Recent legislation, notably in California (along with Colorado, New York, Oregon, and Washington) attempts to take a chisel to these residual compensation inequities.
At its best, capitalism and a free market create abundant opportunity for those willing to take risks and work hard toward their lifestyle dreams. However, when left unchecked, the same boundaryless opportunities can be plagued – intentionally or unintentionally – by greed, ineptness and systemic biases.
Identifying and dismantling the structures that perpetuate inequal pay is a tall task. As organizations look to meet pay transparency legislation requirements, it has highlighted the importance of pay philosophy and strategy, which impacts employment brand and employee experience. Organizations have been forced to respond and put practices in place that could have positive or negative consequences.
Adopting a pay philosophy and strategy is required in order to build a solid foundation for pay transparency. For many companies, this is a change management project, and it requires the same attention – and intention – as other enterprise-wide practices.
I recently sat down with compensation governance, risk and controls expert Mike Kestenbaum to explore this subject in more depth and discuss best practices for developing, implementing and managing pay transparency in an organization.
Michael Kestenbaum is a Managing Director with Gallagher’s Executive Compensation practice. Mike began his career in total rewards in 2002 as a consultant with Willis Towers Watson’s executive compensation practice. He went on to hold global compensation leadership roles with notable organizations such as Broadcom Corp., QLogic Corp (now Marvell Technology Group), Bank of the West and Silicon Valley Bank. MK holds a B.S. in Economics from the University of California, Berkeley and lives and works in the San Francisco Bay Area. He also serves as a guest lecturer on how to build the employee value proposition and has been quoted in news articles appearing on CNBC.com, NBC-LA and Ground News.
BG: Thank you, Mike, for taking the time to chat with us today about the pros, cons and best practices for implementing an effective and sustainable pay transparency – or, really, compensation – strategy.
I'm a person who doesn't shy away from a challenge. So, Mike, I'm going to start with the cons and pull the generational card out right away. I'm a GenX-er. When I started working, I was told very clearly that if I talked about my salary, it was a fireable offense. So I'm a little uncomfortable with this whole idea that people are knowing what we're all making. And, related to that, I imagine the first con would be: if you're a company that has pay inequity challenges, and all of a sudden you start exposing that to your employee population, it could really have some significant ramifications.
Would you speak to how that is a challenge and, from your perspective, how it has been addressed poorly?
MK: It's very true what you've said, and the guiding principle I want to make sure everyone recognizes is that the purpose of pay transparency, ultimately, is to help us as a society and as businesses to reduce and find ways to effectively diminish pay inequities and achieve fair pay – or, at least, get closer to it.
When we talk about the cons of pay transparency, I think what we're really saying is these are things that can be painful for organizations to face because they're challenges they haven't met before, and they can't exactly expose issues or concerns that would make employees uncomfortable. That will be hard for managers to talk about.
So where I've seen this go wrong really lies in how an organization reaches out to and communicates with the staff. Frankly, the problems with this are when they're just not prepared. And they're not taking the time to first understand where they have issues with pay. They're not necessarily always looking to see how they are paying all of their different, historically under-represented groups versus their white employees or male versus female employees.
You have to look at that and do the research. If you're not looking at these things , and you just start sharing pay ranges, then you'll have people coming in and questioning why they're at the bottom of the range?” Or why they're outside of the range entirely.
And then you need to prepare managers to have conversations with employees, because inevitably organizations will have differences in pay that oftentimes they probably didn't even recognize or really pay attention to. If managers aren't prepared for that conversation, then they're going to be left flat footed, and employees will be very unhappy. They'll feel as though they're being undervalued, underpaid, and it's difficult to come back from that unless you really have a strong plan to discuss what's happening here -- why are you seeing this? What does it mean? And what are we doing about it?
BG: I think that's a great point. Talking about money can often be uncomfortable for managers, even for HR, for that matter. And really this is a matter of getting comfortable with being uncomfortable talking about this.
It also leads to employee disengagement and reputation issues, especially if you're out trying to look for other talent and they know you don't pay equitably. So the whole idea here is to equip everybody to answer all of the challenges that might come with pay transparency initiatives.
I read something in the Harvard Business Review, a study that suggests a boss can decline an individual's request for a raise by saying, “A raise for one means a raise for all. I can't do that.”
How would you respond to that?
MK: That's a very interesting angle. My take on that, honestly, is that it is a bit of a smoke screen -- the idea that we can't increase someone's wage because in doing so we have to affect everybody. That’s a fallacy, because the idea behind pay transparency, and behind fair pay and pay equity in the first place, is that we can pay people differently. But the pay differences need to be based on justifiable, bona fide business factors.
So is your performance different? Do you have broader responsibilities? Are you simply more effective at your role? Those are reasons we can differentiate pay. What we can't do is differentiate pay based on factors that we can't quantify or qualify.
And it's all around. The idea of let's not inadvertently, systematically, be changing pay based on gender or race or ethnicity, and not even realize we're doing so. So let's make sure we really understand what's happening with pay.
But the idea that we can say we can't change your pay because we’d have to change everyone's pay, it's simply not true.
BG: I think for me, in my own personal experience, I used to manage OFCCP compliance for one of the organizations I worked for, and we discovered an inequity of a Hispanic male who had been in a leadership role and had been with the company a long time, and he was behind significantly. He didn't complain. He didn't know. We discovered that, and then we did the right thing and brought his compensation to market rate.
And that was all unintentional right? And you see it more the longer people stay at your organization versus if they're coming in from the outside and you’re maintaining some kind of pay with the market.
MK: A hundred percent. And with these organizations, the things we're seeing are these are not intentional results. It's not as though managers are saying, “I intend to discriminate.” This is institutional-level bias, and, as you said, particularly for employees who have been somewhere for a long time and their prior pay history followed them. Or they've been somewhere for a very long time, and, as a result, they haven't moved as quickly.
In almost every case I've ever seen working with clients, when we discover these disparities, it's almost always a surprise. Managers didn't realize what other teams with similar employees were doing, or they just didn't really look at it or think about it. So it's very rarely intentional, but that doesn't make it any less painful. And it doesn't mean we don't have to address it.
BG: So now let's move now onto the pros, which, hopefully, are obvious! But let's talk about a few of the pros of pay transparency: that would be to promote pay equity, build trust and engagement, and reduce pay secrecy and rumors.
So if you could speak to that, MK, and equip all of us with some sound bites to use to try to influence managers and leaders about the positives, or pros, of pay transparency?
MK: In building up to this, we talked about the cons, the painful points. In almost all cases there are going to be some painful conversations that organizations going into this will have to determine.
What is it we want to share? What does that look like? And in doing so, who's going to be impacted? Who's going to be affected? Is there going to be a cost? Do we have the money to do this? And so forth.
But in all cases of organizations I've worked with and been a part of in coming through the other side, I've noticed 2 things.
First, usually the level of disengagement isn't as significant as organizations think it will be. They believe that when they go to their employee base and managers and say, “This is pay transparency. This is the information we're going to need to share now,” it can be painful. But the bottom line is, once that happens, then you've created a much stronger bond of trust with your employees.
And not only that, in a sense, you've enabled and equipped your managers to be smarter and more intelligent in talking about pay in general. You've enabled them to be better at having conversations when it comes to pay.
Second, you've created an organization where employees say, “I know what these roles pay. There's no more secrecy around what the range is. Now I know where I am and the company is talking to me about my progression. If I'm not being paid at the midpoint or in the upper parts, here, perhaps, is why and what I can do. And also I can see throughout the organization from a career development standpoint – maybe this is a role I want to move into. Now I know what the pay range is.
So now they have the knowledge to make decisions. We're treating employees like adults, and that's so so critical.
BG: Such a novel concept.
MK: It really can be. And we think we do that. But when we hide things, what are we doing? We're saying, “You can't handle this information, and we've done it for good reason.”
Because, like you mentioned earlier, we all came out of cultures where that was normative. We didn't talk about pay. That would be problematic. And now we're saying it's a new world. How do we do that?
But creating that bond of trust, having that level of transparency, ultimately, that brings significant value. And employees feel valued and they feel trusted and they know they can make smart decisions. It's just a better environment for all. In every case it's been better.
BG: I like this because you're giving vision right? Those are all visionary statements of where we want to go. Maybe we're not there now, or maybe some of us are halfway there, but that's the full vision.
Now let's talk about implementation. How do we execute? First I want to address that pay transparency is one part of a broader compensation strategy. And when we think of compensation, it is both philosophy and strategy.
If you're just implementing pay transparency without thinking it all the way through, as it relates to the broader strategy of compensation, it might be hard just to start right there with pay transparency. You might need to view the broader methodology of your compensation practices.
So where do you start if you want to do it right?
MK: What you said is absolutely true. I couldn't have articulated better. It is a part of the broader compensation philosophy – where it needs to be for those organizations that are thinking about these concepts independently.
Pay transparency is about two things: It's about complying with legislation, because there are certain places in our country where there are specific rules around what you disclose on job postings, and beyond that, it's conceptually about how much information do we share about pay?
Take a step back before you start sharing information about pay and how you pay.
For example, when we think about our organization, what is our intention? Do we have a strategy around trying to pay at the midpoint of ranges? Do we even have ranges? Do we have any sort of compensation structure whatsoever that says this is how this is, how we look at roles, what career level they are? What's the career path?
Can we look at roles and say, this is what a job would pay for this role in this market, or have we not even built that out? Let's say we have. Let's say we have pay ranges for everybody we need to think about. Where do we expect them to be? And why do we generally think people should be at midpoint or at the higher end, based on performance and seniority, and at the lower end.
I bring all this up because once you say we're going to start talking about pay, you want to see and understand how well you're doing against that compensation strategy. So here are the steps:
Examine your compensation strategy. Make sure you're comfortable with it. Make sure you think it's serving its purpose.
Determine how are we going to comply? What that comes down to is, are we going to share pay ranges for those roles that exist specifically in geographic markets where there's legislation? If we have remote work, what do we say? Well, it's any role that could be a remote worker, because theoretically you could hire them in one of those geographic markets.
When we say let's do pay transparency, do we just bite the whole apple at one time and share all the ranges for all the jobs that we have? That's true, full transparency. So, again, we need to decide what is it that we're going to share.
Determine what are our pay ranges going to look like? We could say we're going to take our actual ranges and use those. Or we might say, we want broader ranges. And then that invites different questions. If you use a really broad range, then when you share, people are going to say, “Well, nobody's at the high end.” So they're going to wonder why we know we're near that.
This is change management, which, frankly, is more important than those than those strategic and tactical decisions. Because you have to figure out how am I going to talk to my organization? How do I prepare them?
So it's about having a really strong change management plan with cascading messaging. We make sure your most senior leadership understands what you're doing and why they're on board, and then you go out to managers. You should go out to managers and prepare them. So that's about education. That's about engagement. That's about giving them the space to ask questions and say, “I don't understand what's going on” Or “How's this going to impact me?” Or “What am I going to talk about?” It's about all of those things.
And then ultimately, you roll these programs out. And you educate your employees. You know your coworkers, and you give them the opportunity to ask questions again. The education is the most important part. You know, it's 80% of this process.
BG: Yes. And I think to your point, this is not a one-time deal. This is the significance of change management. I always like to say the easiest thing to do is roll out something new. The hardest thing to do is put it into adoption where people are actually using it in their day-to-day operation.
So this is not a one time “we're done, check the box, we're being compliant.” This is an ongoing opportunity to communicate, over and over again, to beat the drum quietly and relentlessly until it gets into adoption and just becomes part of the culture of the business.
To me, that’s what change management really means. You are truly affecting and reinforcing that sustainable change until it becomes the operation. I so appreciate that.
Now, I think there's something really important here for us as HR leaders. We're often working with financial leaders who are working within budgets when we're talking about compensation.
CEOs think in multiple languages: finance, marketing, sales. They're not so well versed in HR language. As HR leaders we have to meet them where they are. So when we're talking about influencing the CEO to adopt this themselves, they have to be the spearhead of this change, right?
Please share with us, what are a couple of bullet points for HR leaders that they can use to make the point, to influence that CEO or the C-suite to adopt pay transparency?
MK: What it comes down to, ultimately, is it's the employee value proposition. What you're saying is, in doing this we are building a stronger relationship with our employees in a time when it is difficult to find and keep good employees. Wonderful organizations whom I speak with every day are losing people. They're being poached.
So the smartest thing you can do is build an environment where employees feel valued and they wish to stay. And that's about, among other things, fostering honesty and fostering transparency, and that goes a long way toward fostering a really meaningful culture.
Beyond that, what you're talking about is consistency and fairness. So you are empowering the organization and giving them the tools they need to make smart decisions about managing pay. And pay is one of, if not the, biggest costs for many employers. You want to give them the tools to be able to make smart decisions, to understand the impact of their decisions. And, frankly, a lot of this will help to stave off potential losses.
If you want to get right down to brass tacks in certain circumstances, understanding what's happening with pay will better position you to avoid having costly lawsuits that could come from employees filing for disparate treatment. You definitely don't want that.
BG: That's so on point. I’m always wanting to move HR toward being a strategic partner, but I would want to make sure the C-suite doesn’t just see HR as the compliance police. So I’m inclined to sequence that conversation just as you did – starting with employment value proposition, then attraction and retention of talent and, last, compliance. That’s a powerful set of points to get the C-suite on board.
Thank you, Mike, for taking the time to talk with us today. There’s so much valuable information here. And we invite folks to take a look at the full webinar, including the additional Q&A at the end, for more pearls of pay transparency wisdom.
MK: Thank you, Brenan.