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This month, laws went into effect in California and Washington State that required companies to post salary ranges on job listings. Like similar rules in New York City and Colorado, lawmakers passed them on the premise that pay transparency helped reduce wage gaps.
There’s little debate among researchers that this is the case. “It is totally 100 percent true across all the studies I’ve seen, with very few exceptions,” Zoe Cullen, an economist at Harvard Business School, said. Pay transparency laws are “very good” at reducing wage disparities, she added.
But that’s not the end of the story. As companies embrace pay transparency — either because the law forces them to, or because their employees are becoming more comfortable disclosing their salaries anyway — both employers and workers have noticed ripple effects. It’s changing how bosses set salaries. And it has the potential to make life a little less lucrative for star performers.
When Ron Harman King, the founder of a small content-marketing firm based in Colorado, started posting salary ranges on job listings in order to comply with state law, he was surprised. The candidates who responded to his ads seemed like a better fit than those who previously applied with higher salary expectations. “The interviews have been easier,” he said. “They knew what the position would pay, and they were already interested in applying for it at that range.”
The way that Mr. King set his rates also changed. Instead of looking at industry data nationwide, he could look at what his direct competitors were paying. “Everybody’s got to kind of, you know, show what they got,” he said. “So I feel like we all are better informed as to what it takes to really be competitive as an employer.”
Tyler Stodden, a software engineer, said that when his employer published salary ranges for every position before New York City’s law took effect, it lent credibility to the company’s rule of not negotiating when employees received an offer from a competitor. Now, he is confident that he knows — and is being told — the upper limits of his salary for his job. “I feel pretty confident that they’re sticking to what they’ve said they are from them releasing the bands,” he said.
Though pay transparency laws and policies are generally aimed at reducing inequality, a growing body of research has examined some of their indirect effects.
One trade-off is that some forms of pay transparency seem to make pay not only more fair, but also more flat, with a smaller gap between low and high performers.
In a study published in the journal Nature Human Behaviour, researchers analyzed the salaries of 100,000 academics over 20 years. As websites made their salaries easily searchable, the gender pay gap improved by almost 50 percent. But the gap between academics who performed best — based on markers like publications, awards, grants and patents — and those who performed less well also shrank.
“What the transparency seems to do is that it dampens the performance-based incentives,” said Tomasz Obloj, an associate professor at Indiana University Kelley School of Business who co-authored the paper.
LaKeisha Caton, a partner at the law firm Pryor Cashman who advises companies on employment-related matters, said that she discusses the potential for pay transparency to compress pay with clients. “I think that’s just the other side of the bargain,” she said, noting that without transparency’s effect of nudging salaries to the middle, “women and minorities tend to do the worst in those circumstances.”
With pay transparency, Ms. Cullen noted, some differences that are related to performance may be wiped away, but the same may happen to differences related to discrimination.
One explanation for why some types of pay transparency tend to weaken the link between income and performance is that this disclosure weakens individual bargaining power. If salaries are public, employers can claim that giving one worker a raise would mean that they would have to give everyone a raise. Workers may also be less likely to try to bargain in the first place if there’s a public salary range for a position.
“They see the posted price and think, Hey, I’m not going to be able to ask for more because obviously they’re not going to change their entire website, which applies to everybody, on my behalf,” Ms. Cullen said. She was a co-author of a working paper for the National Bureau of Economic Research that found wages on average fell by 2 percent when laws protecting pay transparency were introduced in the United States.
There are other ways that employers may benefit from pay transparency. For example, some research suggests that when wages are more transparent, employees tend to work harder.
In an experiment at a large commercial bank in Asia, Ms. Cullen and a co-author found a similar result: Workers tended to underestimate the salaries of their managers. When the bank made salaries public, they learned they would earn more than they had if they moved up the ladder and put in more effort.
Companies that pay fairly may benefit most from this effect. In an ongoing project, Mr. Obloj and his co-authors looked at productivity and pay for 20,000 academics. They found that at universities that paid fairly, increased pay transparency resulted in an overall boost to productivity, while at universities where pay transparency revealed unfair pay, productivity dropped. Other research has suggested a similar pattern for turnover: When pay systems are perceived as fair, pay transparency is associated with lower turnover rates. When it is perceived as unfair, the opposite is true.
When salaries become more transparent, some managers may finesse the system by compensating employees in ways that are less public, like bonuses and benefits. And that can undermine the reduction in pay gaps. “If we’re shifting rewards to other forms where there’s less transparency and where we also know that there is gender inequity, we’re not really solving anything with pay transparency,” said Peter Bamberger, a professor at Tel Aviv University. He co-authored a study published in the Academy of Management Journal that found that employers were more likely to request, and managers were more likely to grant, these kind of perks when pay was public.
In order to avoid the trap of paying everyone the same thing regardless of performance, or shifting to less transparent systems, Mr. Bamberger said companies needed to figure out how to assess performance and explain differences in pay. “Those companies have a competitive advantage,” he said.
Ms. Caton said that, in practice, pay transparency laws are pushing companies to think harder about how their decisions play out.
“I don’t think you can just post the salary and then that’s it,” she said. “I think it’s actually leading to more conversations internally regarding, How do we think about pay?”