The Pros and Cons of Pay Transparency

What’s behind the growing trend of US states passing pay transparency legislation? Are the laws working as intended? What’s the future of pay transparency?

A growing number of US states are implementing pay transparency laws, which require employers to list salary ranges on job postings. Though the laws have led to some improvements for workers and employers, they’ve also created some unintended, undesirable consequences. 

Below we’ll take a look at the pros and cons of pay transparency.

Is Salary Transparency a Good Idea?

In 2021, Colorado became the first US state to implement salary transparency laws, which require employers to display pay ranges in job postings. Eight states have since followed suit, and another 16 states and Washington, D.C. have considered the laws in the 2023 legislative session.

Here are the pros and cons of pay transparency laws.

Pay Transparency Pros

Researchers have found that current salary transparency laws are improving workers’ and employers’ situations by:

• Increasing worker productivity. Researchers have found employee productivity increases when workers discover, through pay transparency laws, that their company is paying employees equitably and consistently for performance. 
• Saving hiring managers time. HR teams no longer have to weed out candidates who don’t like the pay scale, since applicants are doing that on their own. 
• Improving applicant talent pools. Recent surveys reveal employers’ belief that posting pay ranges has strengthened candidate quality:
  • 66% say that applicants they now see are more qualified.
  • 65% say that listing pay ranges has made them more competitive in attracting high-performing candidates. 

Transparency Laws Combat Pay Inequity

The main goal of salary transparency is to reduce pay inequities based on gender and race. The idea is to drive out shadowy injustices by shining a light on everything from the janitor’s salary to the CEO’s.

Pay transparency laws vary, but they generally require companies to post the salary ranges for every filled and open position. California’s law even requires businesses to categorize pay rates by race, ethnicity, and sex. Some laws also prohibit employers from asking job candidates for their salary history, which can keep workers locked in low wages from job to job.

Data shows just how much pay inequity hurts non-white and non-male workers. The US Census reveals that for every dollar a white man earned in 2021, women were paid half to three-quarters of that: 

• White women made 73 cents
• Asian, Native Hawaiian, and Pacific Islander women made 75 cents
• Black women made 64 cents
• Latina women made 54 cents
• Native American women made 51 cents

Comparable racial pay gaps also exist. The US Department of Labor reports that for every dollar paid to a white worker (regardless of gender), 

• Asian and Pacific Islander workers made $1.12
• Black workers made 76 cents
• Latinx workers made 73 cents
• Native American workers made 77 cents
• Multiracial workers made 81 cents

Additionally, LGBTQ+ workers in the US earn about 90 cents for every dollar a typical worker makes, according to an analysis by the Human Rights Campaign.

Pay Transparency Cons

At the same time, researchers say that pay transparency laws have created some unintended—and undesirable—consequences, including that they:

• Can lower overall wages. Though the new laws increase pay for individuals who have historically been paid inequitably, they can dampen wages for the broader population. This is because employers are now less likely to negotiate salary increases with prospective or current employees—saying that if they give a raise to one worker, they have to give a raise to all workers in the same salary band.
• Can decrease worker productivity. Pay transparency can discourage and reduce the productivity of workers who are paid the same salary as, but outperform, employees in their pay band.
• May fuel turnover of top performers. As companies level out salaries and don’t reward high performers with higher pay, some of those top workers leave their companies for better-paying jobs.
• Aren’t loophole-proof. Some employers continue to skirt pay transparency laws by posting overly broad salary ranges for positions—for example, using a new hire’s salary at the low end and an executive’s at the high end. 

Looking Ahead

Experts expect pay transparency to gain momentum in 2023 as more states look to pass legislation and with the introduction of a related bill in Congress. 

Some predict that pay transparency laws will increasingly benefit workers in states that don’t have them because:

• Many of the new laws require companies that employ out-of-state workers to implement consistent practices across state lines.
• Companies operating in multiple states with multiple pay transparency laws will likely adopt the most stringent transparency regulations to decrease administrative burdens. As a result, employees who might otherwise have been subject to less strict rules will benefit from stronger ones.
• The continued expansion of pay transparency laws and practices will position more workers to negotiate higher salaries.

Finally, experts say that employers will benefit from pay transparency laws because complying with them will ultimately:

• Reduce long-term labor costs related to compensation decision-making, planning, and budgeting. 
• Reduce the likelihood of losing time and money to discrimination and legal disputes over compensation.

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