Use Pay Transparency Laws to Drive Better Pay Decisions for Your Organization

Flexible pay ranges are not your friend.

New pay transparency laws may send some employers scrambling to comply when posting job vacancies or answering employees' questions. Achieve compliance and make equitable and cost-effective pay decisions now through a sound compensation strategy.

More than a dozen states, counties and municipalities have enacted new pay transparency laws since California's initial legislation in 2018. Most call for employers to disclose pay or pay ranges with job descriptions and job postings, provide pay information upon request and file annual disclosure reports. Some variations address organizational size, "look-back" periods, current employees versus applicants, data reporting and penalties for violations. These inconsistencies can make compliance challenging for multi-state employers.

Pay transparency laws aim to promote fairness and reduce pay disparities associated with gender, race and ethinicity. Legislators designed the laws to compel organizations to discover and amend any discriminatory pay practices, while empowering job seekers. While it's unclear to what extent organizations are complying, failure to identify and correct inequities puts organizations at risk of losing employees' trust and facing costly legal action.

With the transparency laws in place, attorneys, employees and job seekers can access more information to evaluate the relative fairness of the employers' compensation policies. Websites that publish crowd-sourced salary data give some employees confidence that they know how much their peers earn. And more people are comparing notes:. Nearly 42% of Gen Z workers (ages 18 to 25) and 40% of millennials (ages 26 to 41) have shared their salary information with a coworker or other professional contact. This level compares with 31% of Gen X workers (ages 42 to 57) and 19% of baby boomers (ages 58 to 76), according to a 2022 nationwide Bankrate survey.*

Flexibility is not your friend

Wide pay ranges that give hiring managers flexibility when negotiating with potential candidates is one of the biggest sources of pay inequity. Offering a starting salary in the top part of a wide range to attract talent is likely to cause salary disparities. Correcting inequities such as wage compression can require years of painful discussions.

Conversely, adhering to a pay structure supported by a comp philosophy allows hiring managers to demonstrate the employer's commitment to pay equity.

Gallagher's approach to pay begins with determining what jobs are worth in a single dollar amount. The employer should set the range based on very specific criteria applied systematically. For example, you may decide to pay fully performing employees 100% of job value. Those training or still developing might be paid 90% of the job value, while true superstars might receive 110% or 120%. Your team can modify and apply this approach to performance management programs and still meet budget limitations.

Develop and communicate your compensation philosophy

Like them or not, pay transparency laws are in effect, and savvy leaders will use them to advantage. Organizations that have developed equitable and transparent pay policies will benefit from more satisfied and productive workers. Such a proactive pay strategy results in lower turnover and an increased ability to attract top talent. Further, proactive organizations incur less legal risk associated with their pay practices.

Avoid letting pay transparency become a distraction. The important question is how to pay employees equitably, competitively and cost effectively — no matter what laws change in the legislative landscape. Employers that have developed a sound pay philosophy and strategy — and can clearly explain how they make pay decisions — will find themselves in the best position to communicate with employees and applicants.

Navigating state and local pay transparency laws

The impact of pay transparency laws extends well beyond the home office. Many states require employers to comply for all employees, including remote workers. The State of Washington — which passed one of the most expansive laws — requires employers to disclose pay range information on all job postings, regarless of location. To minimize the administrative burden in managing multiple laws, many employers voluntarily comply with the most employee-friendly laws. Those organizations with no current legal obligations should work to get ahead of the curve and reap the benefits of a culture of pay transparency before the law requires them to do so.

Start with your goals

Many employers regularly undertake internal pay equity analyses. Those that identify patterns of pay discrepancies should examine their pay decision-making policies and practices. Many organizations are ready to address these deficiencies, but don't know how to begin. You could purchase compensation data from online databases or websites, thinking these are enough. In reality, the data may not be accurate or align with your specific job descriptions.

At Gallagher, we use multiple sources of data, including our own proprietary curated data. We recommend as a best practice that organizations use multiple sources of compensation data, not just one.

Instead of relying solely on data, consider the goals you hope to achieve with your pay practices. Job analysis can establish internal relativity as a means of interpreting job-specific competitive labor market data ranges — some of which are quite wide — when creating a pay structure. These steps will lead to measured and objective job classifications and associated pay levels that can guide your pay decisions.

How evolved is your pay plan?

A solid pay plan requires a philosophy to guide policy, internal job evaluation and market analysis — as well as a communications component to support transparency and employee trust. Organizational pay plans may range from an ill-defined plan on one end to a comprehensive design and implementation roadmap on the other. Most organizations are in one of the following five stages on an organizational pay plan spectrum:

Exploring. Building awareness and discussion of compensation strategies and structures
Developing. Establishing a formal compensation philosophy and strategy
Emerging. Developing a new pay structure to frame pay decisions that are competitive, cost-effective, equitable, legally compliant, motivational and easy to communicate
Established. Maintaining and updating the structure to accommodate labor market inflation, new jobs and organizational changes
Leading. Continuously improving practices and embracing creative, innovative approaches to total rewards, consistent with the organization's culture and values

Beyond compliance: Steps to making better pay decisions

Determining where your organization falls on the pay plan spectrum is a good first step. To continue the journey:

Develop a compensation philosophy. What are your compensation and equity goals? What role do pay and overall total rewards play in attracting and retaining talent? What is the tolerance for transparency and the feasibility of the compensation strategy? Consider how the company's ability to pay aligns with the market, and to what degree tenure and performance figure into pay.
Assess job descriptions. Are they up to date? Do they include percentage of time relative to duties and responsibilities? Are they Americans With Disabilities Act (ADA) compliant, exempt or non-exempt? Consider gathering employee input and manager sign-off.
Create a pay structure and classify jobs using job values based on internal relativity and labor market research. Consider only those factors that are job related and agnostic to individual employees' age, race, ethnicity, gender or other protected class characteristic. Base pay plans developed in this manner can make pay equity analyses unnecessary.
Determine pay adjustments annually or otherwise as needed. Review the organization's pay philosophy to determine employee pay relative to the job value and budget limitations.

Conducting Compensation Analyses (43%)

Identified as employers' top strategic priority for attracting, retaining and engaging talent in 2023.

Source: Gallagher Q3 Workforce Trends Pulse Survey, October 2022

Communicate to employees on a need-to-know basis the overall pay philosophy, goals and methodology of the plan.

Maintain the plan as a strategic management tool by adjusting for labor market inflation and classifying/reclassifying new and changed jobs as needed.

Communicate your pay plan to employees

Employee communications are more critical and sensitive than ever. Now, employers must be able to communicate not only "what" but "why" to build employee trust, loyalty and retention.

The best pay communications plans use definitive language to explain the organization's compensation philosophy. Managers must clearly explain the plan's goals and methodology to help employees understand how their pay was determined.

Gallagher can help employers develop and communicate employee pay plans. Explore additional insights on communications strategies at Gallagher's employee experience portal.

A structured compensation plan delivers many benefits

Employers want pay policies and practices that support competitive, equitable, cost-effective, compliant and — in some cases — motivational wages and salaries. Pay transparency laws serve as a catalyst for compensation planning as part of a larger compensation strategy. The most successful organizations embrace this holistic approach as a way to enhance organizational competitiveness and wellbeing. A well-designed compensation plan and communications strategy will:

Embody your organization's values.
Enhance employee trust, engagement and morale.
Support an environment that rewards performance and builds career wellbeing.
Motivate employees to perform at high levels.
Attract and retain talent, reducing costs associated with turnover.
Foster a positive workplace culture.

Gallagher can help you navigate pay transparency and equity

Minimally, organizations must comply with pay transparency, equity and reporting requirements. Employers that view pay transparency as an independent objective fail to achieve strategic goals.

At Gallagher, we help teams like yours develop compensation plans that are internally aligned, market driven, equitable, cost effective and easy to communicate to employees. Such well-developed plans will comply with new pay transparency laws and other regulations. When implemented, a holistic compensation plan can help improve pay management practices, motivate employees and support organizational wellbeing.

Let our experienced team partner with you to create a custom solution based on your culture and organizational goals. Please visit www.ajg.com/compensation to learn more.

Contact a Gallagher expert to explore a customized strategy and apply the latest data to drive decisions that help your organization face the future with confidence.