Compliance

Pay Transparency: Paid in Full Disclosure

By Todd Henneman

Mar. 25, 2015

Namasté Solar practices what CEO Blake Jones calls “extreme transparency.” “There are basically no company secrets,” he said.

Every document and every meeting is open to all 105 employees of the Colorado-based company, which installs solar-powered systems. And everyone knows what everyone else makes.

“At my best employers, there was always a lot of water-cooler talk about how much other people made,” said Jones, whose résuméincludes a stint at a subsidiary of Halliburton Co. “We’re saying, ‘Here’s the exact information. We don’t want you to incorrectly speculate.’ It’s all very clear. We even share what total compensation is — the cost of all health insurance and payroll taxes and everything else.”

Employees have access to salaries, meeting minutes and other documents through the company’s intranet. Namasté Solar also shares finances and other key data in what Jones calls monthly “big picture” meetings. During annual salary reviews, the spreadsheet is distributed by email.

The transparency reflects the values of the 10-year-old company, said Jones, who calls it a “democratic workplace.” It’s cooperative, where 50 of the 105 employees own equal shares. After one year, workers become eligible to buy a share for $5,000.

“An important democratic value is transparency,” Jones said. “It builds trust. It instills a sense of ownership. When everyone understands what’s going on in the company, they ultimately will do a better job.”

No Secret

Namasté Solar is one of a number of young but vocal organizations that have rejected the long-established corporate norm of pay secrecy and instead embrace the other extreme. They’re providing a real-world test to what academics have wondered for decades: What effect would pay transparency have on performance? Such a policy has the potential to avert discrimination, but it also has the potential to create acrimony, if co-workers become jealous of another’s pay. And the uneasiness goes deeper with public employees, who face the ire of taxpayers when their pay — even if justified — becomes the subject of mean-spirited diatribes. It also has organizational leaders and workers debating where to draw the line.

ON THE WEB

Transparency Is Key

Don Tapscott, co-author of “The Naked Corporation” calls transparency one of the key principals of what he labels the Open World. In the era of the naked corporation, he said “fitness is no longer an option.” Companies must “undress for success.” Workforce.com/NakedCorporation.

“There really hasn’t been a definitive series of research studies that say all you have to do is make public and you’ll have a disaster or everything will get better,” said Edward Lawler III, director of the Center for Effective Organizationsat the University of Southern California Marshall School of Business. “There are a lot of ifs, ands or buts.”

Lawler, who has studied the topic for 50 years, has found negative effects in pay secrecy. People tend to overestimate the pay of others and become dissatisfied, leading to turnover because employees perceive they’re underpaid.

“If you don’t give people information, they make assumptions,” he said.

SumAll, a New York-based a data analytics company,maintains a file on its network that lists the equity allocations and the salaries of everyone who works there. Its 50 employees have access to it, CEO Dane Atkinsonsaid, and a transparency committee ensures the data are kept current.

Atkinson creditsthe salary transparency with producing a lot of“natural positive effects”: fairness instead of inequities, dedication instead of detachment, and collaboration instead of fiefdoms.

“It does make for a better company, and it does make for a more equal world,” Atkinson said. “It’s a necessary idea.”

It also helps employees take charge of their careers, modeling behavior after co-workers who earn more or switching to jobs that pay more. But he acknowledges that the transparency also forces executives to explain, rather ignore, the fact that the company’s salespeople make a lot of money considering their backgrounds.

“We have to talk to spectacularly trained scientists who went to Harvard about how the guy who went to Miami University is making the same amount of money as he does,” Atkinson said.  “Those are the hard conversations that usually people are spared, but in our environment they have to live through.”

Transparency hasn’t fueled turnover, he said. In fact, SumAll has less than 10 percent churn, Atkinson said, compared with an industry range of 30 to 50 percent.

Social media startup Buffer went a step further. It gained national attention in 2013 when CEO Joel Gascoigne posted on his blog the company’s salary formula along with all of its employees’ salaries. Buffer continues to use those formulas, spokeswoman Courtney Seiter said. This January, Gascoigne introduced the Transparency Dashboard, where visitors may access salaries, revenue and other key data.

In some ways, these startups are mirroring what has happened in the public sector. Pay of public officials long has been available through state and federal freedom of information laws. In recent years, some states have passed laws that make government pay and benefits more easily accessible. Arkansas, for example, created a website in 2011 that allows anyone to search for salaries by employee name.

AnneWeismann, interim executive director of the government-watchdog group Citizens for Responsibility and Ethics, believes that government accountability includes taxpayers having a right to know the salaries of public employees.

“You’re using taxpayer money,” Weismann said. “Taxpayers are entitled to some accounting for it.”

Several watchdog organizations asked the Obama administration to disclose publicly the calendars of public officials, inspector general reports and correspondence with Congress.

“It stems from the same fundamental belief that how public officials function, who they are meeting with is of public interest and should be readily available,” Weismann said.

However, transparency comes with a price. After a California newspaper published a story about more than 500 teachers earning six-figure salaries, hundreds of readers posted comments debating their wages — something that management consultants, software engineers and many other occupations never experience.

“While many schools suffer financially these rich teachers laugh all the way to the bank,” a commenter registered as Jerry Jones wrote. “Then sit in front of their tax preparer looking for ways not to pay taxes.”

Commenter Adrian Arancibia wrote: “Teachers’ hefty salaries are driving up taxes, and they only work nine or 10 months a year. It’s time we put things in perspective and pay them for what they do — babysit. We can get that for less than minimum wage.”

Labor economist Linda Barrington said employees have begun to question pay as websites such as aGlassdoorand PayScale began posting salary data.

“They think it may be good comparison data, but it may not be,” said Barrington, executive director of the Institute for Compensation Studies at Cornell University. “But it’s out there. And then they think, ‘How come that’s not me?’ ”

Pay for Performance

The structure of pay also has changed. American employers increasingly have shifted from paying hourly wages to performance-based salaries. Anxiety about pay has been an unintended consequence of pay for performance, Barrington said.

“There’s more of your income being determined in this black box, which is you met your objectives to this degree and, therefore, you’re getting paid this much,” she said.“People start to wonder: ‘Am I being evaluated fairly? Am I being paid fairly? Maybe everyone should just post all the salaries.’”

Often when people think of transparency vs. secrecy, they think of it as all or nothing, Barrington said. In reality, there’s continuum. Companies could be transparent about how a particular performance score translates into a particular merit increase. Or companies could be transparent about pay grades.

In a way, a lot of power rests with employees. They could make pay transparent. That’s because employees could write their pay on a chart in the break room, she said.But people shy away from pay transparency when it’s posed that way.

“Part of the catch is psychological,” Barrington said. “You want to know everyone else’s pay, but you don’t want everyone else to know yours.”

Cynthia Estlund, a professor at New York University School of Law, said company rules — and tacit norms backed by threats of discipline — that forbid co-workers from discussing pay violate the National Labor Relations Act.

“Not only should employees have the right to talk about their pay,” Estlund said, “they do have the right to talk about pay.”

An engineering firm in Texas learned that lesson in 2013. The National Labor Relations Board determined that Houston-based Jones & Carter Inc. illegally had fired an employee for talking about pay with co-workers.

The board ordered Jones & Carter to rescind its policy that had forbidden employees from discussing salaries and to pay back wages and offer reinstatement to the fired employee.

Estlund herself has worked for private universities, where pay wasn’t disclosed, and public ones, where pay was known. She appreciated the accountability that came from more openness about pay, but she acknowledges that she has mixed feelings.

“I’m not rushing to talk with my colleagues about pay here,” Estlund said. “I can understand why employers, in the interest in workplace harmony, might want to keep pay secret.”

However, she has concluded that the benefits of pay transparency outweigh the costs. The No. 1 benefit: shining a light on pay gaps based on gender or other unjustifiable reasons.

‘When everyone understands what’s going on in the company, they ultimately will do a better job.’

—Blake Jones, CEO, Namasté Solar

“I don’t know if there is anything on the other side that is as clear of a loss as that clear gain from transparency,” she said.

Whole Foods Market Inc. remains the largest company to make salary information of all employees available to any team member of its 400-plus stores.

John Mackey, the company’s co-CEO, has said that the transparency eliminates gossip and averts favoritism and nepotism.

The naturaland organicgrocery chainalso limits the salaries of its executives, most recently setting it at 19 times the average full-time team member’s salary.

One challenge for large companies to adopt pay transparency: skeletons in the closet, said Lawler, the USC business professor.

“Often when I’ve preached to companies about making pay more public, they’ll say, ‘Give us a couple of years to get things in order, and then we’ll make it public,” Lawler said. “The veil of secrecy encourages, or at least allows, people to think they can get away with indefensible pay decisions.”

Little research has assessed effects of pay transparency outside of the lab.

Economist David Card of the University of California at Berkeley and his colleagues conducted one of the few studies to look at the effects in the real world. They evaluated the happiness of a sample of University of California employees before and after they were told about a database that gave salaries of all state employees.

Workers with salaries below the median for their occupation were more dissatisfied with their pay and job after they knew that they earned less. That finding may not be surprising. But the researchers also found that employees earning above the median reported no higher pay or job satisfaction after they knew they were in the top half.

Maureen Driscoll, a principal in the Minneapolis office of compensation and benefits consulting firm Verisight Inc., believes that employees should be encouraged to treat their own compensation levels as confidential and that employers should help employees understand the organization’s total rewards philosophy.

She encourages her clients to show employees the salary range for their job, where they fall within the range and ways to merit a raise.

She also recommends educating managers and supervisors about the basics of compensation — the source of benchmarking data, how often it’s updated and why the organization considers it reliable — so they’re able to address questions.

“Let’s say a company has a very generous benefit program, better than what the market provides. The company might choose to have its base salaries slightly below the market because its total package is actually better than the market,” Driscoll said. “Part of it is an education process with managers and supervisors to understand what is the philosophy in our organization about our total package.”

Recently, Namasté Solar asked its employees about its complete compensation transparency. Should the status quo continue? Or should the company remove names or move to total secrecy? The result: Near-unanimity to maintain complete transparency, the company said.

“Once everybody is used to it, it’s just not a big deal,” Namasté’s CEO Jones said. “And we can say that from experience.”

Todd Henneman is a writer based in Los Angeles.

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