With the coming of the new year, the Government of Ontario’s Pay Transparency Act took effect on January 1, 2019. As the first legislation of its kind, its goals and expected impacts are worth a closer look.

Taking Aim at Pay Equity

According to the Ontario Ministry of Labour, part of the motivation for the bill was to to “give women more information when negotiating compensation that is equal to their male peers”—in short, pay equity. The legislation would:

• Require all publicly advertised job postings to include a salary rate or range
• Bar employers from asking a job candidate about their past compensation
• Prohibit reprisals against employees who discuss or disclose compensation
• Establish a framework to require larger employers to track and report compensation gaps based on gender and other diversity characteristics, to be determined through consultation

At some workplaces, you may have been asked to sign a Non-Disclosure Agreement regarding your pay. Under this legislation, firms would not legally be allowed to do that. However, regardless of the law, most people find themselves in a work culture where wages are not discussed.

A Call for Kudos (With Caveats)

This bill not only seeks to empower job seekers, but pushes for a direct change in workplace culture. Although it promises to address gender pay gaps, it’s not clear how much the bill would help employees in salary negotiations. For example, although potential hires are not required to reveal previous compensation, employers are free to make them feel like they need to.

Also, under this bill, although employers are required to revealed a salary rate or range before any negotiation takes place, a low wage could be chosen to anchor the salary at or below the industry average. Similarly, a chosen range could be shifted down to take advantage of the psychology of meeting in the middle.

While the Pay Transparency Act only applies within Ontario, organizations everywhere can always develop their own transparency policy. Companies that have implemented a transparency policy have found they stand out in recruitment efforts, have stronger corporate culture with higher retention and possess stronger employee loyalty. This acts as a cushion during inevitable economic downturns. Despite the benefits, the requisite need for a culture shift likely remains the biggest barrier for those seeking to embrace the potential.

‘Radical’ Transparency Already in Play

Buffer, an eight-year-old digital marketing platform used by 80,000+ firms, including Microsoft, has implemented what they call radical transparency. They post every employee’s name and salary on their website including how they calculate their pay! Check it out here.

Buffer’s CEO and co-founder, Joel Gascoigne, who makes exactly $225, 518 a year, believes it builds a sense of fairness and has had a positive effect on recruitment, bringing over 2,000 applications for five-10 positions at any time, as reported in the Wall Street Journal.

Even so, Gascoigne admits, “Some employees were reluctant at first… but none has had any problems because of the exposure.”

One issue with their algorithmic way of calculating wage is that there is “no negotiation” regarding salary—something that plenty of talent from hot-tech cities might not appreciate. Business Insider reported that Buffer’s pay transparency policy resulted “in a decrease in applications from San Francisco and New York City” despite the overall high volume.

Other companies with a form of radical transparency include the grocery mega-firm Whole Foods, Bridgewater, SumAll, Verve, Zappos and Patagonia.

To be Clear About Transparency

While there are plenty of notable transparency pioneers, people often talk about transparency like it’s optional. They fail to understand that transparency exists inherently to a certain degree in any collection of people working together. Transparency relates to the quality of interactions which is core to the very idea of business; transfers of value. This brings us to a good question—what is transparency exactly?

Behind the buzz, transparency is a multifaceted macro-variable involving honesty, communication, accountability, trust, as well as the accessibility, quantity and quality of information. It’s also not always clear how these factors interact.

Consider whether transparency policies affect an increase in trust or whether it’s strong trust among employees that’s needed for transparency to have an effect? It’s likely that all the elements of transparency are interdependent and there’s plenty of literature on the subject. Any discussion of transparency that doesn’t acknowledge its nuanced nature will fall short. As a buzzword, transparency is far too often used in a carefree way.

It’s common thought that transparency increases employee trust in an organization and that it helps make individual decision making more efficient. However, is it really transparency that’s responsible?

A joint study in the European Economic Review suggests that its the interpersonal communication itself (independent of the transparency) that returns the benefits from transparent communication. Is this a huge blow for transparency advocates? Not exactly. It’s common knowledge that communication fosters productivity between people. Transparency means there are more things employees can discuss and a culture for those discussions to actually happen.

Transparency policy does produce benefits as Buffer and others have shown. There are a number of ways that transparency benefits an organization, one of which is employee feedback.

The Feedback on Transparency

In her INBOUND talk (WATCH VIDEO), Kim Scott, a CEO coach who has had management responsibilities at Google and Apple, describes what she calls “radical candor”, her 21st century re-formulation of tough-love management.

In her book, Radical Candor: Be a Kick-Ass Boss Without Losing Your Humanity, Scott tells a story of an employee she really liked but who didn’t produce good work. She says she engaged in “ruinous empathy” by failing to directly challenge his poor performance despite caring for him. Eventually, she was forced to fire him or divide the team. During her inevitable confrontation about his poor performance, he plead “Why didn’t you tell me?” Ouch. Scott realized she had failed to provide transparent feedback.

Such critical conversations and employee engagement are a complicated phenomenon that involve a number of factors. Feedback is one of the key metrics that we have identified at Jalapeño Employee Engagement. As we saw with ruinous empathy, transparency is an important factor in effective feedback, which suggests it might impact employee engagement more broadly.

Engaging the Quantity and Quality of Information

In their 2015 Employee Engagement Trends Report, Quantum Workplace identify the six top drivers of engagement. The drivers are listed as statements in the order of most agreement by engaged employees:

• The leaders of this organization are committed to making it a great place to work
• I trust the leaders of this organization to set the right course
• I believe this organization will be successful in the future
• The leaders of the organization value people as their most important resource
• I see professional growth and career development opportunities for myself in this organization
• I trust the senior leadership team to lead the company to future success

Drivers of engagement numbers two, three and six rely on faith in their leader’s commitment to the organization’s success and drivers one, two, three, four and six relate to leadership integrity and trust. This insight resonates with the “quantity and quality of information” definition of transparency.

Having a sense of where the company is and where it’s going, as well as a sense of who the leaders are and what their values are, is necessary for every top driver of employee engagement. Effective employee engagement is maximized only if transparency is embraced in principle and practice, but there is an ideal limit on transparency.

Transparency is Radical (Not Total)?

Ray Dalio, an American billionaire and founder of the investment firm Bridgewater Associates (mentioned earlier), wrote Principles, a book that encourages corporations to adopt a policy of “radical transparency.” Radical transparency means giving unconventional levels of free, open access to otherwise sensitive corporate information.

“Don’t get me wrong, radical transparency is not the same as total transparency. It just means much more transparency than is typical,” Dalio clarifies. “We do keep some things confidential, such as private health matters or deeply personal problems, sensitive details about intellectual property or security issues, the timing of a major trade, and at least for the short term, matters that are likely to be distorted, sensationalized, and harmfully misunderstood if leaked to the press.”

Some other possible drawbacks of transparency-gone-wrong are information overload, unproductive second guessing from lower management, resentment due to salary differences, reduction in creativity due to over-scrutinizing superiors/clients and the possibility of information being used with malicious intent.

That said, a company that publicly embraces transparency in principle and practice will attract people that resonate with the principle and thrive in such an environment. Those negative effects are more likely in companies with workplace culture that have yet to undergo the needed shift towards transparency. Those firms won’t have those ‘principled’ players in place, making the shift more challenging. To be fair, every business decision carries risk and cultural changes have some of the least precise ROIs even though the evidence for the benefits is clear and accurate.

Such cases of “culture shock” could be diminished by rolling out transparency policy while scaling or during periods of higher turnover so people can be selected whose values align with transparency. Even better, entrepreneurs could decide to have a solid transparency policy from the start of a business.

So how can we tie all of these concepts together: the need for transparency, its relationship with feedback and the question of pay transparency?
Salary IS a Form of Feedback?Pay transparency is special. It has great potential for driving engagement while being a sensitive tool that, as we have seen, can backfire. One concern with implementing pay transparency is that some employees might be emotionally invested in their wage and see differences with colleagues as differences in personal worth.

An article by Julian Birkinshaw and Dan Cable in McKinsey Quarterly titled, “The Dark Side of Transparency,” makes a compelling argument for the cause of this perception. According to the authors, ”[There exists a] psychological phenomenon of social comparison, whereby people have a need to compare themselves to others… Perceiving our ratio of rewards to contributions as worse than other people’s creates mental dissonance that can spiral into envy, distraction, stealing, withdrawing effort, or quitting.”

However, in a very real sense, transparency isn’t optional; there is always a responsibility to provide frequent, insightful feedback to employees. Pay transparency adds the extra responsibility of understanding and harnessing the fact that salaries are a form of feedback. What does that look like?

Consider pay transparency as an opportunity to publicly reward employees who show desirable behaviour. Since everyone is aware of everyone else’s increase in salary, the high achievers can serve as exemplars. Jalapeño has found that some workplaces lack role models and this alone could single handedly shatter the 80/20 rule (that 80 per cent of work is done by 20 per cent of the employees).

The Good With the Bad

Even so, disciplinary action can be unavoidable. Remember, avoiding tough feedback is ruinous empathy. Dane Atkinson, the CEO and co-founder of SumAll, a firm that engages in pay transparency, reported that he had to reduce some employees’ pay in certain cases. If he didn’t, their salaries would have been seen as unfair and the valuable, sensitive employee-employer trust would have been broken.

It was also noted that “[pay] transparency shifts the burden to the dissatisfied employee to ask for a raise.” One might see this as a burden, but implemented properly it empowers employees. Despite Buffer’s “no negotiation” policy regarding their algorithmic salary calculator, they do allow exceptions if a strong enough argument can be made before a committee.

Opaque salary policies inherently carry both the logical question of whether an employee is being paid fairly and the lingering emotional frustration of whether they should feel ripped off. This could be quelled by strong employer trust but, as we’ve seen, transparency reinforces trust.

While pay transparency has clear benefits, transparency regarding bonuses has not been shown to be effective. In one case, when a firm was clear about the way bonuses were evaluated, employees gamed the system. Instead of being an unexpected reward, the bonuses built a culture of competition where not receiving a bonus felt like negative feedback—as if bonuses were part of their baseline salary. It resulted in decreased trust in the employers and a significant decrease in the employees’ sense of fairness regarding bonuses.

At Jalapeño, we faced a scenario with a Vancouver company where the lack of role models or a clear definition of “good” work made self-improvement difficult for employees. In this scenario, we might recommend strategic salary raises and/or bonuses if it’s feasible.

When a business embraces transparency—in principle and in policy—they stand out during recruitment and experience lower turnover, higher employee loyalty and stronger employee-employer trust; as a result, they have higher employee engagement and higher profits.

Understandably, there are limits to what businesses should be transparent about, including sensitive information, industry secrets, security information, the timing of deals and bonuses.

Alternately, transparency needs to flow from the top and throughout an organization, supported by ongoing communication and feedback. As research and experience shows, employees need to trust their leadership and to have a sense of where the company is and where it’s going in order to be fully engaged.

Since there’s always transparency to a certain degree in a business, companies must necessarily strive for a balance between transparency and privacy. The goal is to ensure the benefits are maximized and the drawbacks are minimized. To undervalue transparency, or worse, to be willfully ignorant of its necessity and benefits, will decrease employee engagement, stifle feedback and result in lower productivity and profits.

If unexplored opportunities for profit aren’t enough of a reason for businesses to adopt a transparency policy, consider what motivated the Ontario government legislation—social responsibility.

Luc Briedé-Cooper is the Marketing and Business Development Manager at Jalapeño Employee Engagement in Vancouver, BC, Canada. He has a BSc. in Physics from the University of British Columbia.

Jalapeño is bringing their vision of a better workplace to life by helping firms to increase employee engagement and profits using Jalapeño’s powerful platform paired with professional services.”For updates regarding transparency legislation and information about employee engagement, visit Jalapeño Employee Engagement on LinkedIn, Facebook, Twitter, Instagram or check out our website.