What You Should Know About Pay Transparency

As big businesses prepare to comply with pay disclosure rules, small businesses are also considering how pay transparency can affect employee morale.
August 12, 2015

While your mom may have stressed that it’s not polite to discuss money in mixed company, small-business owners and employees may need to start talking in order to achieve wage equality.

The Securities and Exchange Commission has taken the first step toward pay transparency by adopting a “pay ratio disclosure rule” that “requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees,” according to a press release.

Pulling Back the Curtain

Though the ruling won’t take effect until 2017—and doesn’t apply to private and small-business owners—it's already stoking the ongoing debate around income inequality, and what business owners and shareholders can do to nudge the scale in favor of the middle class and women, who are still largely underpaid compared to their male counterparts. If people know what their colleagues are being paid, the thinking goes, they can begin to advocate for themselves and in turn close the wage gap. 

“What this new regulation will do is reignite the fair wages debate and give employees a bargaining weapon they’ve never had before: facts,” says Brandon Baker, owner of boutique bakery Loveletter Cake Shop in New York City. “Typically, a fair wages debate has consisted of frustrated employees expressing their dissatisfaction and disillusionment with company executives because they had a vague, yet accurate, understanding that their CEO was earning 700 times more than they were even though they worked the same hours for the same company.

“This new pay transparency regulation will equip employees with actual numbers—a weapon they’ve never had before,” Baker continues. 

The stage is being set for more openness around compensation. The National Labor Relations Act protects private-sector employees’ right to talk with their colleagues about matters of importance such as salaries, but “about half of all workers (51 percent of women and 47 percent of men) report that the discussion of wage and salary information is either discouraged or prohibited and/or could lead to punishment,” according to a 2011 Institute for Women’s Policy Research study. This new SEC rule—and President Obama’s 2014 executive orders encouraging transparency and prohibiting pay secrecy for federal employers—may normalize these types of conversations.

Pay Transparency Trickle Down?

As bigger companies prepare for what this new age of wage disclosure will mean for them, small-business owners OPEN Forum spoke to are either finding affirmation in their own policies or worried about a transparency trickle down.

“Pay transparency frightens me as a small-business leader,” says Andrew Royce Bauer, CEO of leather goods company Royce Leather. “At my privately held company, we foster a workplace atmosphere based on cooperative decision making. If employees are sharing salaries, it takes away from the workplace camaraderie and creates a divisive culture that impedes our mission to build a focused and team-oriented small business.”

Many share Bauer’s worry that the desire for more transparency will lead to a sort of naming names in the break room. But there’s a way to do so without upsetting your team, suggests Robyn Tippins, co-founder of high-tech marketing agency Mariposa Interactive, which makes its employees and contractors’ salaries and raises transparent. “By being general—job title X is $50,000 a year—there is still transparency without a breach of privacy,” she says.

Crystal Stranger, president of tax firm 1st Tax, sees a major strategic benefit to the call for big businesses to be more transparent. “If they are listing how much their pay scales are for employees with varying levels of seniority, it becomes easier to determine pay scales and raise schedules,” Stranger explains. “This is really important when creating a business plan because it can be tough to determine total costs of employment, which influences both the cash flow statement and the burn rate, especially as a company grows and needs higher value talent. Without having a clear idea of these numbers, it's tough to know how much you need to borrow or raise to make your business a success.”

While Baker doesn’t think a trickle down will happen—“There is less of a stigma on small-business owners than large corporations," he says—he claims it does align with his own mission to provide fair wages to his employees.

“By introducing pay transparency to large businesses, the SEC will encourage more employees to speak up and will pressure more traditional companies to adopt fair wages,” he adds. “When you pay employees more, what you are actually offering is a career, not a job. And employing career-oriented employees saves you the costs of high turnover, re-hiring, training and acclimation. Someone who has been with your company for 10 years will finish in one hour what it will take a new employee three hours to do. And while you might be paying that new employee $2/hour less to work, they cost you an extra two hours in labor costs to achieve the same task. The perceived advantages of hiring cheap labor is a myth.”

As pay transparency becomes the norm in the business world, small-business owners should consider what that will mean for them and their teams.

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