Pay Transparency Explained: Everything HR Professionals Need to Know

A ban on pay secrecy clauses means that employees are free to discuss their salaries with others if they choose to, marking a pivotal stride towards greater transparency.

In light of this legislative change, what do HR professionals need to be aware of in this new era of pay transparency? What are the consequences of pay transparency? And if you are considering implementing pay transparency within your organisation, what should you keep in mind?

We spoke to Natasha Hawker, the Managing Director of HR consultancy Employee Matters. With more than two decades of experience in the world of HR, Natasha is a sought-after expert in the field of HR and compliance.

Read on to discover Natasha’s advice for HR professionals wanting to improve pay transparency.

Pay secrecy versus pay transparency

Pay secrecy is not to be confused with pay transparency. Pay transparency is when an organisation voluntarily makes employee salaries readily available. This can be done on an internal basis or can be published externally, such as on a job advertisement.

Pay secrecy refers to banning employees from discussing their compensation with anyone, whether inside or outside the organisation. A new pay secrecy law took effect on 7 June 2023, banning pay secrecy clauses in employment contracts and other workplace agreements.

“In the past, employment contracts contained clauses that required complete confidentiality when it came to discussing or sharing your compensation arrangements,” Natasha explains.

“As a result of this change, you cannot forbid any employee from discussing their compensation or asking another employee what they’re earning. That employee does not have to answer the question, of course, but they can if they choose to.”

The push for pay transparency

Pay transparency openly sharing information about employee salaries within an organisation. This allows employees to compare their pay with others in the company and can extend to candidates, too.

ELMO’s latest Employee Sentiment Index (ESI) revealed that 86% of Australian workers believe there should be greater pay transparency in organisations, with retail workers the most likely to agree (94%).

“Organisations may not think of pay transparency as a priority right now,” says Natasha. “But if you have a solid, proactive HR policy, implementing pay transparency is not much of a stretch. In turn, you should have better productivity and be able to attract better candidates while retaining your people. So there’s definitely a financial return on investment to being more transparent.”

How pay transparency can drive pay equity

Banning pay secrecy and promoting pay transparency are both critical for facilitating more equitable remuneration practices. With Australian organisations over a certain size set to publish their pay gaps from early next year and plans to bring in similar legislation in New Zealand, the conversation around pay transparency will only become more prevalent.

“Businesses need to be prepared for employees to start raising issues of pay transparency at work,” says Natasha. “If a pay gap is discovered between colleagues, then the business needs to be able to back up that disparity. This is where good HR processes are necessary.”

“This includes clear setting of goals and expectations, a detailed performance process and a transparent salary increase process.”

When you have these clear frameworks to support how remuneration decisions are made, employees can map and assess their compensation level based on clearly established metrics. These frameworks make it much easier for businesses to communicate their decision making clearly and openly.

“If employees understand what is expected of them then they should perform accordingly, and high achievers will be known inside the organisation. It shouldn’t be a surprise among colleagues that those who go above and beyond are recognised with greater benefits,” says Natasha.

5 steps to implement pay transparency

While pay secrecy clauses have now been banned, it doesn’t mean organisations are compelled to implement a pay transparency policy. But it pays to be proactive. Committing to greater transparency is worth considering to help the business prepare for pay gaps to be made public.

Here are the five steps that Natasha recommends organisations take towards creating a pay transparency policy:

1. Review and amend your contracts to remove any pay secrecy clauses

First things first, make sure you’re compliant. Businesses must remove the pay secrecy clause in any employee contracts that have been issued on or after 7 December 2022. This is also a good opportunity to review any contract templates to ensure they are compliant with the new legislation.

2. Conduct a pay audit

You can use salary data to identify pay gaps and trends by conducting a pay audit. Make sure to examine pay gaps at different levels (like-for-like, by-level, and organisation wide).

Read more: The 3 types of gender pay gaps that exist in the workplace

If inequalities are found at a macro, investigate why. For example, is the composition of your workforce unequal? Do you have more men in leadership roles or concentrated within higher paying departments?

Consider how you could rectify any like-for-like gaps in the short-term and commit to department or organisation-level improvement in the future.

3. Communicate the change and rationale

Communication is key, and employees will appreciate being kept up to date concerning the new pay transparency policy you plan to implement. It’s important to let them know what will be happening and the reasons behind it.

This is particularly important for the managers in your business. They are the people on the ground most likely to be asked about pay transparency by their team members and so it’s important they feel comfortable having those conversations. Consider putting together a frequently asked questions document to help answer any queries that will inevitably arise.

4. Develop a dispute resolution process for underpayment complaints

You should expect that some employees may want to take this opportunity to raise complaints about their remuneration. To prepare for this possibility, create a dispute/resolution process framework (if one does not already exist) to ensure that employees understand their entitlements.

Preparing for this eventuality can help HR professionals to be on the front foot, and ultimately guide the situation towards a satisfactory resolution.

5. Formally document the performance appraisal process

Ensure you have a formal performance appraisal process in place to show how performance impacts salary and capture this information in one central place. This document should outline what different levels of performance looks like in practice so employees can clearly see the link between performance and salary.

The potential risks of pay transparency

While there are plenty of benefits to implementing pay transparency, it’s always worth considering the possible risks.

Turnover

With greater access to salaries within the company and outside of it, employees may jump ship if they can find a better offer somewhere else – especially if they feel undervalued. However, it should also be noted that pay transparency can sometimes have the opposite effect. A recent study by Payscale discovered that pay transparency can reduce employee turnover by up to 30%.

Impact on culture

Transparent pay structures might shift the focus of discussions and negotiations toward compensation rather than an individual’s job performance, skills, or contributions to the organisation.

Alternatively, a culture of competitiveness and comparison could emerge, overshadowing collaboration and teamwork. Employees might be more focused on their peers’ salaries rather than working together for the collective success of the organisation.

Conflict and discontent

Revealing pay disparities within an organisation can lead to resentment and conflicts among employees. Those who discover they are being paid less than their colleagues may feel demoralised and undervalued. That’s why it’s imperative to have a clear framework for deciding salary and bonuses based on performance.

Pay transparency as a vehicle for change

Pay transparency can be a powerful tool for positive change and can benefit employers and employees.

“The good news is that if you have been implementing sound performance management processes, have clear skills attached to the roles and have beneficial feedback sessions, you’ve already taken important steps towards implementing pay transparency,” says Natasha.

“And if you don’t, this is a great time for you to look at your HR processes and ensure you’re doing everything you can to minimise pay inequity within your organisation.”

How technology can help

The first step to tackling a gender pay gap is understanding it. ELMO Remuneration offers greater visibility of your salary and benefits data, helping managers and admins to make informed decisions.

Only with the right data can HR leaders design a strategic action plan to close their gaps – and importantly, keep them closed.

If you’ve enjoyed this content and want to see more like it, subscribe to our newsletter for first-look access to our free research, blogs and resources.