Will Salary Transparency Laws Change Employee Compensation?

As the employment market continues to shift, a worker push for transparency is making headway. About a quarter of U.S. workers now live in states, counties, or cities where employers are legally required to share pay ranges. In some areas, including New York City and the states of Colorado, California, and Washington, employers must list the salary range in job postings. Other localities’ laws oblige companies to share salary ranges upon request, during the interview process, or when extending a job offer.

It’s safe to assume that available salary ranges may change the level of applicant interest, but it’s harder to envision the big-picture effects these transparency laws will have on salaries and compensation overall. We turned to our expert panelists for their responses to this statement: New salary transparency laws will cause companies to increase bonus pay and other nonreportable perks as a share of total compensation.

Agree

The largest group of panelists (45%) agree to some extent that transparency laws will drive changes in compensation, with some saying that these laws will increase pay equity and empower employees. Bocconi University’s Andrea Fosfuri asserts that “salary transparency is likely to generate employee complaints and salary adjustment requests as pay differentials become more visible.” Similarly, Anita McGahan of the Rotman School of Management writes that these laws “are likely to have the intended effect of exposing irregularities, which in turn creates pressures for companies to remedy them.”

But others are more skeptical that employees will benefit from transparency laws. Hong Kong University’s Jin Li notes that companies’ responses “will probably weaken the intended goals of the transparency laws.” Yael Hochberg of Rice University points out that companies might work around transparency requirements by setting one base pay rate publicly while adding other forms of compensation, such as bonuses, “for retention, attracting top recruits, and so forth. Academia has been doing this for many years to retain top professors.

Agree

“Other forms of comp will be used for retention, attracting top recruits, and so forth. Academia has been doing this for many years to retain top professors.”

Yael Hochberg

Rice University

Neither Agree nor Disagree

About a third of our panelists (36%) fell somewhere in the middle. “This is one of those claims where ‘it depends,’” writes Rotman’s Joshua Gans, pointing out that these laws could change benchmarking against competitors in addition to affecting salary negotiations with employees. “For some employers and job categories, this may have big incentive or retention effects; for others, it might not,” notes Kellogg School of Management’s Meghan Busse.

Neither agree nor disagree

“Do they want other firms to know that they pay their employees well, or not? It depends. Do they want employees to base their application decisions on salary statements? It depends. Hence, it is hard to predict the impact here.”

Joshua Gans

Rotman School of Management

Some panelists say that the effects will be minimal. “For most firms, I suspect that these disclosures might only have minor effects in terms of increasing pressure on them to pay their employees more,” notes Olav Sorenson of UCLA. Stanford’s Kathleen Eisenhardt contends that “there will clearly be various workarounds.” Both Sorenson and the University of Utah’s Jennifer Brown point out that employees at lower levels in the organization may lack leverage and bargaining power, despite pay disclosures.

A number of panelists mentioned the drawbacks of increasing bonus pay. Economist Preston McAfee points out that “banks often focus on salary for mortgage evaluation, limiting how far companies can go in substituting for salary without harming the employee.” Petra Moser of New York University notes the potential effects on companies’ ability to attract desirable applicants: “Companies may switch to bonus pay if they try to avoid reporting high salaries. But they could also report high salaries to attract the most qualified workers.” Monika Schnitzer of Ludwig Maximilian University of Munich raised similar concerns, writing, “Increasing nonreportable bonuses while lowering reportable salaries may not go down well with potential future employees.”

Neither agree nor disagree

“It … depends on how willing employees are to accept the risk of having a lot of their compensation in a discretionary bonus. (A ‘guaranteed bonus’ sounds like a dodge around the law, as I’m sure companies would realize.)”

Meghan Busse

Kellogg School of Management

Disagree

Fewer than a quarter of the panelists disagreed that transparency laws will increase bonuses and perks. Indeed, London Business School’s Olenka Kacperczyk expects a shift toward pay equity and notes that requiring companies to disclose pay at various stages in the screening process could help reveal gender and racial pay gaps. But she also notes a potential downside: “Pay transparency has been shown to reduce wages overall because firms anticipate stronger negotiation with all employees once wages are disclosed.”

Disagree

“While there will be instances where particularly valuable workers may end up with more ‘nonvisible’ perks, I believe this will be the exception rather than the rule.”

Scott Stern

MIT

Others anticipate that the laws won’t drive major compensation changes. Richard Florida of the University of Toronto writes, “Companies will do what they need to do to comply with the new state salary transparency laws but will likely just stick with their existing compensation structures.” And Stanford’s Erik Brynjolfsson acknowledges that the ultimate results of these laws may be unexpected: “Pay transparency laws can have large and often unintended side effects.”

Many of these laws are sufficiently new; some have been in effect only since Jan. 1, so the downstream implications will take some time to manifest. Across the board, panelists note that there will likely be unanticipated consequences from these new laws, and it will be important to monitor how they play out in the labor market.

In the meantime, Brynjolfsson also points out one big-picture narrative that most can agree is a good one: “Even without these laws, both employers and prospective employees increasingly have access to detailed data about pay rates, working conditions, and other factors that are important to hiring decisions, drawing on a variety of new data sources and analytics.”