Skip to main content

Pay transparency laws are coming to Ontario, and while studies show that such requirements reduce income inequities, their implementation can also bring some unintended consequences.

On Nov. 14 the Province announced it would soon join British Columbia and Prince Edward Island in requiring employers to disclose salary ranges in job postings. According to the Ontario government only 37 per cent of online ads included salary information in 2022. The bill is part of a suite of policies intended to address the gender wage gap and other inequities in the labour market.

Studies find that pay transparency laws are effective in reducing those gaps in a meaningful way, but researchers find they can also lead to some negative side effects. One study published in the Academy of Management Journal in April suggests pay transparency requirements in the United States, United Kingdom and China, lead managers to compress base pay and make secretive arrangements with individual staff to keep them satisfied.

“It’s very hard to have a very legitimate, 100-per-cent bulletproof reason [to pay people differently], so managers will try to mitigate that problem by paying everyone more or less the same,” says the study’s lead author, Leon Lam. “Pay compression will trigger the employees to make idiosyncratic deal requests – they feel like they deserve more, so they raise their hand to ask for more – and subsequently our research shows managers tend to grant those idiosyncratic deals.”

Mr. Lam says in practice pay transparency can move hidden discrepancies in compensation from base pay to other forms of compensation – such as vacation time, flexibility and advancement opportunities – over which managers often have more discretion.

“The purpose of pay transparency is to put everything on the table,” says Mr. Lam, who completed his undergraduate degree at the University of Toronto and is currently based in Hong Kong. “Managers, instead of putting it on the table, they will grant those side deals, so it goes back under the table; that is the counterintuitive part.”

Other research shows that pay transparency can lead to employee dissatisfaction and even interpersonal conflict. A study conducted by researchers at the University of California found that when staff members were given access to their colleague’s salary it significantly reduced job satisfaction among those who fell below the average, ultimately leading to higher turnover.

“That suggests that this negative effect on work satisfaction can be real,” says Kun Huo, an assistant professor at Western University’s Ivey Business School. “It’s probably not a good idea to suddenly throw this information at people without an explanation of pay dispersion.”

Mr. Huo, who co-authored a white paper on the effects of pay transparency for CPA Ontario, says such requirements naturally cause employees to inquire about their compensation, and employers need to be prepared with satisfactory answers.

“What I try to conclude in the white paper is that performance data and how accurately you can measure that is key,” he says. “If you understand what factors drive performance, and you can measure that, and use that to justify salary decisions [and] bonus decisions, then people will perceive it as fair and that creates a more trusting environment.”

Mr. Huo adds that once pay ranges are required in job postings, employers may want to state which attributes they consider base-level requirements and which are used to determine where an employee falls within the range.

Others, meanwhile, fear that forcing transparency in job postings could move more of the labour market away from public listings.

“If you’re sourcing talent, you could talk to your network, companies can look internally, they could look to their employees’ network, and never actually post a job,” says Darcy Clark, the senior principal of compensation at Montreal-based human capital consulting firm Normandin Beaudry. “We haven’t seen that yet, but there’s an idea that companies could try to bypass the legislation that way.”

Mr. Clark emphasizes that for pay transparency to accomplish its intended goals without the unintended consequences, organizations will need to define how performance is measured, how pay is determined and train managers to communicate that information effectively.

That’s what Vancouver-based people analytics firm Visier did before implementing its pay transparency policy, according to its chief people officer Paul Rubenstein. He says the challenges associated with pay transparency requirements only really apply to organizations that are compensating their staff unfairly.

“The first overdue library book for many organizations is the failure to manage pay equity in the first place,” he says. “If you’re going to post salary ranges tomorrow, and you have a lot of employees who are under that range, you better have a good explanation, because they’re going to ask.”

That is why Mr. Rubenstein says Visier reviews its compensation levels twice a year to identify staff in similar roles with a 5 per cent or more discrepancy in salary. “If we can’t explain it, if there’s been some kind of structural misstep, we bring the lower one up so that nobody gets left behind,” he says.

Mr. Clark adds that pay transparency policies will force managers to engage in honest dialogue with staff about performance and compensation, which may be uncomfortable, but is ultimately necessary.

“Pay transparency will lead to performance discussion transparency and more honest dialogue around why you get paid what you get paid and what you need to do to outperform,” he says. “That conversation isn’t difficult; it’s honest. What is difficult is never having that conversation.”

Editor’s note: An earlier version of this article stated the study conducted by researchers at the University of California involved professors. In fact, it involved staff, not just professors. This version has been corrected.

Interact with The Globe