When Colorado first enacted its pay transparency law in 2021, some employers balked, refusing to hire workers in the state. Now that more than a quarter of US workers are covered by some form of salary disclosure law, with more likely to follow, that’s no longer feasible.
Some employers may also be starting to see the benefits of openness and voluntarily sharing salary information. In addition to attracting more applicants, research shows that salary disclosure improves candidate quality, boosts retention in some cases, and can help narrow the gender and racial wage gaps. It can also benefit smaller employers: Indeed found that candidates were more likely to apply for jobs at companies they didn’t recognize if they posted salary information.
But salary transparency can also have unintended consequences, according to analysis by Todd Zenger, a business professor at the University of Utah. As he and Indiana University business professor Tomasz Obloj write Harvard Business Review, studies suggest that the practice lowers overall wages because it gives employers cover to avoid negotiating for higher pay. Bosses can more easily fend off an individual request for a raise when they can claim that a negotiation for one is a negotiation for all.
Other studies show that pay transparency can also reduce pay gaps between high and low performers, causing potential dissatisfaction and turnover among talented staff. And transparency pushes employers to reward measurable metrics over potentially more important qualities like cooperation and helpfulness. When National Hockey League players learned that their pay was largely based on offensive performance metrics, their defense tanked, and overall performance declined.
While removing the guesswork about compensation is meant to smooth the negotiation process, it can also have the opposite effect. Weiting Liu, who runs Arc, a job search platform for software developers, says that many applicants overestimate their qualifications and request salaries at the top end of the range. “This poses additional challenges for employers, as they need to come up with reasons to explain why they don’t meet the qualifications for the top salary,” he says.
Nonetheless, pay transparency is catching on. Indeed’s data shows that every US state increased its disclosure rate over the past year, and five states did so by more than 20 percentage points. Three were states that had passed state or local laws—California, Washington, and New York—but the list also included Vermont and South Dakota, neither of which mandate pay disclosure.
Stahle hypothesizes that this is because of their proximity to states that do have laws in place, New York and Colorado. Employers may want to attract commuters or remote candidates in those states, he says. He also found that pay transparency increased in states that simply proposed laws, which both of these states have.
It remains to be seen how useful that data will be if the labor market cools, potentially widening the ranges employers advertise. “There may be ups and downs over time,” says Stahle. “But salary transparency is here to stay.”
Updated 9-18-2023, 12.15 pm EDT: This article was updated to correct the spelling of Cory Stahle’s name.