Change is imminent. In recent years, a proliferation of U.S. pay transparency legislation and regulations as well as investor and societal demands across the globe have gained momentum. And each effort is focused on closing gender and racial pay gaps.
Organizations are at a tipping point, and leaders must act in anticipation of major change. Now is the time to prepare by determining goals, establishing structures, frameworks and programs to support how pay decisions are made, communicating with employees and training managers along the way.
Understanding where pay transparency and pay equity are heading begins with an understanding of from where we have come. Pres. John F. Kennedy signed the Equal Pay Act of 1963 (EPA) to prohibit gender-based wage discrimination between men and women in the same establishment who perform jobs that require substantially equal skill, effort and responsibility, and are under similar working conditions. Upon signing, Kennedy acknowledged that the EPA was a first step, and “much remains to be done to achieve full equality of economic opportunity.”
After the EPA was enacted, other laws further sought to reduce employment discrimination:
In 2017, California amended its law to prohibit unequal pay for employees of different races or ethnicities pay. Each federal, state, county and city regulation thereafter, whether proposed or enacted, has attempted to address this goal: Provide equal pay for comparable work to all employees.
By implicitly accepting past or current pay as appropriate and free of bias, employers’ dependence on applicants’ salary history to set starting pay has played a significant role in perpetuating the wage gap. Massachusetts became the first state to prohibit employers from seeking salary history from job applicants in 2018. Since then, many states and localities have implemented similar bans.
Currently, 29 U.S. states have some prohibition on the use of prior salary to justify pay disparity, and some states go further. For example, Connecticut expanded the prohibition to include employers inquiring or directing a third party to inquire about an applicant’s prior wage and salary history. On January 29, 2024, the U.S. Office of Personnel Management (OPM), the federal government’s human resources agency and personnel policy manager, finalized a rule that bars federal agencies from using salary history to set new hire pay.
While not a federal requirement – nor even a law in all states – many U.S. employers recognized the potential for bias and adopted a salary history ban in all U.S.-based hiring. Instead, they set starting pay based on an assessment of the applicant’s skills and experience without factoring in prior salary history with their employment offers.
Pay range transparency is the latest strategy to narrow the pay gap by providing clarity and visibility into pay levels. Lawmakers are demanding pay range disclosures so that job seekers are better informed when they apply for jobs. Providing job applicants with a salary range that estimates what the employer plans to pay effectively levels the negotiating playing field.
Broader access to pay data has increased pay transparency expectations among both job seekers and employees. 85% of upcoming college seniors and recent college graduates said they are less likely to apply for a job if the company does not disclose the salary range in the job posting, according to Adobe’s Future Workforce Study.
As companies struggle to attract workers in a highly competitive labor market, there is increased pressure on employers to share pay ranges with employees. WTW's global database of millions of employee opinions confirms that fair pay is fundamental to employee engagement. It also is an essential component for high-performing companies.
Several pending federal actions may support a national approach to pay transparency. For example, the Salary Transparency Act, H.R. 1599 would amend the FLSA to require wage ranges be provided to job applicants and allow employees to request pay scales for their current roles. And, the Federal Acquisition Regulatory Council issued a proposed rule, Pay Equity and Transparency in Federal Contracting, on January 30, 2024 which would require U.S. federal contractors and subcontractors to disclose pay ranges in all job postings by the contractor or on their behalf.
Another indicator of change is the potential reintroduction of EEO-1 Component 2, requiring employers to report employee compensation data and demographics to the U.S. Equal Employment Opportunity Commission (EEOC). California already requires pay data reporting, while Illinois requires equal pay certification – another step closer to achieving pay equity.
Finally, the Paycheck Fairness Act was re-introduced in 2023 under S. 728 and H.R. 17 to:
Regulatory attempts to close the pay gap also are accelerating outside of the U.S. The EU Pay Transparency Directive reflects a clear political intent to fast-track change and may provide a preview of regulatory requirements to come for U.S. employers.
Key provisions of the directive require member states to take the necessary measures to ensure that employers have pay structures that ensure equal pay for equal work or work of comparable value. Public- and private-sector employers of all sizes will be required to provide workers with objective and gender-neutral criteria that determines pay, pay levels and pay progression. Employers with at least 100 employees within an EU member state entity will be required to disclose entity-level pay gaps externally and pay gaps by category of worker internally.
Member states have until June 7, 2026, to transpose the directive into their own national law, and then employers will have a year to comply. The directive has enforcement teeth, including providing employees with full recovery plus costs (subject to time limitations). The burden of proof is on the employer to show that no pay discrimination occurred, or they will be ordered to disclose and possibly subject to fines.
Increasingly, organizations are including environmental, social and governance (ESG) metrics in their executive incentive plans. 69% of companies in the S&P 500 have at least one ESG metric in their incentive plans – 67% in the annual incentive plan and 8% in their long-term incentive plan. These metrics lean toward environmental goals (40%); however, of the 10% of companies that added an ESG metric to their annual incentive plan, the most common metric was tied to diversity, equity and inclusion (DEI) (8%), followed by environmental (5%).
69% of companies in the S&P 500 have at least one ESG metric in their executive incentive plans.
ESG investors continue pressuring U.S. public companies to disclose pay gap information, primarily through shareholder proposals. We expect investment companies and advisors to increase their efforts to require talent metric disclosures. These initiatives could result in additional company disclosure and reporting, and lead to more shareholder calls for additional material metrics to be included in incentives. Organizations should start reviewing how they track and measure factors that may be in scope for future disclosures, including talent pool, attraction and retention, development and safety.
A patchwork of regulations, the need for a strong pay program foundation, lack of time to prepare and expanded need for data analysis to deliver required reporting makes implementing pay transparency complex. But, as with compensation program design, where the company’s compensation philosophy and related strategies drive design, the same is true for pay transparency.
Leading organizations develop compelling fair pay strategies and narratives that go beyond mandated disclosure requirements to connect strategy to business and financial outcomes. To achieve financial, ESG and DEI goals, fair pay strategy must at least address the company’s key priorities for pay equity and provide necessary transparency.
Key questions to resolve:
Your fair pay strategy should:
Achieving your ambitions often is a multi-year journey. A roadmap ensures you are assessing, evolving and changing your tactics and anticipating changes rather than reacting to them. Your roadmap also should include a change management and stakeholder readiness plan to support your journey to pay transparency and the changes taken place.
You need to be confident about your pay equity position and prepared to provide greater pay clarity and visibility. Your underlying structures, frameworks and programs must be in place to support pay decisions.
You should:
Many employers that have already started posting pay range information find that their own employees are raising more questions than job candidates. In fact, possible employee reaction was cited as the most common factor preventing organizations from sharing more pay information, according to our 2023 Pay Transparency survey findings.
Employees have elevated expectations that their employers will be transparent and honest in their communications. They expect information on pay just as they are provided with the tools, resources and support to do their jobs. With or without legal requirements, workers strongly support pay range transparency.
In the 2021 Employee Experience Survey, employees claimed they knew how their total compensation compares to the typical employee at their organization, yet a sizable portion of employees do not fully understand their compensation – nor do they think they are paid fairly. Employees also expect a more personalized, consumer-like experience with pay communications, including a complete understanding of each pay element. For many, their current access to pay information is via social media.
Your fair pay strategy should be integrated into your employee communications. Clear information on how pay programs have developed as well as the company’s position on fair pay provides context to your commitments as well as your progress in achieving them. Communicate regularly about how the company’s pay programs work to enable employees to recognize the overall value of their compensation, understand what they can do to influence their pay, and trust pay decisions are fair.
Four out of five organizations rely on managers to deliver information on pay decisions, according to the 2023 Pay Transparency Survey. You must equip leaders and managers to talk effectively about pay – including how opportunities are set, decisions are made and how pay can grow over time with career progression.
Managers serve as ground zero for pay discussions. They must be knowledgeable and capable of articulating the business case as well as the personal impact on employees, all while considering the broader employee experience. Like any other managerial competency, the organization needs to provide support and training to managers not only on the mechanics of pay programs, but also how to have sometimes difficult conversations about a personal topic.
Train managers on employees’ expanded rights to inquire about wages and wage differences and develop a process for responding to employee requests for comparative pay information. Also, remember that managers are employees, too, and have the same rights as those who report to them.
Fair pay is a key component within your HR processes. You need the right data, partnerships, strategy and processes to ensure your organization continues to achieve its goals. If you haven’t started yet, begin gathering input from key stakeholders who can inform program, process and communication improvements. Also, define, track and report on specific metrics to identify whether each event in an employee lifecycle, from job creation through recruitment, development, promotion and performance contributes to fair pay.
Regardless of government regulations, you must continue focusing on fair pay goals. We are at a tipping point and, to maintain the momentum and move forward successfully, you must commit to achieving fair pay, communicate clearly to the public, candidates and employees, enable managers to serve as a resource, and monitor your talent programs to ensure they support your strategy.
