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How companies can respond to new legislation on salary transparency

How companies can respond to new legislation on salary transparency

One of the biggest hiring trends in the US in 2023 is the push for wage transparency. After a wave of local and state legislation last year, 2023 begins with employers facing unfamiliar recruiting territory. More than 1 in 4 Americans live in cities or states with laws requiring pay transparency when hiring.

In addition to this momentum, a continued robust recruitment market and the democratization of access to potential employers through online job boards have enabled applicants to become more selective in where they apply. Of 6 out of 10 job seekers (62%) report that including a salary range in a job posting is the most important driver in deciding whether or not to apply for a position. Employers are ready to act.

Some companies are already responding to this trend and discover that being at the forefront of pay transparency is a competitive advantage for attracting and winning top talent. So the decision for employers today is not whether to adapt to this emerging demand, but how to adapt to this new landscape effective and avoid being left behind.

However, acting effectively on pay transparency is complex and can easily backfire. Visibility across pay scales can put at risk of losing top talent unless hiring teams have a clearly articulated pay philosophy. Hiring leaders must sell potentially skeptical executives concerned about losing bargaining power when hiring. And in the wake of major layoffs and rising salaries, new insight into pay ranges could leave current workers feeling let down, erode workplace morale and deprive companies of their best talent.

Executing a successful move towards pay transparency requires deliberateness and nuance. But if done right, it can give organizations a competitive advantage. There are two key elements to developing a successful pay transparency policy and using it to market your business to today’s top talent.

Defining a salary philosophy

Establishing a philosophy for how compensation relates to jobs is a first step towards developing an effective pay transparency policy. Companies are often shocked by this embrace wage transparency and are concerned that their pay bands will be lower than the market value. However, proactively defining the most important skills, experiences and responsibilities for a position – and the associated market valuation – forms the basis for competitive pay scales.

In situations where pay ranges are below market value, a clear linkage of the required job skills to their market value equips hiring teams with a well-articulated framework for selling leadership when updating the pay scales for a position.

Before starting a hiring process, hiring teams should work with hiring managers to answer three key questions:

What skills and experiences are essential for this position and what is their market value? This determines the minimum for the salary scale. Before a job posting goes live, recruiters should work with hiring managers to critically review the position, catalog the skills and experiences needed for success in the role, and then recruiters can query similar roles to determine the competitive scope for a candidate that fits to the core requirements.What are exceptional skills or experiences for this role? In addition to defining core skills, recruiters should align with hiring managers about the skills and experiences that make for exceptional hiring. Be sure to also discuss how these qualifications would be factored into the salary offer. An effective pay transparency policy should reliably and consistently differentiate between candidates who meet core requirements and potential employees who significantly up your game. Do the responsibilities of the job match the compensation? The relative scope of a position’s responsibilities should influence decisions about salary offers. Hiring managers may work with recruiting to conduct an internal audit comparing a new position’s responsibilities to similar internal job titles, and positions with expanded job responsibilities should have a higher or at least broader salary range.

While all pay scales have institutional guidelines and limitations, a move toward pay transparency that begins with a well-defined pay philosophy makes pay transparency a boon to the hiring process. This promotes competitive pay, gives recruiters clear reasons for pay ranges when interviewing candidates, streamlines offer decisions for hiring teams, and ultimately promotes more fairness in offers.

Nailing the range and hooking top talent

As more recruiting teams start posting specific salary ranges, an often mentioned disadvantage is less influence for the company during negotiations. Leaders are concerned that candidates will ask for the top dollar of the posted range and that transparency about pay will mean less wiggle room for recruiting teams during negotiations. Deciding which salary ranges to post is an acute pain point for many teams, with identifying “good” salary range size benchmarks and maintaining bargaining power in offers emerging as top-of-mind concerns.

Pay range posting can be a powerful attractor for high-quality talent, but the range must be informative to attract and win talent. In particular, too broad a reach will harm the effectiveness of the recruitment. Posting extraordinarily broad salary ranges increases the risk of misaligned candidate expectations, resulting in more rejected offers, wasted recruiter effort, and delayed time-to-hire.

Extremely broad pay ranges can hurt your employer brand, as candidates may view overly broad ranges as an implicit signal that the company pays lip service to an equity-oriented policy and that the company is under no obligation to pay equity. This can be particularly detrimental to diversity hiring goals, as women, BIPOC and LGBTQ+ candidates rate the company’s commitment to pay fairness as a top attractor and signal of an inclusive work culture.

Instead, use the following guidelines to establish informative, attractive compensation ranges and communicate them effectively to applicants:

Use your pay philosophy to substantiate your salary ranges. The value range for a job’s main job requirement provides a solid starting point for defining the maximum range for a seconded pay grade.Consider narrowing the post range to shorten outliners and maintain negotiation flexibility. A useful heuristic is to take the average salary as defined by your pay philosophy and adjust the range to end up at 25% above and below the median.Refine posting ranges based on internal salary scales and budget constraints. With 2022’s rapid salary growth and major layoffs, the market value of pay ranges may exceed internal ones and may need to be revised downwards to mitigate compression concerns and fit budget constraints.Equip recruiters and hiring managers with the job pay scales and associated pay philosophy, so they can proactively set expectations with candidates and provide informed answers about salary as they arise.

One of the most acute challenges for hiring teams this year is the difficulty of getting talent into their hiring pipeline. Even as the US economy shows signs of cooling, the labor market remains warm 4 out of 10 vacancies remain unfilled every month. At its core, finding talent is a sales challenge – standing out and enticing potential applicants to invest their efforts in your position versus competitors – and pay transparency can be a powerful tool for selling talent by reducing uncertainty and enhancing your company’s values to be transferred.

When based on an intentional pay philosophy and clearly communicated in job descriptions, pay transparency meets a vital and acute talent demand. Moving jobs, or even considering changing jobs, is a costly and time-consuming operation. Showing candidates the material impact of changing jobs upfront not only removes a major decision hurdle when applying, but also ensures that the candidates who do apply are a better fit for the position, making the hiring process smoother and a higher share of accepted offers.

Dr. Andrew Monroe is a social psychology expert and director of veteran talent research at a recruiting analytics firm Verify insights.

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