Can HRs be Transparent With Salaries? An open compensation policy is worthwhile but comes with both pros & cons

"The contents of this letter are to be kept confidential'! This instruction often accompanies offer letters containing details of compensation package to new employees. Others are verbally advised by the HR to not disclose salary details to anyone. Most of us have often wondered what makes compensation of an ordinary employee such a matter of secrecy. Yet, this is more of a norm rather than exception in our corporate world where salary offers and appraisals are usually made after intense negotiations. There has been a growing debate in the industry in recent years as to whether this policy of keeping salaries confidential should be jettisoned in favor of an open compensation system under which there is clearly defined pay scale with transparency. However, very few organizations have adopted this practice. While some managers argue in favor of an open compensation practice, others are of the opinion that it would create a lot of difficulties within organizations, and necessitate a lot of explaining.

The case for open compensation policy

Like everything transparent, an open compensation practice comes with a lot of benefits, including raising the ethical standards of an organization and thereby attracting the most talented workforce to its folds. There is no doubt about the fact that clearly defined compensation guidelines interest job hunters and attract talent. When an organization clearly lays down a salary range, it eliminates the apprehension of not being compensated fairly, does away with the need for tedious negotiation and makes the process of recruitment more efficient. Not only does it improve recruitment process, an open compensation practice and clearly defined logics for the same is the foundation of a highly satisfied workforce.

By specifically sharing how much an employee is paid and why they are paid so, you also delineate clearly the factors the management is taking into account to determine the worth of an employee. With the logics related to compensation & performance clearly stated, comparison and complaints of discrimination take a backseat especially where people are paid differently for similar jobs. This is likely to boost productivity by inducing positive competition and eliminating negative vibes.

However, it is not all easy to have an open compensation system which can be tricky to implement and needs to be handled with a lot of maturity.

The Cons

While it rings in many benefits, an open compensation practice is more suitable for larger organizations that boast of the best compensation packages in the industry. For the smaller and lower paying organizations, such a policy may even backfire if not handled appropriately since the salary comparisons not only happen within but also with industry peers. With a transparent system, smaller organizations may run the risk of repelling potential talent even before they apply or interview for a position. On a macroeconomic level, an open compensation system is more suited to mature markets like the US or Canada as it requires maturity on the part of both employees and employers. Indian industry which is less than three decades into liberalization might still need some time to adapt to such practices.

While open compensation policy can keep many employees motivated, it can also lead to dissatisfaction amongst many. Let's elaborate this with an example. Rachna, a 27 year old employee of an advertising agency has been an outstanding worker ever since she started her career with the same organization 5 years back. Every appraisal, every feedback concludes her to be one of the most valuable employees of the organization. Yet, her salary ranks much lower than several of her peers who are at similar positions. Why? For the simple reason that she started at a low pay scale as a fresher and has risen within the organization, while several others were hired mid career from elsewhere, giving them a benefit of negotiating from a higher scale. Now, despite giving her decent raises, the managers find it hard to immediately and abruptly bridge the pay gap between her and some of her peers! The above mentioned example is a quite common phenomenon, and an open compensation package can wreck the confidence of many employees like Rachna. Many others might not be satisfied with the "why' aspect of a differentiated salary, and may feel disenchanted.

So, if you are a large organization with among the best pay packages in the industry, go ahead and adopt an open compensation system. It would not only boost your organization's image in the industry, it will act as a magnet for the most talented professionals. However, if you are a small or medium sized company, which doesn't have the wherewithal to pay as per the best industry standards, it would be advisable for you to wait a few years before adopting an open system.