Having employees on different pay grades can come back to bite businesses

The competitiveness of the modern workforce, coupled with the intense talent shortages experienced over the past year, means that salaries aren’t always going to match up for each person in the same position. However, if unaddressed, this can create issues.

As recently reported by HR Leader, a lack of transparency, coupled with disparity in pay, is hurting businesses as employees are left unhappy.

The wider effect on business

The rollover effects this unhappiness can have on businesses is significant. Tariq Shaban, senior assessments consultant at HireVue, noted that this disparity only serves to hinder fairness and equity.

“According to our latest HireVue data, nearly half of Australian employees agree there are significant differences in pay for employees with the same job title. This situation underscores a crucial challenge in organisational psychology: maintaining a sense of fairness and equity,” Mr Shaban said.

“When employees perceive their pay as unfair or inequitable compared to peers in similar roles, it can deeply affect their job satisfaction and sense of value within the organisation. This perception of inequity, a fundamental concept in organisational justice, leads to feelings of being undervalued and can significantly diminish morale, motivation, and engagement levels.”

The individual isn’t the only party affected. Unhappiness can permeate and create issues for the wider workforce, an issue that can sow discontent among employees.

“These disparities in pay not only affect individual employees but can also have broader implications for team dynamics and the overall organisational culture. Inequities can create internal conflict and an ‘us versus them’ mentality, eroding the collaborative spirit crucial for a productive workplace,” explained Mr Shaban.

“Moreover, consistent perceptions of unfairness in compensation can shape an organisational culture that is perceived as unjust and potentially toxic. This environment can erode employees’ trust in the business, further impacting their commitment and loyalty.”

During times of talent shortages and economic instability, maintaining employee satisfaction can prove invaluable.

Mr Shaban continued: “Pay inequality also poses a real threat to talent retention. If high-performing employees think they’re not fairly compensated, the allure of more equitable opportunities elsewhere may cause them to consider alternative job opportunities, resulting in higher levels of talent attrition and turnover. This turnover, particularly of top talent, can be costly for organisations, not just financially but also in terms of losing critical skills and experience.”

“By proactively addressing issues like pay inequality, you not only mitigate these challenges but also reinforce your commitment to your most valuable asset – people. Prioritising fair and transparent compensation policies is essential in cultivating a workplace environment that values fairness, employee wellbeing, and organisational justice.”

Where does salary transparency fit in all of this?

Amendments to workplace law mean that employees are no longer legally prohibited from discussing pay. Encouraging transparency can be an effective way to build upon culture and put minds at ease.

“Salary transparency can be highly effective in fostering a positive and equitable workplace culture. When done well, it not only enhances trust and morale among employees but also provides them with a transparent understanding of how salaries are determined. This transparency helps in reducing perceptions of inequity, as employees are less likely to feel unfairly treated when they understand the factors influencing pay variations,” Mr Shaban outlined.

“Some of the key benefits associated with salary transparency include bolstering confidence in the fairness of the compensation system, improving employee engagement, and promoting career advancement clarity. Collectively, these all contribute to improved retention levels. Additionally, it plays a critical role in closing wage gaps and promoting a more diverse workforce by making any systemic biases in pay more visible and thus addressable.”

As with most things, care should be taken, however. Other considerations must be made as it is not always black and white when it comes to wages.

“The approach to salary transparency requires careful consideration and strategy. It is essential to provide clear, contextual explanations about how salaries are determined, considering factors such as experience, education, skills, and performance. This clarity is crucial to prevent misinterpretation of the shared data and to maintain a positive perception of organisational justice,” said Mr Shaban.

“On top of this, salary transparency should be part of a broader communication strategy that includes educating employees about the organisation’s overall compensation philosophy and how individual contributions are valued. Such an approach not only mitigates potential discomfort but also reinforces the organisation’s commitment to fairness and ethical practices in compensation.”

How to prevent issues

A tricky area for sure – how can employers navigate pay transparency? Mr Shaban noted that it “requires a holistic approach”.

“The initial step involves conducting an in-depth review of the existing salary structure to ensure it aligns with industry standards and accurately reflects the unique skills, experience, and contributions of each team member. This process includes evaluating candidates and employees based on their skills and capabilities rather than on extraneous factors like previous employers, schools, gender, age, or cultural background as a fundamental measure to eliminate bias. Alongside this, transparent communication about compensation policies is crucial. This entails not only sharing the rationale behind salary determinations, which might include factors such as experience, qualifications, and market norms, but also gradually introducing transparency to allow for adjustment,” he said.

Mr Shaban concluded: “Employers should emphasise the overall compensation package, including benefits beyond salary, and maintain a balance between openness and individual privacy, possibly by discussing salary ranges rather than specific amounts. Furthermore, fostering a culture of transparency and trust involves encouraging employee feedback, providing education on understanding compensation structures, and training leaders to effectively manage conversations around salary. This holistic strategy, underpinned by regular review and adjustment of the compensation strategy, can help in smoothly integrating salary transparency into the workplace culture.”