The Hidden Challenges of Salary Transparency

Examples of unintended consequences from well-intentioned laws and regulations are as common as the winter cold.

For example, an Australian state’s 1990 regulation requiring bicycle riders to wear safety helmets did, indeed, reduce brain injuries from bike accidents. But it also had a net negative impact on the health of children in the state because more kids became less active, ditching bike riding altogether instead of wearing something they considered unfashionable.

Business owners soon will be facing the unintended consequences of a new law that goes into effect in September requiring salary transparency in help-wanted, transfer and promotion ads from employers with four or more employees.

A Look at the Law

The new law requires employers to link a good-faith compensation range with every job posting for which there is a job description for work to be performed in New York State. It also requires compensation ranges for postings for promotion and transfer opportunities.

Failure to abide by this law will result in investigation and prosecution by the state commissioner of labor, with civil penalties not to exceed $1,000 for the first violation, $2,000 for the second and $3,000 for the third and every subsequent violation.

On the surface, the aim of salary transparency is noble and right. The main goal is to reduce salary inequality between men and women, especially Black and Hispanic women. According to U.S. Department of Labor numbers, women made 83 cents for every dollar made by men in 2020. Black women made only 64 cents and Hispanic women earned 57 cents for every dollar made by men in that same year.

New York Gov. Kathy Hochul hailed the new law as a “historic measure” that “will be a critical tool in our efforts to end pervasive pay gaps for women and people of color.” This is likely true.

What business owners need to be prepared for are some new issues created by this well-intentioned law.

So much of what determines a person’s salary is unseen by the majority of employees. The biggest factor in many situations is actual performance. Thus, the perception of non-race or -gender based differences in salary between employees likely is going to be very different from the reality known by the employer.

Put more bluntly, we’re not very good at assessing our own performance compared to others who might be better at doing their jobs than we are. Further, when we’re made aware of differences in pay between us and a colleague, that blind spot gets bigger. Thus, employers should be ready for a period of increased turnover and lower morale. Here’s proof:

A California Example

Shortly after the University of California made its employees’ salaries public, a team of scholars conducted an interesting study. They sent letters to a random set of faculty in the UC system, informing them of a newspaper website that could be used to find out the salaries of their peers.

A few days later, the researchers called all campus employees to ask about their use of the website, their job satisfaction and their job search intentions.

Those who visited the site and discovered they were paid lower than the median were much less satisfied with their jobs and more likely to express the intent to leave than those who were paid below the median but didn’t receive the prompt to check out their colleague’s pay.

There’s no reason to think similar awareness in New York will lead to different results than what the California study found.