Pay reporting: is it having an impact on pay transparency and fairness?

Employers have to comply with more pay-related legislation than ever before. Be it gender pay gap reporting, CEO pay ratio reporting or outlining how they’re communicating pay decisions to key stakeholders, including employees. But what impact is this having on employees’ perceptions of pay and the transparency around reward decisions.

Pay reporting: is it having an impact on pay transparency and fairness?

We spoke with Charles Cotton, senior performance and reward adviser at the CIPD, about their latest Reward Management research. It found that 60% of organisations claim to talk about the fairness of pay processes and outcomes, but only 10% of staff report their line manager talking about such matters. It also revealed that just half of employers communicate how pay increases are decided, how pay structures work, and what staff need to do in order to get a pay rise.  

These findings suggest that tighter legislation around pay reporting is not necessarily helping to make pay more transparent for employees. However, the drive for greater pay fairness from government and society as a whole suggests that more open and transparent organisations will become the norm. And this is not a bad thing, as Cotton explains.

“Transparency in itself is not the end, but rather a means to an end, and that end is fairness,” says Cotton. “If employees feel that the employer is treating them fairly in terms of management, development, reward and recognition, then not only will they become more productive, but in the end, they may not even bother reading the information that comes out about pay from the firm because they feel they can trust it [their employer] when it comes to reward.”      

Defining fair pay

A key first step to ensuring that pay perceptions are accurate is for an organisation to define what it means by pay and what it means by transparency.

“You come up with these definitions by not only looking at what make sense internally but by talking to stakeholders, employees and investors for their views,” explains Cotton. “For instance, are you happy with full disclosure in terms of knowing what everybody else gets paid? Or would you look at it on an aggregate basis i.e. how your pay compares to the median/mean/maximum/minimums. Or by reference group, which is how you compare by gender, ethnicity and disability in terms of transparency.”

It is also important to consider the different types of pay definition that are currently used by other bodies. For example, an employer’s definition of what counts as pay may be different to the Low Pay Commission, HMRC or the Equality and Human Rights Commission – all of which define pay in different ways.

Only by having an accurate definition of pay can employers begin to talk about fairness. The Reward Management survey showed that although most employers talk about fairness, only a third report having a definition of ‘fairness’ that they use in their communications about pay management. Furthermore, only a few employees were surveyed by their employer about their view on whether they think pay processes and outcomes are fair. The most common ways to test pay equity were found to be gender pay gap and equal pay audits.

The challenge of communication

Ultimately, the perception of pay fairness is reliant on how well the information – transparent or otherwise – is communicated with employees.

“What’s important is for organisations to communicate to employees so that they understand what the purpose is of their approach to pay levels, bands and progression, and to be able to explain ‘this is what we’re doing’ and these are the steps that we’ve taken to ensure that this is done on a fair basis,” says Cotton.

However, more often than not, this communication comes down to line managers. Yet, as the CIPD’s survey showed, there is a contrast between the views of HR and line managers in the role they play in communicating pay messages. Half of employers say their line managers have full to moderate involvement in communicating information on pay levels and pay rises. However, more than three-fifths of employees sat they’ve never had an explanation from their managers about why they receive the amount they are paid.

“A challenge that many organisations have is that they rely on line managers to communicate to staff about reward, pay and benefits, but they often don’t give line managers the ability, the opportunity or the motivation to do this,” says Cotton. “HR need to support line managers through things like training, tool kits and mentoring.”

A further danger when communicating pay decisions is that it either becomes bland and meaningless, or it is used as a PR opportunity to show how ‘great’ everything is.  

“What employees would like is for their organisation to be honest with them,” says Cotton. “So they [employers] shouldn’t treat pay communications as an opportunity to present all that is good, but recognise that there are challenges as well, and demonstrate how the organisation is trying to overcome these.”

Trust arrives on foot but leaves on horseback

Open and honest cultures that generate trust are essential to ensuring that perceptions about pay align with the reality. Often employers can face an uphill battle with this, given the cynicism that permeates through society. However, transparency in all parts of business, not just relating to pay, can help to overcome this. As Cotton explains, employers need to be open about people management processes, not just for employees, but also for customers and investors to see.

“You’re not going to be able to please everyone all the time, but it’s important to be able to justify your actions. There’s a famous Dutch saying: trust arrives on foot but leaves on horseback – suggesting that it does take a lot of time to create trust, so it’s important that employers invest in this area to ensure that over time people start to trust the organisation,” he says.

Greater pay transparency is a given in a world where pay reporting on all sorts of metrics is becoming the norm, and pressure from investors, customers and employees alike is growing. Defining, communicating and justifying pay decisions is critical to changing pay perceptions, building a culture of trust and ultimately boosting loyalty and productivity.

The author is Dawn Lewis, content editor at REBA.

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