Many Job Ads Now Require Salary Ranges. A Tipping Point Is Coming.

Fewer than 50% of the jobs posted by ZipRecruiter customers included salary information in 2022, but that share has already risen well above 50%, and over 70% of customers surveyed tell us they plan to disclose pay in new job postings soon. Doing so may seem like a simple matter, but it’s actually surprisingly complex. In fact, the new laws are prompting employers to make significant changes in how they hire, pay, and manage their employees. 

First, the requirement to disclose salary ranges is prompting employers to come up with formal processes for determining what those salary ranges should be in the first place. In many companies, the old way of setting pay lacked transparency. Candidates would often walk into interviews with little idea of what the company was prepared to pay, and a recruiter might open a salary negotiation by asking what the candidate was hoping or expecting to earn. In this awkward process of discovery and negotiation, candidates’ chutzpah often mattered far more than their qualifications in determining their compensation. 

Raises were typically set in a similar manner, with cost-of-living increases automatically given to everyone equally, if at all, and additional raises sometimes granted on a case-by-case basis in response to employee or manager requests. The result was that the squeakiest wheels often got the most grease, and pay gaps unrelated to performance persisted or even widened over time. Moreover, these disparities were very often strongly related to race and gender—an uncomfortable and embarrassing fact for many companies, as well as a potential legal liability risk. 

New pay transparency laws are requiring companies to take a very different  approach. Companies are developing a pay philosophy, and exploring what they want to achieve with their pay structure—be it attracting the best external talent, cultivating long-term retention and loyalty, or incentivizing productivity. They’re also figuring out how to communicate their values and approach. Companies are exploring the recruiting, retention, and productivity returns to targeted increases in compensation. And they are establishing objective criteria for promoting employees within or across pay bands. Additionally, they’re conducting market research to find out what other employers pay and how compensation should differ across locations to reflect differences in living costs.

In setting their pay bands, companies are weighing external competitiveness against internal equity. Postpandemic labor shortages have prompted employers to raise offers to new candidates in a bid to attract scarce talent. The result has been substantial wage compression, or even inversion, in many companies, with green new hires making as much as, or more than, experienced employees. 

Watercooler conversations about wages in which these dynamics have been discovered have left some incumbent employees feeling underpaid and resentful. In some cases, so-called boomerang employees have quit and then reapplied for the same jobs at higher pay. So employers are trying to find the sweet spot that allows them to recruit effectively without either having to raise pay for everyone and blow up their cost structure or upset incumbents and harm retention or productivity. 

After finding these optimal pay bands, employers have been developing training for hiring managers and internal communications for employees to help them understand the intent behind the new pay practices and policies. This is proving to be a crucial step to ensure that employees feel fairly treated and understand what they need to do to increase their pay.

Finally, employers are developing systems for collecting and reporting relevant data, as required under the various laws. The California law, for example, requires companies with 100 or more employees not only to store job postings and pay records but also to report mean and median wage gaps for every breakdown of race and gender for each of the outlined job categories (such as professionals, technicians, and administrative support workers). However, since workers are not actually required to supply information to employers about their race, gender, or ethnicity, employers will be required to guess based on “observer perception”—a potentially thorny issue. 

Employers are confronting unintended consequences as they work through the new laws. One possible result is the risk that transparency could slow hiring by reducing flexibility. The following example illustrates why. Let’s say you have three employees in a role currently earning $50,000 a year and discover you need to pay $75,000 in the current economic climate to hire a fourth. You might have had the flexibility simply to do so quietly before, but now it’s potentially problematic. Your choices are to raise your payroll costs by $75,000 more than planned by raising pay for the three incumbents or to keep the role vacant longer in the hopes of finding someone who will take the job for less—possibly someone of lower quality, with potential downsides for customers and company culture.   

For all the challenges, however, there are also many upsides to these new pay transparency changes. The potential recruiting benefits are significant. Job postings on ZipRecruiter that include pay information receive about 50% more applications on average and are twice as likely to deliver quality applicants. Hiring managers also report that when candidates enter the hiring process knowing the pay range upfront, there’s less chance for misunderstandings and disappointed withdrawals down the road. 

The effect on equity could also be significant, particularly in occupations where employers have discretion, pay is subjective, and pay frequently varies widely. There is evidence that women tend to ask for less pay than similarly qualified men—a phenomenon known as the “ask gap”—but adjust their salary requests upward when informed of the going market rate, without harming their chances of getting hired. 

In a recent study, MIT economist Nina Roussille found that the gender gap in requested salaries disappeared when an online recruitment platform for full-time engineering jobs in the U.S. prefilled the answer box where job candidates were required to input their salary requests with the median employer bid salaries for similar roles and similarly qualified candidates. Moreover, women did not receive fewer offers when they asked for more. In other words, that one small intervention—providing more information about the typical employer wage offer—reduced the gender pay gap on the platform to zero. 

Now is the time for companies to use the new laws to their advantage by aligning pay with goals, measuring what matters, improving culture, and building trust. It’s a chance to reset pay with intention, structure, and discipline. And, most of all, it’s a historic opportunity to close unjustified gender and racial pay gaps—the original intent of the pay transparency laws being adopted by state after state.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.