California and New York both passed their own pay transparency laws in late 2022 – joining the US states of Maryland, Colorado, and Connecticut. But the drive towards greater pay equity isn’t just an American revolution. Similar rules have been piloted in the UK and, in April 2023, the European Union (EU) introduced a pay transparency directive designed to level out imbalances in pay.

The EU’s rules on pay transparency are significant for businesses. Any organization with more than 250 employees will have to report annually on their gender pay gap, with smaller organizations reporting every three years. If that regular reporting uncovers a pay gap greater than 5%, companies will have to provide justification for it or reassess what they pay people. 

“It's been pretty well demonstrated through polling and people's responses to pay transparency that this is something that workers really want, and it's not going away,” says Samantha Gordon, chief programs officer at the TechEquity Collaborative.

It's particularly pertinent legislation for those working in the software industry, where a clear gender pay gap already exists. It’s therefore vital that you’re abreast of the situation – and know how to prepare properly for the changes, whether they’ve already arrived in your jurisdiction, or are just around the corner.

What do we mean by pay transparency?

“Pay transparency means different things to different people in different places, but the aim seems to be universal: to reduce systemic inequalities in pay,” says Hywel Carver, CEO and cofounder of Skiller Whale. This is particularly pertinent to the tech industry, “which has long been dominated by white men like me,” he says. 

EU data shows that women in Europe make 13% less than men in the equivalent role. In the US, it’s 18% and not just a divide based on sex. Black and Latinx workers earn less than their white counterparts. 

While the law changes by jurisdiction, they share similar components: Being more transparent, whether that’s at the level of displaying salaries on job ads or reporting on the gender and ethnicity pay gap. 

“Progressive companies have been doing both for a while,” says Carver, pointing to Softwire, a UK-based digital engineering company, which proactively reports its pay breakdown. “We already know that displaying salaries on job ads disproportionately encourages a more diverse range of candidates to apply, and we already know that calculating and reporting on pay disparities is a very strong forcing function to reduce them,” says Carver.

Being transparent, then, is the way forward – not just because it’s the right thing, but also because it’ll soon become a legal requirement in many locations your company may operate. For Carver, if you’re worried about sharing a salary on a publicly-posted job ad because others within your company will see it, that’s a problem. “This is pretty much an acknowledgment that you aren’t paying fairly,” he says. 

Making the change, rather than being forced

For engineering manager Stephen Roughley, the drive to look at pay transparency began after receiving consistent feedback from staff that career and salary progression options weren’t always fully clear. 

“Having worked in previous environments where pay was a closely guarded secret, I have first-hand experience of how flawed that approach is,” Roughley says. “You constantly feel like you're trying to bail a boat with a colander.”

Roughley calls his own prior experiences with previous employers “just an endless fight”. “Employees want to know where they stand,” he says. “As a manager, you really want a reliable system you can fall back on, so everyone wins.”

The company Roughley works for began to audit their pay for staff and whether there was a discrepancy between who was paid what. There were no significant gaps, but there was work to do, he acknowledges. “We will need senior leadership team buy-in to make any positive adjustments to ensure everyone is in line,” he says. But he’s confident that will happen.

“All of this has really been to keep teams happy,” he says. “As long as you are clear and fair and can justify your framework and bandings, then this should be a mainly positive change by its very nature.”

The manager also points out that many of the most successful companies in a variety of sectors are those with happy employees – and those with the happiest employees are businesses that treat and pay their employees fairly. “The business should notice an improvement in morale, creativity, and productivity following these changes,” he says.

Preparing for change

The first step here is to try and strip subjectivity from any pay decisions. “Build skill matrixes, assess job performance against well-defined criteria, and determine pay rationally,” says Carver. “Favor criteria that reward all kinds of valuable work: the lone wolf developer and the glue developer are both valuable in different ways.”

But, doing so is easier said than done. “Take a holistic look at what are all the different needs, what are all the different roles? And how do I set up a system where there will be fairness across the board?” says Gordon of the TechEquity Collaborative. If you’re a massive company like Microsoft, you can hire a company like McKinsey, she says, but for smaller organizations, you’ll have to do it yourself. Whatever the case for your company, big or small, proactivity is key.

As a result of these new laws, pay transparency has been catapulted to a front-of-mind status. Though still in its early stages, the outcomes of pay transparency efforts will ultimately help build trust in the workplace and generate a fairer company environment, pushing the industry toward the end goal of pay equity.